Global Emerging Markets Equity

Client-Specific Concerns

The client, a large government-linked investor in South East Asia, was seeking to restructure its exposure to global emerging markets (EM) equities. With its EM equity portfolio entirely invested in passive funds, the client was looking to shift a portion of this exposure to a diversified combination of active strategies. The client was seeking to appoint 2–3 external managers whose approaches would be complementary to each other—in terms of their investment style (e.g. growth, value, quality), their management style (e.g. systematic or discretionary) and the ‘type’ of firm, among other things. In addition to identifying managers with high-calibre investment strategies, the client also wanted to find firms that could offer compelling proposals for knowledge transfer and demonstrate a willingness to build a long-term strategic partnership.

The concept of knowledge transfer, which refers to any additional services that a manager provides beyond its investment remit, is of great importance to many institutional investors in South East Asia. As it relates to asset management, knowledge transfer from asset manager to client often includes dedicated training sessions/seminars, secondment opportunities, access to the firm’s other investment capabilities, invitations to conferences/events and regular provision of materials. It is very much a bespoke offering, tailored to the needs and objectives of specific investors, and provides a two-way benefit: the client gains opportunities to ‘upskill’ its team, and the manager gains a client that is highly engaged with its investment approach. This mutual understanding bodes well for a long-term relationship that can better withstand equity market volatility and periods of potential underperformance.

Outcome

• Providing knowledge transfer for this engagement, knowledge transfer was also relevant for the selection process itself. The client had not previously undertaken a search for active equity strategies, and, from the outset, several members of the client’s in-house investment team were embedded with bfinance during the search process, learning firsthand from bfinance’s equity specialists to develop their expertise across quantitative analysis, style research and qualitative due diligence.
  
  
• Offering broad perspective on the manager universe: in seeking to construct a portfolio of active managers with no pre-determined criteria on preferred investment styles, bfinance conducted a broad search on the client’s behalf, allowing the investor to review all available options and defer the (important) ‘style decision’ to a later stage of the process.
  
  
• Delivering combination analysis: seven high-calibre managers presented to the client at the final stage and the decision about which—and how many—to appoint was driven by consideration of how the managers’ strategies would fit together. To facilitate this process, bfinance constructed a detailed analysis of all 56 potential combinations (21 for two managers, 35 for three managers), showing the historical style profiles and simulated risk/return characteristics for each solution over time. This analysis identified a small subset of combinations that had delivered consistent performance patterns without undue or excessive style bias.