Parametric offers five-point checklist
The US fund manager Parametric has drawn up a five-point checklist to assist superannuation funds targeting returns from emerging market equities.
Parametric’s Australian Managing Director, Research, Raewyn Williams, says super funds need to keep the best and avoid the worst of active and passive emerging market investment strategies, and this checklist, based on a number of the firm’s published research papers, will help funds achieve this goal.
“At a time when some super funds are increasing their weight to emerging market equities in a search for higher returns, what makes a good emerging market investment strategy is a question well worth asking.
“Many emerging market fund managers are capacity-constrained, so as super funds look for new managers and strategies it’s worthwhile revisiting what makes for an effective exposure to these equity markets.”
Williams says there are well-known deficiencies with traditional active and passive approaches to emerging market investing.
“In the past, it seems that many super funds have just been content to accept these deficiencies as part and parcel of investing in these markets.
“Super funds owe it to their members to do better than this and should look for an approach that seeks to capture the best of active and passive strategies while bypassing the negatives. This is why Parametric has devised a five-point checklist to provide a foundation stone to build a higher-performing emerging market portfolio.
“It is a tool offering practical insights and suggestions to give super funds the capacity to avoid the pitfalls of investing in these markets.” They are:
- Avoid under-diversifying – Diversification is a rare “free lunch” for portfolios, but a typical passive emerging market portfolio (and many active portfolios) is not well diversified and can have high concentration risks;
- Prioritise country selection – The only broad risk that is really important to manage in emerging market portfolios is country selection; other risks matter less so managing them is second order. This is very different to the risks that drive developed market equity returns. The best “bang for your buck” fee spend in emerging markets is a strategy that prioritises country selection;
- Stay unhedged – Currency hedging is not worth the effort – for philosophical and practical reasons. It can actually undermine what super funds are trying to achieve in emerging markets;
- Focus on implementation – Emerging markets attract high transaction costs and super funds must look for fund managers who measure and manage these costs. High turnover emerging market strategies have a real headwind versus low turnover strategies because of these transaction costs; and
- Favour transparency – Emerging markets are, by definition, a high-risk asset class and can deliver shocks, so super funds need transparency about what’s happening inside their emerging market portfolios. This again creates a headwind for active emerging market strategies that can be opaque “black boxes” versus simpler, rules-based emerging market strategies.
Parametric Portfolio Associates LLC (“Parametric”), headquartered in Seattle, Washington, is registered with the U.S. Securities and Exchange Commission (“SEC”) as an investment adviser under the U.S. Investment Advisers Act of 1940. Parametric is exempt from the requirement to hold an Australian financial services license under the Australian Corporations Act 2001 (Cth) (Corporations Act) in respect of the provision of financial services to wholesale clients as defined in the Corporations Act and the Australian Securities and Investments Commission’s (“ASIC”) Class Order 03/1100. SEC rules and regulations may differ from Australian law. Parametric is not a licensed tax agent or advisor in Australia and this does not represent tax advice. This material is intended for wholesale use only and is not intended for distribution to, nor should it be relied upon, by retail clients.
This information is intended solely to report on investment strategies and opportunities identified by Parametric. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. Parametric does not provide legal, tax and/or accounting advice or services.
Global market investing, (including developed, emerging and frontier markets) carries additional risks and/or costs including but not limited to: political, economic, financial market, currency exchange, liquidity, accounting, and trading capability risks. Future investments may be made under different economic conditions, in different securities and using different investment strategies. Currency exchange may negatively impact performance.
Parametric is headquartered in the United States at 1918 8th Avenue, Suite 3100, Seattle, WA 98101, with Australian offices at MLC Centre, Suite 6502 Level 65, 19-29 Martin Place, Sydney NSW 2000. For more information regarding Parametric and its investment strategies, or to request a copy of Parametric’s Form ADV, please contact us at +61.2.8229.0222 (Australia) or +1.206.694.5575 (U.S.) or visit our website, www.parametricportfolio.com.
Simrita Virk at Shed Media
T: 02 9247 8533
M: 0434 531 172