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Boutique Asset Manager Selection in Emerging and Frontier Markets

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LMG presentation during the Fund Manager Selection conference in Zurich, Crowne Plaza hotel, Sep 25-26 2013 …

LMG presentation during the Fund Manager Selection conference in Zurich, Crowne Plaza hotel, Sep 25-26 2013

This presentation is a draft version. Changes compared to the final draft presented at the event are not exluded.

LMG believes that a lot of investors and their advisors suffer from a few biases:

1) They overestimate the importance of bottom-up manager selection vis-a-vis top-down asset allocation;

2) They tend to stick too often to the 'usual suspects' who basically represent well-known brand names instead of those with the most promising strategies as far as the potential for excess return is concerned.

3) Within EM and FM space some countries suffering from so-called 'foreign bias' have a far more difficult task to attract investors into local asset management boutiques than others. Often this is not correct.

4) Of course there are regulatory and corporate governance related factors that might work against the EM and FM managers. However, most of them are more than willing to set up structures in line with what investors want, even if this implies going international to let's say Luxembourg, London, New York etc.

Bottom-line: do not avoid a careful analysis of interesting local managers.

LMG is using quite a few of these managers already in its investment solutions.

Published in: Economy & Finance, Business

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  • 1. LMG Emerge Presentation The GLOCAL Concept Selection of Boutique Asset Managers in EM and FM Countries September 22, 2013 Erik L. van Dijk Principal
  • 2. Abstract LMG’s GLOCAL Concept is an innovative in/outsourcing system based on our belief that local asset managers are best equipped to add value bottom-up, with LMG coordinating the activities of these managers top-down Top-down: Our tailor-made GTAA advisory system is one of the most extensive of its kind. It is based on a 10-year collaboration with Nobel Prize Laureate dr Markowitz (see also FAJ March/April 2003). Clients have included pension plans and other large institutional investors. Advisory Assets under Management over the period 2005-2012 have been in excess of € 35 billion Bottom-up: Best-of-Breed Manager Selection system in close collaboration with Camradata (UK) and eVestment Alliance (USA) Strong backbone partners have already embraced the concept: Banque Privee/Edmond de Rothschild (Developed Markets); Emirates NBD (Emerging Markets/Islamic Finance); Invest AD (Frontier Markets)
  • 3. Abstract (2) Result: LMG Emerge Implemented Consultancy Extra layer for "Alpha Generation" Focus on “Best-of-Breed’’ Manager Selection Improved "Risk Control“ Independent Solutions Strong Partner for Local Specialists Challenging the dominant position of the giant ‘Usual Suspects’ Transparent Process
  • 4. Abstract (3) But: A lot of the specialists are not completely there yet!! Small, focused teams with less resources What about back-office? What about knowledge of the international financial markets? Willingness to cooperate is there, but how? If you want them to do what they are good at: ensure that other parts of the investment process are taken care of It is hard to ‘convince’ when unfair odds are against you, so help and train those managers Beware: we are NOT implying here that locals are in all circumstances financially less strong. Local market leaders can be financial power houses in their home market, but relatively unknown internationally
  • 5. Presentation Outline 1. LMG Emerge 1. Who We Are 2. What We Believe In 2. Structed Asset Allocation as Condition Sine Qua Non 3. LMG Emerge’s Glocal Concept; 1. The Process 2. The Strategy / Our Luxembourg Fund Structure 4. Overview – (Boutique) Manager Selection in EM/FM 5. LMG in Emerging and Frontier Markets 1. General 2. MENA/Africa 3. Russia/Central Asia 4. India 5. Other Regions
