Across the Gulf… and into the world
Limestone Asset Management launched its first fund, the New Europe Socially Responsible fund, in July 2008. Great timing: it was down 47% by December. But, that was 2.6 percentage points better than its benchmark, the Stoxx EU Enlarged Total Market index. And it made quite a comeback: when it ended 2009 up 83.1%, it left the index trailing by 42 percentage points - outperformance which it has built on since.
One should not be surprised. A bottom-up eastern European stockpicker with a strong ESG bent, Limestone was set-up in 2007 in Tallinn, Estonia, by a team of 10 professionals who had managed €650m for Swedbank/Hansabank. The ambition had always been to create a boutique for institutional investors, and the firm’s operational robustness reflects that.
“We chose Luxembourg for the funds, and a founding partner was a dedicated risk manager who produced world-class reporting and risk-management procedures - we really do run a V8 engine in the middle office,” says Paavo Põld, head of business development. “But the only outlet for all that was eastern European equities.”
Indeed, while New Europe now manages €23m and a more focused eastern European real estate strategy runs €3m, that is respectable, but in need of growth and diversification.
“These markets haven’t been flavour of the month, but in any case they could never be flavour of the month forever,” says Põld. “We wanted to diversify by looking for like-minded entrepreneurs and offering what we had to help them become institutionally-credible.”
Fortunately, Limestone has some influential friends. One early shareholder was Petri Kuusisto, former head of investments at Finnish pensions giant Varma, who had allocated capital with them back in their Hansabank days. Along with Ari-Pekka Hildén (whom Kuusisto hired as head of equities at local government pension fund Keva and took with him to Varma) and Tomi Långström (from Man Group in Switzerland) he set up a new venture - Northern Star Partners - which bought 52% of Limestone in March 2011. Kuusisto took the role of CIO alongside Långström as CEO, while Mihkel Õim remains CEO and Alvar Roosimaa CIO at Limestone. The idea is to use Limestone’s ‘V8 engine’ as the foundation for an institutional multi-boutique with Northern Star branding. The firm has 23 employees in Helsinki, Tallinn, Moscow and Zurich.
Kuusisto makes the familiar multi-boutique argument about how a flight to quality and size often means a flight to ‘boring’, or benchmark-hugging strategies - and how entrepreneurs supported by institutional infrastructure are the solution. He notes that talented managers are struggling against post-crisis set-up costs.
“There are several reasons why Tallinn should be the hub,” he says. “It’s already licensed, it has the infrastructure - but there’s also a great talent pool because the Baltics were so badly hit by the crisis, people with a much better understanding of the local markets than candidates from London or New York.”
The first new launch - Globetrotter fund - is an inside job, helmed by Hildén. He always had an interest in emerging markets equities (he sits on the board of MENA specialists Silk Invest), and this bottom-up strategy will target annualised returns of 15-20% over a three-year cycle from global emerging markets with a strong frontier tilt. Launched in February, it has grown to €21m. The second, rolled out in April 2011, is the Northern Star Russia fund, headed by Maxim Achkasov, a manager whose fund Kuusisto seeded with Varma capital when he worked for Pohjola Asset Management. The firm poached the CIO of FIM Asset Management, Raoul Konnos, to work alongside him: Konnos’s track record in Ukrainian equities fits with Northern Star’s ambition to run concentrated portfolios (New Europe and Globetrotter both hold less than 30 stocks) capitalising on opportunities off the beaten track.
“We will run high-conviction portfolios, but acknowledge they will never be the core of any institution’s allocation,” says Kuusisto. “Every client will need to budget for the risk that they get from us, which will be absolute rather than relative. But with our pensions background we think that we bring some understanding of pension funds’ perspectives, especially what long-term investing means when asset managers have become fixated by quarterly results.”
The partners invested heavily in the funds, and their revenues at risk as well: management fees are kept at 1.25-1.50% on institutional share classes by adding a 20% fee on excess performance (for the New Europe and Russia funds) or on annual performance above 8% (for Globetrotter).
Those fee structures perhaps betray the echo of the pension fund CIO’s wish-list, (although one might hope that the management fees might come down as the asset base grows). It is certainly there in the ESG capability that Limestone brings to emerging and frontier markets (overhauled in 2010 to make it even more quantitative), which remains difficult to get in these markets even though it appears to be most effective there. A recent Risklab report suggests that, over 20 years, applying ESG criteria to global emerging markets can slash a tail risk.
“The engagement process in the emerging markets is easier, once you have gathered your information - but that is awfully labour-intensive,” says Kuusisto. “The ratings agencies do a great job, but based only on public information - and there are well-managed companies that just haven’t got around to publishing facts.”
Põld offers the example of a Bulgarian REIT, which Limestone first bought in mid 2009 and which, having doubled in price, now holds top spot at 8%, of the New Europe fund. “The combination of Bulgaria and real estate caused a lot of investors to question us,” he recalls. But Limestone’s ESG screens picked up the praise the REIT had received from a Colliers environmental study for its world-class green offices, and the fact that it is obligated to pay out all its rental revenues as dividends. Trading at half its book value, Limestone reasoned that all it had to do was sit and wait for a disposal of assets to get a near-100% dividend yield on those assets.
There is a lot of potential growth to be had for this new venture: one only has to look at the under-investment of pension funds in emerging markets to see that.
“At some point this will become part of investors’ core pan-European allocations,” Põld reasons. “The index providers haven’t picked that up yet, and so investors invariably have exposure to Greece, Portugal, Ireland and Spain and yet none in the new EU members. This is the thinking that we hope to get investment officers to take back to their committees.”
But, he concedes, they have to overcome those ‘magical thresholds’ - three years’ track record, €100m under management. New Europe will celebrate its third birthday in July, and Põld reckons €100m is a realistic target for year-end, given added sales resources. That is why the focus for the foreseeable future is growing those funds rather than launching new ones.
“Coming to the Netherlands, Switzerland or the UK is like starting the horse race 200 metres behind the best-known runners and riders,” says Kuusisto. “We need to create recognition for these products, where potential clients can see that we are really 200 metres ahead of the pack. The most rewarding thing is where we see investors that truly understand the impact of non-financial risks, where the commitment to responsible investing is real: the Nordics take those ideas seriously, as everybody recognises, but central Europe is more receptive than most.”
This explains the new office in Zurich, which will aim to add Swiss, German and Austrian money to what Limestone has already attracted. And if Limesetone is not yet a familiar name, Kuusisto’s should at least be a familiar face.
“It’s unusual for pension funds to meet people on the sell-side who have 20 years’ experience sitting on their side of the table,” as Põld puts it. Kuusisto returns the compliment: “The Limestone set-up was brilliantly implemented, and it’s very rewarding to think of a bunch of people in Tallinn coming up with something not seen in London or New York.”
This match has made the Gulf of Finland a bit narrower. The task now is to bring the rest of the world a little bit closer to Tallinn and Helsinki.