Russian stocks overdue for rally

By Douglas Busvine

MOSCOW (Reuters) - Russian stocks have flatlined this year but are poised to rally and the best prospects are in the power and infrastructure sector, according to $4 billion fund manager Prosperity Capital Management.

Apprehension over who will succeed Russian President Vladimir Putin, due to stand down next year, has contributed to Russia's underperformance in relation to the booming emerging markets of China and Latin America.

Prosperity Chief Investment Officer Alexander Branis reckons those fears are misplaced, however, and predicts that Russia's next leader will stick to the growth-oriented policies of the Putin era.

"We can understand that large global fund managers are a bit hesitant to commit significant capital just before the elections," Branis said in an interview at the Reuters Russia Investment Summit.

"We don't take this concern seriously, so we think that sooner or later this market will continue rerating. We believe there is great upside in this market."

The Russian Prosperity Fund, the group's flagship fund, has outperformed its benchmark, the RTS index .IRTS, by 6.5 percentage points in the year to date.

Over the past five years the fund, which takes a bottom-up stock picking approach, has posted annualized returns of 52 percent. That beats the RTS, which has grown at an annualized rate of 42 percent, according to Prosperity.

POWER PLAY

Prosperity has achieved its outperformance in part by betting on Russia's power sector, the world's fourth largest, which is undergoing radical reforms to break up state-controlled monopoly Unified Energy System EESR.MM (UES).

UES is spinning out six wholesale generating companies and 14 regional generators to create a competitive market and raise funds for investment. Once it becomes an empty shell next year, UES will be wound up.

Branis, who joined Prosperity in 1997, has taken an active role in the restructuring, serving as an advisor. That expertise has helped Prosperity build stakes in some utilities and generate high returns. Its specialist Quest power fund has achieved annualized returns of 91 percent since 1999.

"We have continued investing in the power sector, which is quite a big field for us. We are extremely excited that restructuring of this sector has progressed very, very well," he told the Summit, held at the Reuters office in Moscow.

Across its funds, Prosperity owns 19 percent in one of the regional generators, called TGK-4 (TGKD.MM: Quote, Profile, Research, Stock Buzz).

The company, which operate to the south of Moscow, plans a supplementary share issue in December and Prosperity is looking to team up with a Western strategic investor in a bid to secure majority control, Branis said.

ASSET GRAB?  Continued...