Guy Norton talks to chief investment officer Mikhail Derkavski about the company’s investment approach.
Life can be cruel in Almaty. You live in a million-dollar penthouse in the north of the city and have just spent hundreds of thousands of dollars and many months waiting to take delivery of your brand new Lamborghini Diablo convertible. It’s your pride and joy and naturally enough you want to show it off to your family and friends who live in the south of the city.
All’s going well as you head downtown with the top down – heads are turning and there are lots of envious looks being aimed in your direction. Then disaster strikes as you approach a set of tramlines that bisect the city. Crash, bang, wallop! The ground clearance on your supercar isn’t enough to get it over the tracks and you find yourself stuck fast at a busy intersection, with the hoi polloi laughing their heads off as they trundle past in battered Ladas or decrepit Moskvichs. The shame of it all.
What’s the solution, though? You sell the Lamborghini, downsize to something more practical like a Porsche Cayenne 4×4, and stick the rest of the proceeds into Compass Asset Management, which will make you enough money to buy a helicopter instead.
That at least would be the advice of Mikhail Derkavski, the mutual fund company’s newly appointed chief investment officer.
Russian-born Derkavski joined Compass in Kazakhstan at the start of August, having previously worked in the US as head of research for RCM Global Investors, part of the Allianz financial services group. There he played a major role in developing the firm’s well-regarded GrassRoots financial intelligence product.
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“Financially, the high net-worth individuals here in Kazakhstan are becoming more sophisticated and realize that they need to protect their wealth, not just spend it” Mikhail Derkavski, Compass Asset Management |
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So why desert a major US fund to come and work at a relatively small, obscure operation in central Asia? The more cynical Euromoney readers will no doubt think it’s simply about the money. Leaning back for a moment in his designer armchair, Derkavski is suitably coy about the remuneration levels he was offered to make the move from RCM but is clearly excited by the challenge of building a western-style fund in one of the world’s top investment hotspots. “Kazakhstan is a very interesting place,” he says. “It’s the ninth-largest country in the world and is blessed with incredible mineral resources, with the best possible strategic position between the emerging economic superpowers of Russia and China, with the potential to serve as a regional hub connecting them both.”
Temptation
Although he acknowledges that the asset management industry in Kazakhstan is still very much in its infancy, the opportunity to forgo 50 years of asset management theory and practice and build a world class player proved too much of a temptation.
Formed in 2004, Compass Asset Management employs a small team of about 20. Derkavski is openly enthusiastic about the people around him. “They’re a young, very well educated, very ambitious group of individuals who are hungry to learn and build up a world-class asset manager here in Kazakhstan.” The company has about $20 million under management and hopes to reach $100 million within 12 months. Derkavski says that the decision to join Compass was made easy by Almas Chukin, executive director of Compass Asset Management, whose original vision it was to transform Compass into a company capable of competing on a global basis.
His immediate goal is to align the firm’s existing portfolio with a set of appropriate strategies comprising high-, medium- and low-risk options. At present Compass solely invests in equities but Derkavski plans to introduce fixed income and derivative instruments into the mix.
In terms of investors there are three main target groups – western institutional investors, high net-worth individuals in Kazakhstan and mass-market retail clients in the country.
High net-worth individuals currently constitute the largest single group of investors. Within a Kazakhstani context that covers individuals able to make a minimum $100,000 commitment. Commenting on their investment outlook, Derkavski says that after indulging in an orgy of conspicuous consumption for the past few years many are now looking to be more sensible with their money.
Protection
“Financially, the high net-worth individuals here in Kazakhstan are becoming more sophisticated and realize that they need to protect their wealth, not just spend it,” he says.
Next in terms of importance come western institutions. Derkavski believes Compass is also well positioned to attract growing numbers of foreign investors to the Kazakhstani markets. “We’re here on the ground in Kazakhstan, part of a financial services group that has its finger on the pulse, and are only offering absolute return products, not relative return ones,” he says. “What’s the point in telling an investor we’ve beaten the index by 10bp when he’s lost half his capital?”
Although the mass market retail component of Compass’s investor base is still very small, Derkavski envisages a rapid expansion over the next 12 months. “Part of our strategy is to aggressively expand the retail side of the business with the aim of creating a global product for local people,” he says.
With the Kazakhstani economy set to expand by 10% a year from now until 2015, Derkavski’s aim is to design investment products that take advantage of long-term growth but also maintain a level of stability. “We’re looking to identify pricing opportunities – emerging markets tend to overshoot on both the up and down sides. Over the long term a buy-and-hold strategy always works but there can be big sell-offs along the way.”
Given Kazakhstan’s strong recent economic performance, Derkavski acknowledges that one of the greatest challenges is to manage people’s expectations. “We’re trying to develop appropriate investment strategies and products that will take advantage of the boom-and-bust cycles that inevitably hit emerging markets.”
Although trying to develop equity investment culture among a mass market audience that has traditionally fought shy of being too exposed to the financial services sector is likely to prove a protracted process, Derkavski believes that the firm’s simple absolute return investment rationale will win them over. “Alpha is the only target that we have and at the end of the day that’s want everyone wants,” he says.