  • 6. 1. LMG Emerge Who we are LMG Emerge Specialist institutional investment consultant in the Continental European Market; currently staff of 6 ; additional ‘human resources’ via backbone partnerships ‘Backbone partners’: Emirates NBD (General Concept, MENA & Islamic Finance and GLOCAL EM); Invest AD (GLOCAL FM; Africa); Banque Privee / Edmond de Rothschild (Developed Markets); Camradata & eVestment Alliance (database partners) Asset Allocation approach incorporates more than 75 countries • Innovative joint work with Nobel Prize Laureate dr Markowitz (FAJ Mar-Apr 2003), chosen by dr Markowitz and a group of fellow Nobel Laureates as one of his best articles • Monte Carlo simulations by Prof M Kritzman (MIT) confirm added-value of the underlying heuristic Advisory Assets under Management have amounted to more than Euro 35 billion over the period 2005- current Luxembourg-domiciled SIF-Sicav implemented consultancy-based Fund range established Q1 2013: i) Equities; ii) Fixed Income; iii) Opportunity; and iv) Islamic Finance (forthcoming) LMG Glocal is our specialized distribution affiliate and LMG Capital our newly established private equity/investment banking affiliate specializing in EM/FM.
  • 7. We believe that: • Real diversification is the most effective method to control portfolio volatility • Asset allocation is responsible for the majority of investment portfolio returns and risk • Real asset classes provide investors a risk premium vs. inflation and cash over time • Markets are not efficient, and Emerging Markets are often very inefficient • Emerging markets will be the growth engine of the global economy for next 50 years • Local players will play a growing role in Emerging Markets asset management 1. LMG Emerge What we believe in
  • 8. 2. Asset Allocation Gary Brinson et al.: "The bulk of investment success or failure can be explained by asset allocation decisions"
  • 9. 2. Asset Allocation (2) Current practice: • Asset Allocation – Asset-Liability Management (ALM Study) – Strategic Allocation (SAA) – Tactical Asset Allocation (GTAA) But….. – Contrary to ALM and SAA; – Tactical Asset Allocation often ad-hoc and unstructured And: Over-focus on Bottom-up Manager Selection vis-à-vis Top-down Asset Allocation
  • 10. 2. Asset Allocation (3) ? ? ? ALM/ SAA EquitiesBonds Other Current Practice Alpha At Risk Risk Control Gap Better structure for increased risk-adjusted returns: ALM/ SAA EquitiesBonds Other Structured GTAA
  • 11. Structured Investment Process 1 ? ? ? ALM/ SAA EquitiesBonds Other Current Practice Alpha At Risk Risk Control Gap Better structure for increased risk-adjusted returns: ALM/ SAA EquitiesBonds Other Structured GTAA
  • 12. 3. LMG Emerge’s Glocal Concept Optimal structure for higher and TAILOR-MADE risk-adjusted returns: Client-specific risk profiles & Other constraints LMG Emerge GTAA Link to LMG Emerge Manager Selection ALM/ SAA EquitiesBonds Other Structured GTAA Space for innovative boutiques and GLOCAL managers
  • 13. Structured Investment Process 2 Optimal structure for higher and TAILOR-MADE risk-adjusted returns: Client-specific risk profiles & Other constraints LMG Emerge GTAA Link to LMG Emerge Manager Selection ALM/ SAA EquitiesBonds Other Structured GTAA
  • 14. 3. LMG Emerge’s Glocal Concept Harry M. Markowitz & Erik L. van Dijk Financial Analysts Journal, March-April 2003 "Optimal Portfolio Construction is not the same as Textbook Mean-Variance Optimization"
  • 15. 3.1 Process LMG Emerge’s Glocal Concept LMG Emerge’s Glocal Concept is the result of more than 20 years of research Essential underlying principles of the process are: “Man-Machine” “Near Optimization” and State-of-the-art GTAA “Be active when you can, but passive when you have to” ‘’Best-of-Breed’’ Manager Selection Local Presence Adds Value Hardly any global asset manager outperforms in more than ‘just’ 30 percent of its products and this is especially for the large, global fund houses
  • 16. LMG Glocal Trust Fund; building blocks: • Multi-manager SIF-Sicav structure, consisting of 4 sub-funds (launched Mar/Apr 2013) • Equities Sub-Fund Listed equities; Developed, EM and FM Markets; balanced approach • Fixed Income Sub-Fund Fixed Income, Developed, EM and FM Markets; sovereigns and corporates; balanced approach • Opportunity Sub-Fund Other asset classes; Developed, EM and FM Markets and Opportunistic Equity • Islamic Finance Sub-Fund (forthcoming) 3.2 The Strategy - Our Luxembourg Fund Structure
