Getting to grips with emerging market investing

Mike LeBel a Senior Investment Analyst at Mercer looks at the challenges of investing in emerging markets and how the asset class can be used for longer-term strategies

Insurance Investorposted on Friday, December 06, 2019

Insurance Investor: How can investors embrace risk management within emerging markets?

Mike LeBel: From the perspective of an OCIO provider, we build investment solutions using a mix of asset managers so it is important to understand how each of our managers think about risk at the portfolio level from both the macro and micro perspectives.

We use a mix of both quantitative and fundamental managers who tend to assess risks in different ways.

Diversification in processes and philosophies allows us to build investment solutions that should provide a better risk return profile than the emerging market benchmarks and the asset class as a whole.

Insurance Investor: Technology and innovation have been the key factors throughout history to drive transformation. How can asset managers cope with new demands for enhanced information reporting in EM?

Mike: We do use managers at both ends of the spectrum.

By this I mean that we use some of the largest asset managers with the largest teams that have a great amount of resources to collect massive amounts of data globally and systems that can translate this data into useful insight, but we also compliment these larger, quantitatively focused managers with smaller teams who focus on understanding the crucial pieces of information that align most closely with their investment processes and who have shown to deliver alpha throughout different market cycles.

There will be a continued advancement at both ends of the spectrum in terms of how managers continue to optimise the data that they feel is most crucial for their own investment processes.

Insurance Investor: Do you see a difference in the quality of data that is collected by a small, specialist firm versus the larger asset managers?

Mike: Yes, I do, as the larger asset managers will collect data from hundreds of sources where some of our more focused teams who are interested only in particular characteristics of stocks or companies will generally focus on these specific metrics.

There are quality managers for instance who will only focus on particular metrics that they feel adequately measure the quality of managements, companies and balance sheets and these types of managers won’t have nearly the type of broad data collection resources that the larger asset managers have, however both can be successful.

Insurance Investor: Do you see a big difference in terms of data collection in different geographical areas?

Mike: The only difference I see is between global organisations and smaller, regional or country specific asset managers because the global asset managers tend to have the greater resources with larger teams so you will generally see larger more sophisticated data collection operations at these global organisations.

Insurance Investor: Can there be a truly long-term EM investment strategy?

Mike: There can be a long-term EM investment strategy.

For the investment solutions that we build, we use managers with track records of successfully picking EM securities and they are experienced teams with clear investment philosophies.

Regardless of the differentiated nature of EM, there are still investment processes that you can look at which have been able to generate alpha through different market cycles, even with the evolution of EM over the past couple of decades.

Global investors should consider both equity and debt in EM for a long-term investment strategy. You do have to size the positions correctly but both asset classes should be considered for a long-term investment strategy.

Insurance Investor: How will the EM arena evolve in the next 12-18 months

Mike: It will be interesting to see the growth of China’s weighting in both the debt and equity benchmarks.

The greater China equity markets are now reaching close to $10 trillion in market cap so as the index providers continue to increase the weighting of China in their EM benchmarks, fund of fund managers will have to build investment solutions that take full advantage of regional differences.

If we have particular managers who can exploit regional differences better, we can consider using regional managers versus using a number of managers who invest broadly across the EM landscape.

This is something that is already done in developed international equity portfolios where portfolios are built at a regional level and this is most likely the progression that we will see in EM equity investing going forward as well.

 

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