Download Strategy Guide - Standard Life Investments

Strategy Guide
Enhanced-Diversification
Global Emerging Markets Equities
April 2017
This document is for investment professionals only and
should not be distributed to or relied upon by retail
clients. It is only intended for use in jurisdictions where
the relevant funds are authorised for distribution or where
no such authorisation
is required.
ED Global
Emerging Markets 1
About Standard Life Investments
Standard Life Investments is a leading asset manager with an expanding global
reach. Our wide range of investment solutions is backed by our distinctive Focus
on Change investment philosophy, disciplined risk management and shared
commitment to a culture of investment excellence.
As active managers, we place significant
emphasis on rigorous research and a strong
collaborative ethos. We constantly think
ahead and strive to anticipate change before it
happens, ensuring that our clients can look to
the future with confidence.
As of 31 December 2016, Standard Life
Investments managed €325.5 billion on behalf
of clients worldwide. Our investment capabilities
span equities, fixed income, real estate, private
equity, multi-asset solutions, fund-of-funds and
absolute return strategies.
Headquartered in Edinburgh, Standard Life
Investments employs more than 1,700 talented
individuals. We maintain a presence in over
20 locations across Europe, North America,
Asia and Australia. In addition, we have close
relationships with leading domestic players in
Asia, including HDFC Asset Management in India
and Sumitomo Mitsui Trust Bank in Japan.
Our parent, Standard Life plc, was established
in 1825. A leading provider of long-term savings
and investments, Standard Life went public
on the London Stock Exchange in 2006 and
is now a FTSE 100-listed company. Standard
Life Investments launched as a separate
company in 1998 and has quickly established a
reputation for innovation in pursuit of our clients’
investment objectives.
Our investors rank among some of the world’s
most sophisticated and high-profile institutions.
They include pension plans, banks, mutual
funds, insurance companies, fund-of-fund
managers, endowments, foundations, charities,
official institutions, sovereign wealth funds and
government authorities.
Contents
1 Introducing the EDGEM portfolio
2 What is the EDGEM
investment strategy?
4 How do we construct the
portfolio?
2 ED Global Emerging Markets
6 What is our investment
expertise?
7 Summary of benefits
8 Find out more
Introducing the EDGEM portfolio
Global emerging markets (GEM) offer an exciting investment opportunity.
A combination of supportive demographics, growing economies and
a multitude of world-class businesses provide a positive investment
backdrop. However, many investors shy away from the asset class because
of concerns about perceived risk and volatility. In response, we offer the
Enhanced-Diversification Global Emerging Markets Equity (EDGEM) Strategy.
Through this unique solution, we aim to deliver GEM equity-like returns over
the market cycle – but with less than 70% of the volatility.
A new choice
Focus on Change
EDGEM is a distinctive and truly blended
combination of stock-picking expertise and
diversified multi-asset strategies, drawing
on Standard Life Investments’ demonstrable
excellence in both these fields. Through this,
we aim to deliver market-like returns with lower
volatility – culminating, we believe, in superior
risk-adjusted performance.
Our investment process is underpinned by our
Focus on Change philosophy. Through this, we
seek to identify non-consensus change and to
exploit this before the market view comes into
alignment with our own. This applies whether
we are looking at stock-selection ideas from the
bottom up or at macro strategy development
from the top down.
A unique blend of stock-picking
and multi-asset strategies
From an equities perspective, due to the size
and disparate nature of the GEM investment
universe, many companies are often underresearched and consequently their scope for
improvement is under-appreciated. This means
many firms are mispriced relative to their
underlying fundamentals. Our Focus on Change
investment philosophy is therefore especially
suited to unearthing these companies.
Our 11-strong GEM equities team drives the
stock-picking portion of EDGEM. We believe
the most consistent source of alpha comes from
bottom-up stock selection, and so the team
focuses all its time, energy and resources at the
company level. By doing so, we aim to ensure
that our highest-conviction investment ideas
enter EDGEM.
Working in conjunction with the GEM equities
team is our award-winning multi-asset investing
team, consisting of over 50 investment
professionals. Its goal is to develop a suite
of multi-asset strategies that we expect not
only to earn a positive return over a longer
time horizon, but also to earn that return in a
different way from GEM equities.
These strategies – covering interest rates,
currencies, relative value, inflation and
opportunistic investments – contain a blend
of emerging and developed market exposures,
some of which are negatively correlated with
GEM equities. This means that they can be
expected to diversify the equity risk in EDGEM.
They can also provide downside protection
when the market is under pressure. We then
blend these multi-asset strategies with the stock
picks from our GEM equities team to create the
EDGEM portfolio.
Reasons to invest
¬ EDGEM is a unique proposition that seeks
to provide GEM-like equity returns with
substantially lower risk than equity-only
investing.
¬We utilise return-seeking, enhanceddiversification strategies to provide a more
resilient portfolio.
¬EDGEM provides access to the best ideas
of our GEM equities team and our awardwinning multi-asset investing team.
