2. What should you consider before
designing investment strategy?
02 December 2014
3. Begin with the end in mind
3
1,000
1,200
1,400
1,600
1,800
2,000
2,200
2,400
GBP Millions
Assets:
£1.6bn
Assets:
£1.8bn
Required Return:7% per
year
Required Return: 5% per
year
Liabilities:
£2.3bn
Full Funding
(Assets =
Liabilities)
Return Requirement?
Risk budget?
Governance
structure?
Liquidity profile?
“All investment strategy starts with the clear
goals, objectives & constraints of the client,
including a defined and agreed risk budget”
- Redington Investment Principle
4. 4
Achieving your end game
Meeting the Gap
Assets with
Cash Flows
Smooth Volatility
Liability Driven
Investment /
Hedging
Property Leases
Corporate Bonds
Developed Market Equity
Emerging Market Equity
Emerging Market Debt
Risk Parity
Multi-Asset
Infrastructure
6. Capital Markets Under Represented
02 December 2014 6
Source: Neuberger Berman
7.0%
15.0%
41.0%
49.0%
64.0%
75.1%
82.9%
93.0%
85.0%
59.0%
51.0%
36.0%
24.9%
17.1%
0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 120.0%
Debt Market Cap
Equity Market Cap (Float Adjusted)
GDP at Market Rates
GDP at PPP
Foreign Exchange Reserves
Land Mass
Population
Emerging Market Economies as % of Total World
Emerging Markets Developed Markets
7. Economic Contribution Continues to Increase
02 December 2014 7
Source: IMF World Economic Outlook, April 2014
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Countribution of GDP by Country
others Latin America Rest of EM Asia China Japan Developed Europe North America
North America (35% to 24%)
Developed Europe (27% to 23%)
Japan (13% to 6%)
China (4% to15%)
Rest of EM Asia (3% to 7%)
Latin America (5% to 7%)
Others (12% to 18%)
8. Rising Domestic Consumption
02 December 2014 8
4
6
8
10
12
14
16
18
20
% of Households with Disposable
Income > $25,000 USD in China
26
34
12
30
0
10
20
30
40
50
60
70
2010 2025
in $ Trillion
World Consumption Growth
Developed Market Emerging Market
Compound
Growth 2.0%
Compound
Growth 8.4%
Source: FundSmith
9. Healthy Balance Sheets
02 December 2014 9
0
20
40
60
80
100
120
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
General Government Gross Debt (% of GDP)
Developed Market Emerging Market
Source: IMF World Economic Outlook, April 2014
10. Growing Investment Universe
02 December 2014 10
EM Fixed Income Universe EM Equity Market Cap (USD Trillions)
Source: Ashmore
12. Passive Equity
02 December 2014 12
Source: MSCI
China
20%
South
Korea
14%
Taiwan
12%
Brazil
10%
South
Africa
8%
Other
36%
MSCI EM – Sector Breakdown MSCI EM – Country Breakdown
Financials
28%
Information
Technology
17%
Energy
10%
Consumer
Discretionary
9%
Consumer
Staples
8%
Materials
8%
Telecom
8%
Industrials
6% Utilities
4%
Health Care
2%
13. Passive Equity
02 December 2014 13
0
50
100
150
200
250
300
350
400
450
500
Developed vs Emerging Markets
MSCI World MSCI EM
Source: Bloomberg
14. Passive Equity
02 December 2014 14
0
50
100
150
200
250
300
350
400
450
500
FX carry explains some of EM Outperformance
MSCI World MSCI EM MSCI World + EM Currency
Equity
Outperformance
FX Carry
performance
Source: Bloomberg, MSCI
15. Active Equity
How do managers outperform?
02 December 2014 15
Top Down
Bottom Up
Macroeconomic
Thematic
Currency
Country
Sector
Stock-Specific
-30.00%
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
Russia Hungary MSCI EMIndonesia Egypt
MSCI EM Biggest Gainers and Losers,Q1-3 2014
Source: MSCI, JP Morgan, HSBC
16. Active Equity
High variation in active returns
02 December 2014 16
-30
-20
-10
0
10
20
30
40
Outperformance relative to MSCI EM (%)
Last 5y Last 3y Last 1y
High 20.95 19.64 30.11
25th Percentile 3.91 4.43 3.73
75th Percentile 0.02 0.14 -1.52
Low -9.50 -7.94 -18.65
Index Return 10.43 7.63 11.05
Outperformance relative to MSCI EM
Source: eVestment Alliance, Returns are gross of fees
17. Emerging Market Debt
Fast growing market
02 December 2014 17
o Emerging market debt accounts for
c.25% of total global credit market size
($30trn total)
o 3 main types of investible debt:
JPMorgan EMBI: Hard currency
sovereign
JPMorgan GBI-EM: Local currency
sovereign
JPMorgan CEMBI: Corporates (hard
currency)
Mortgages/Securitised
40%
Global IG
Corporate
24%
Global High
Yield
11%
EM Debt
25%
GLOBAL CREDIT MARKET
Source: Babson Capital, Bank of America, Barclays
Capital, Credit Suisse, SIFMA, as of end 2013
18. Emerging Market Debt
Good diversification and credit quality
02 December 2014 18
Brazil, 27%
Mexico, 21%
Poland, 11%
Turkey, 8%
Malaysia, 8%
Russia, 6%
Africa, 10%
Other, 8%
REGIONAL SPLIT: GBI-EM
AA
6%
A
19%
BBB
48%
BB
9%
B
8%
C
8%
NR
2%
RATING SPLIT: EMBI GLOBAL
74%
Investment
Grade
19. Emerging Market Debt
Attractive yields
02 December 2014 19
5.31%
6.54%
5.22%
3.67%
2.28%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
EM Hard
Currency
EM Local
Currency
US High Yield US IG Credit US
Government
Yields to maturity as June 2014
0
100
200
300
400
500
600
700
800
900
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
OAS (bps)
Credit Spreads of EMD vs. Major Bond Markets
EMBI Global BAML US Govt & Corp
BAML US Corp BAML US Corp BBB
Source: MSCI, JP Morgan, HSBC, Neuberger Berman
20. 20
Conclusions
• Structural economic growth
• Improving credit fundamentals and demographic trends
• Access to various source of returns
• Financial, geopolitical and currency risk remain
• Expanding investible universe for global investors
• Lack of research coverage
• Career opportunities in local markets