Swiss & Global’s Garcia keeps Russia strategy unchanged post WTO entry

Russia’s accession to the World Trade Organisation last week has not affected the stock picking strategy of Swiss & Global’s manager Javier Garcia, who manages the firm’s Russia focused fund. Yet he is convinced some of the stocks he already has exposure to will benefit from WTO membership.

Garcia said: “I focus more on companies and less on sectors, so I haven’t changed my philosophy because of WTO entry. But my approach has already led me to have exposure to sectors that are likely to benefits.”

One of these is the consumer sector, which is slated to reap the rewards of WTO accession as wages increase, providing Russians with more disposable income.

Russians are increasing spending in the consumer electronics sector. This has already seen increased demand since last year, and according to research centre Romir, Russians plan to continue buying smartphones, video technology and computers in the second half of the year. A stock in Garcia’s portfolio set to profit from this is M.Video, one of the largest Russian consumer electronics retail firms.

Another sector of the Russian economy, which will benefit from an increase in disposable income is the mortgage space. This area of the economy holds only 3% of the country’s gross domestic product, much lower than in other emerging markets, so there is room for expansion.

Garcia sees value in such companies as Etalon, for example, one of Russia’s largest and oldest residential real estate developers. He says it has “strong EBITDA margins, no leverage at all and a high level of transparency.”

But although he expects these sectors to profit from WTO entry, Garcia typically does not make investment decisions based on sector expectations.

He said: “I invest in companies based on cash-flow prospects. I believe earnings potential and quality are the long term drivers of a stock. Taking a top down approach is very difficult in Russia, because different sectors are affected by so many factors outside my control.”

Garcia constructs a “symmetric” portfolio, avoiding large bets on any one stock or sector. He believes having this balance helps him generate upside and avoid big losses when one sector is affected by tax or regulatory changes.

Yet he has experienced a few disappointments recently. Regulatory changes in the utility sector have caused him losses, as well as changes in the shareholder structures of some banks. “It happens from time to time, because there are so many variables in the [Russian] market that are not quantifiable, and it is remains a high beta space,” Garcia commented.

These recent disappointments have led to underperformance this year, but over three years the fund has returned 38%, beating the 34.1% MSCI Russia benchmark.

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