¬The strategy is based on a proven, robust
and repeatable investment process.
ED Global Emerging Markets
1
What is the EDGEM investment strategy?
Our EDGEM investment strategy is a three-stage fusion of bottom-up stock
selection, portfolio optimisation and multi-asset strategies.
Stage one – our best stock ideas
We believe that the most consistent source of
alpha comes from bottom-up stock selection.
As such, we focus our sizeable resources on
company-level research.
We aim to identify positive drivers of change
within a company that the rest of the market has
yet to price in - a non-consensus insight - and
exploit this ahead of the market view coming
into alignment with our own.
Idea generation and research
The majority of our investment ideas are
generated from the information and analysis we
garner from our one-to-one company meetings.
Collectively, our GEM equities team conducts
around 1,000 meetings annually and covers
around 250 stocks. These meetings are used
to ascertain the company’s own views and
expectations of their future prospects and the
markets in which they invest. We also search
and test for corroborating evidence with their
competitors, their suppliers and customers to
give us a complete picture.
High-conviction selection
Our process for evaluating our highestconviction ideas is team-based, with
robust debate encouraged and incentivised
throughout the process.
The culmination of the GEM equities team’s
debate is a list of around 20 of our best GEM
equity ideas. These form the core of the equity
portion on EDGEM.
Our EDGEM investment strategy
Our scale allows a broad and unbiased investible universe
250+
stocks
Idea Generation
3,000+ stocks
We look for Focus on Change opportunity a t c ompa ny level
250+
stocks
150+
stocks
Research
We formalise and review our research by way of consistent
“five question” analysis
150+
stocks
Stock Selection
We select on materiality, conviction and
global thesis corroboration
20 Best GEM Best Ideas List
Portfolio Construction
2 ED Global Emerging Markets
20
stocks
Stage two – neutralise factor risk
With EDGEM, we seek to capture as much of
the stock-specific risk of our GEM best ideas as
possible, while seeing to neutralise exposure
to unwanted risks arising from various factor
influences, such as country, sector or style bias.
We do this by adding around 180 additional
stocks identified by a proprietary optimisation
process. These will be additionally filtered by
our GEM equities team. Overall, this process
facilitates the identification and position sizing
of stocks that are optimal at diversifying away
undesirable risks.
We then combine these stocks with our best
ideas to create the equity portion of EDGEM. This
process ensures that around 90% of EDGEM’s
active risk is driven by stock-specific risk.
Stage three – increase portfolio
resilience
Our multi-asset investing team develops
bespoke return-seeking strategies to work in
conjunction with EDGEM’s equity portfolio. This
adds a robust layer of diversification that seeks
to substantially reduce volatility in EDGEM.
These strategies are typically selected from five
main investment groups.
Interest rates – these strategies are based on
our expectation for changes in interest rates
across major world economies.
Relative value strategies – we take advantage
of differences between equity markets or
sectors, where we expect one to rise relative
to the other.
Currencies – we identify currency pairs where
we expect one to generate a positive return
against the other, from a combination
of carry and spot movements.
Inflation – an agreement to exchange a
fixed percentage for a realised inflation rate
(or vice-versa) on a given notional amount, for
a given term.
Opportunistic – investment opportunities
that are complementary to EDGEM’s
investment objective but not captured by
the other categorisations
Overall, these strategies act as diversifiers
and shock absorbers for EDGEM because they
behave differently from GEM equities. They also
have the potential to make money in declining
GEM equity markets although this is not
guaranteed in all markets.
EDGEM: Investment process
STAGE ONE
Stock selection
Highest conviction stock ideas
based on materiality, conviction
and global thesis corroboration
20 Best Ideas list
Our best stock ideas
STAGE TWO
STAGE THREE
Portfolio optimisation
Optimiser supports the
identification of additional stocks
and position sizes that diversify
away undesirable risk
Strategy selection
Interest rates, currencies,
relative value, inflation and
opportunistic strategies picked
in conjunction with equity
Optimised portfolio
c.180 additional stocks
15-25 Enhanced
Diversification strategies
Neutralise factor risk
Increase portfolio resilience
ED Global Emerging Markets
3
How do we construct the portfolio?
The EDGEM management team (comprising GEM equity and multi-asset
managers) is responsible for overall portfolio construction. We blend
together a portfolio encompassing our best stock ideas, the equity
diversifiers from the optimiser and a selection of multi-asset strategies
that are hand-picked to work best with the equity portfolio.
Typically, the final equity portion of the portfolio
holds around 200 stock positions accounting
for some 70% of the overall portfolio allocation.
These will be chosen by our GEM equities team
and will consist of two distinct sections.
This will be complemented by approximately 1525 multi-asset strategies, accounting for around
30% of the portfolio allocation. We implement
these strategies effectively and efficiently by using
a variety of market tools and instruments (direct
investment, index futures, currency forwards,
swaps, etc.). Once employed, we regularly
monitor and review each strategy to ensure its
continued suitability for inclusion in EDGEM.