  • 17. LMG Glocal Trust Fund; for our clients: • Tailor-made, customized approach using all 4 sub-funds as components: • ‘Defensive’ Profile Strategic Tilt toward Fixed Income Sub-Fund and – if allowed and relevant – Islamic Finance Sub-Fund • ‘Balanced’ Profile No clear tilts over the full business cycle; profile tilt can switch between defensive and dynamic • ‘Dynamic’ Profile Strategic Tilt toward Equities and Opportunities Sub-Fund But Boutique EM/FM specialists included in all strategies and for all clients! 3.2 The Strategy (2) - Our Luxembourg Fund Structure
  • 18. 4 Overview – Man Selection in EM and FM Factor/Region MENA AFRICA EX SA SOUTH AFRICA RUSSIA EM EUROPE TURKEY CENTRAL ASIA INDIA CHINA OTHER FAR EAST BRAZIL OTHER LATAM GLOBAL DEV EDUCATION SKILL SET REGULATORY INFRASTRUCTURE CORP GOVERNANCE ASSET MGT PROFESSIONALISM ASSET MGT BREADTH MARKET SIZE ALPHA POTENTIAL/INEFFICIENCY CULTURAL DIFFERENCES GOOD AVERAGE POOR/QUESTIONABLE LMG: Mena, India and Brazil definitely the three regions where all-of- us should consider to look at local specialists; Africa, Russia, Central Asia and – still – China if you have the guts (or adviser!)
  • 19. Glocal Concept assigns core role to EM and FM • Market Inefficiencies The more inefficient a market, the bigger the likelihood that local presence will add value • Market Trends / Developments Relative weight of EM and FM (as part of global GDP) grows; and so does LMG’s involvement with these markets (since 2005) • Ideal Partner for Globalizing EM/FM Partners and Investors Selected EM and FM Partners and Investors are ready ‘to go abroad’; LMG is their ideal, trusted partner 5.1 LMG and Emerging Markets - General
  • 20. LMG Emerge: Key Emerging Region #1 • LMG partners with regional giants Emirates NBD (Dubai) and Invest AD (Abu Dhabi) as strong backbone partners • Islamic Finance is booming LMG involved with and acknowledged as specialist in Islamic Finance; first official meeting with Grand Imam already back in 2000; definitely an area where one needs the local partners! • Core region due to Energy and Financial Wealth Oil and Gas Wealth; region is home to some of the most wealthy countries in the world (KSA, UAE, QAT etc) 5.2 LMG and Emerging Markets - MENA/Africa
  • 21. LMG Emerge: Key Region #2 • LMG Network Traditionally strong network through our cooperation with TLCS and our own former ties to FIDE (World Chess Federation; with strong ties to the Kremlin) • Changes in ‘Foreign Bias’ Traditionally least-favored region by Western investors; but foreign bias to change in a changing world in which EM and FM gain in importance (= opportunities for specialists like LMG) • High growth region characterized by (natural) resource abundance Commodity-rich region (Energy, Mining and Precious Metals, Selected Agricultural Commodities); Growing interest in top-quality Diversified Financial Services; High level of technical education 5.3 LMG and Emerging Markets - Russia/Central Asia
  • 22. LMG Emerge: Key Region #3 • LMG Network Together with our new backbone partner: an Indian multi-family office that started our LMG Capital joint venture together with us • Changes in ‘Foreign Bias’ Traditionally less favored by Western investors than China; but mild foreign bias to change in a changing world in which EM and FM gain in importance (= opportunities for specialists like LMG) • High growth region characterized by human resource abundance Enormous educational and entrepreneurial tradition; now often explored in a combined fashion (IT, health care, pharma etc); Pool of interesting asset managers grows, but still way too small 5.4 LMG and Emerging Markets - India
  • 23. LMG Emerge: Other regions • Far East and Latin America More or less embraced already by the international community; partly due to more robust legal and financial infrastructures as far as asset management etc is concerned, but also due to psychology! • Opposite ‘Foreign Bias’ ? Is the Foreign Bias in these regions smaller because of valid arguments or is it correlated with the Foreign Bias in the other 3 markets? (“I don’t like the other, so I do like you’’) • Growth regions but already ‘discovered’ These markets have been developed and we are now at a point where foreign investors have to be careful. Also as far as asset manager selection is concerned! 5.5 LMG and Emerging Markets - Other Regions