Vladimir Potapov, who heads the Russian lender’s newly formed VTB Capital Investments division, explains how he has reorganised its operations and forging partnerships in Asia.
He tells FinanceAsia about VTB Capital Investments’ plans to deploy state-of-the-art technology to steal a march on its European banking peers and provide clients with an unrivalled investment management service and also how Russian markets are bouncing back as domestic savings grow.
According to local financial newspaper Kommersant, citing data collected from Russia’s National League of Management Companies, 2017 was the most successful year on record for the Russian collective investment market, with RUB71 billion ($1.06 billion) placed into open-end mutual funds – almost double the amount seen in previous years.
State-controlled VTB Bank merged the brokerage unit of its retail lender VTB24 with the brokerage, consulting, FX services and asset management teams at its investment bank into one unit as of January, 2018, that manages about RUB1.45 trillion roubles, said Potapov who has managed the combined unit since its creation.
The shake-up at Russia's second-largest lender comes as more mom-and-pop traders scoop up more stocks and bonds due to lower bank deposits rates since 2009. VTB Capital Investments stands to gain from this trend as the largest asset manager in Russia as of December, 2017.
In the six months ended June 30, 2018, the largest contributor to VTB group’s total revenue was the
retail business segment at 31.3%.
Last year, VTB Capital Investments became an investment consultant for GF International, a division of China's GF Fund, on Russian bonds. Potapov says this could be the start of a wider relationship, during an interview in Moscow.
Simon Shangguan, the chief executive of GF International said during the plenary session at VTB's Russia Calling! conference in November: “We look at Russian market very optimistically. Russia has enormous natural resources, the government is adopting lots of reform in order to attract investments.”
Shangguan said he expects to cooperate with VTB Capital in Hong Kong, the Cayman Islands and mainland China.
The following extracts of our conversation with Potapov have been edited for brevity and clarity. Some of the questions have been reordered to improve the flow.
Q What was the thinking behind your reorganisation?
A The transformation that we went through [came from] the understanding that we needed to provide all our asset management and investment products to clients from one unit.
The idea was to be able to do a proper product and risk profiling of clients, offer the right products, and, moreover, since you can exploit the synergies, increase the quality and servicing of those products.
So we united all the asset management product groups – retail brokerage and institutional DMA brokerage, asset management – into one group. Now we offer a full product suite to a wide range of investors, our operations have been centralized, and clients are no longer approached by different sales teams within the company.
Q So it wasn’t all driven by cost savings?
A The key driver was to increase client satisfaction, to deliver best-in-class services to our clients.
There was also a clear understanding of the potential for overall market growth. Russians have started to save more. In their savings, the share of public securities has been very low, roughly 15%.
But it’s starting to grow and we are looking to increase it to 30% in the next five years … Compared to the levels of developed and a number of emerging markets, there’s still room to grow.
Q And how’s it working out?
A Our one united product investment factory had [assets under management] as of the end of last year of RUB1 trillion. It’s already gone up by 40% to more than RUB1.4 trillion … this is the result of working on the quality of each product but also it’s about increasing presentations through different channels, both online, offline and through third-party and marketplace channels.
Q What is your outlook for Russian fund flows in 2019?
A Clients are interested not in a particular asset class but increasingly focused on meeting their medium-to-long-term savings targets.
Clients are buying more and more into the idea of proper diversification, whether it’s by currency or by asset class. Clients now believe that they need to have some investments that they find quite risky, this can be global ideas or small-cap Russian equities; and are buying into the idea that Russian blue-chips are becoming more like dividend plays and much less volatile.
So their risk perception of Russian equities has changed ... and they have more appetite. [On the fixed income side], the global trend is for yields on hard currency instruments to go up … Regarding rouble instruments, people are looking for yields higher than bank deposits.
Q What percentage of your AUM is made up of foreign investment and do you expect it to grow next year?
A Around 10% to 12%. We think it may grow next year, especially with our effort on the Asia front but it very much depends on the demand for emerging markets.
Q Can you tell me more about this bond fund you are planning GF International Investment Management?
A VTB Capital Investments has become an investment consultant on Russian bonds for GF International, a division of the Chinese GF Fund. We believe it’s a very good moment for this right now, it’s quite a big niche and if you have a professional credit and research team analysing the companies, there are a lot of areas where you can find yield.
The fund offers interesting investment opportunities and we expect it will attract attention from both Chinese and global investors. The approximate volume of the fund is planned to be around $100 million.
Q Is this the start of a bigger relationship with GF?
A We decided to start with bonds as the least complicated instrument, but, in fact, we are exploring partnerships with GF International on investments into other kinds of assets. Our goal is to build a long-term collaboration.
Q There’s been a lot of appetite for alternatives in recent years and Asia pre-IPO is particularly interesting. You’re launching a pre-IPO fund in Russia early next year. Can you tell me more?
A It’s probably the first public fund [of its kind] in Russia. That’s for qualified retail investors but [some] institutional investors are also happy to join. In terms of this particular niche, we’re not looking really at venture companies but at later-stage private equity stories …
Q There is a lot of talk about the government pension reform scheme [in Russia]. But what will that mean for the asset management community and VTB?
A For the asset management community, changes in the pension system will not make a difference.
Overall, it’s good for the public markets as it makes investments more secure.
The second thing they are discussing is to introduce ‘individual pension capital’ … [to spur companies to save for their employees] … That could be another interesting asset driver for the pension funds and, as a result, for their professional investment managers.
Q Have you won any new mandates lately?
A We are constantly winning mandates … We finished 2017 with RUB594 billion in AUM ($8.61 billion) … and now we are managing RUB745 billion ($10.81 billion), so that’s 25% growth for discretionary asset management in 11 months. That’s just for asset management.
Overall for VTB Capital Investments, the numbers are even more appealing. We finished 2017 with around RUB1 trillion ($15 billion) in assets under management … and now we stand at RUB1.45 trillion ($21 billion) …. Obviously, we want to work more with partners from all around the world and the diversification of the business is key for success.
Q How are you applying fintech in your investment decisions?
A What we are working on at the moment is an online digital product, the app “VTB My Investments”, which was launched in June. It’s a pure retail product that gives you access to over 3.5 thousand investment products and has trials and [allows you to] play with virtual portfolios linked to real markets, with no threshold to start.
Research of VTB Group’s Corporate Investment Business for institutional clients is adapted for retail investors and is also included for free [and made available as quickly as it is] … with links to news and Face ID technology for [completing] transactions.
The app also has a roboadvisor, which provides portfolio recommendations depending on your risk profile, in different currencies. This is a full-fledged instrument which allows clients to rebalance portfolios and supports trading. In this sense, it’s the first of its kind in Russia.
First, the client fills out an online application that determines his investment profile. After that, he chooses one of the model portfolios that best suits his profile, and then the set of securities and assets to invest into. According to the client's profile, the roboadvisor recommends investment transactions, but the final decision rests with the client. The roboadvisor was developed in-house and we are working with external advisors to introduce artificial intelligence functions.
Q Many banks have applications like this. Do you feel you have taken best-in-class products and learnt in-house?
A Not too many banks actually … And we want to introduce more artificial intelligence into the decision-making process, that’s what we’re working on this year and next year. The second thing is to have more customer personalisation … creating chat groups and similar instruments, which we will outsource.