Tip to fund managers: Stop hugging the benchmark; take on more active risk

Moscow

IN the 1990s, when Russian markets were opening up to a brave few foreign investors, East Capital AB Founder Peter Elam Hakansson had a foolproof way of rooting out the good companies from the bad. He visited their offices in winter to check if they could afford heating. In the early years of market capitalism in Russia, it was almost impossible to find reliable information about companies from earnings reports, so those investors prepared to travel to run-down Siberian cities in sub-zero temperatures had an immediate advantage. The proof is in the 2,098 per cent return that Stockholm-based East Capital's first Russia-focused stock fund made in the first decade of the millennium, about a third more than the average of peer funds tracked by Morningstar Inc.

The anecdote may seem redundant in an age where information can be obtained at the click of a mouse and money managers are increasingly being bettered by funds that passively track indexes. But Mr Hakansson says investors struggling to demonstrate their value in the face of growing competition from exchange-traded funds would do well to heed the lessons he learnt investing in Russia at the end of the last century.