1. A central portfolio of 20 of our highestconviction stocks that seeks to benefit
from the finest of our alpha-generating
capabilities.
Risk management
We have extensive risk management
infrastructure in the portfolio to both participate
in the portfolio construction process and to
ensure our investment team operates within the
fund investment framework.
2. The 180 GEM equity stocks from the
optimisation process. These are too small
individually to have stock-specific factor, but
in aggregate can reduce large unwanted risk.
EDGEM portfolio
20%
Total stand-alone risk (%)
18%
16%
Currencies
14%
Credit
12%
10%
8%
6%
4%
Inflation
16.1%
Interest Rates
Diversification volatility
8.94%
RV Equity
Equity
Expected volatility
10.86%
2%
0%
Black line indicates MSCI Emerging Market Index volatility
Source: Standard Life Investments, APT, Enhanced Diversification Global Emerging Markets (EDGEM) portfolio, 31 December 2016
In the example above, the total standalone risk of the portfolio can be calculated by combining
all of the rectangles (19.8%). This represents the amount of return-seeking risk deployed in the
portfolio. This is higher than GEM equity market risk, which was 16.1% as of 31 December 2016,
and explains why we believe the portfolio can generate equity-like returns. However, the expected
volatility of the portfolio is substantially lower than equity market volatility. This is because of the
diversification benefits of our portfolio construction.
4 ED Global Emerging Markets
EDGEM performance
In order to test our investment approach, we ran the EDGEM strategy as a model portfolio for
3 years, prior to the launch of the fund in December 2014. The model portfolio was managed in
strict accordance with EDGEM’s investment philosophy and process, and outperformed the index
by 4.4% with 65% of GEM equity volatility. It did so across a period that included both strong and
weak market conditions.
The chart below shows the performance pattern of the model portfolio. We would expect the portfolio
to underperform in strongly rising markets, but to be much more resilient in down markets, and this
has been visible in the live portfolio.
EDGEM model portfolio performance
140
Investment objective
130
▸ GEM equity like returns over the market cycle
▸ 70% GEM equity volatility
125
Launched 03 December 2014
135
120
▸ Model portfolio began December 2011
115
Annualised performance
(from 01 December 2011 to 30 November 2014)
110
▸ EDGEM 8.9%
▸ MSCI EMF 4.9%
105
100
Monthly volatility (monthly)**
95
(from 01 December 2011 to 30 November 2014)
EDGEM Model*
Nov 14
Jul 14
Sep 14
May 14
Jan 14
Mar 14
Nov 13
Jul 13
Sep 13
May 13
Jan 13
Mar 13
Nov 12
Sep 12
Jul 12
Mar 12
May 12
Jan 12
Nov 11
90
▸ EDGEM
▸ MSCI EMF
9.7%
15.0%
MSCI Emerging Markets
* EDGEM Model from 01 December 2011 to 30 November 2014 ** Volatility is monthly ex-post
Source: Standard Life Investments, Enhanced Diversification Global Emerging Markets (EDGEM) model portfolio performance in USD from 01
December 2011 to 30 November 2015
Past performance is not a guide to future performance. The value of an investment may go down as well
as up and cannot be guaranteed; an investor may receive back less than their original investment.
“A differentiated and innovative alpha focused solution for
investors who seek GEM Equity market returns over the
cycle without the same potential equity drawdown.”
Alistair Veitch
Investment Director
ED Global Emerging Markets
5
What is our investment expertise?
The enhanced-diversification equity investment group oversees EDGEM. It
consists of investment professionals from across Standard Life Investments,
with a range of backgrounds and areas of expertise.
The group’s role is to review, debate and, where necessary, challenge the investment decisions
within EDGEM. This will include assessing the overall structure and diversification dynamics of the
portfolio. Throughout this process, the group will also draw on the insights from our global asset
class teams, benefiting from the collective skills of hundreds of investment professionals within
Standard Life Investments. The result is a more comprehensive and rigorous EDGEM strategy.
Our reputation as a leading investment manager is based on the exceptional quality of our
people. We have never embraced a ‘star fund manager’ mentality. Our EDGEM investment group is
testament to the benefits of this collegiate approach.
EDGEM
Management
Team
Alistair Veitch*
Ronnie Petrie
Jason Hepner
Scott Smith
25 Ind. / 2 SLI
28 Ind. / 21 SLI
19 Ind. / 19 SLI
11 Ind. / 11 SLI
Financials,
Consumer, Telcos
Banks, Real Estate,
Metals & Mining
Portfolio Manager
Portfolio Manager
Asian Equities SICAV
GEM Pension Fund
EDGEM Equity
EDGEM
EDGEM
EDGF
EDGF
EDGEM
¬ 11 strong Equity Team
¬ 60 strong Multi-Asset (MAI)Team
¬ Average of 17 years industry experience
¬ Average of 15 years industry experience
¬ Dual role of analyst and portfolio manager
¬ Specialist roles of fund management and
implementation, risk management and
strategy
¬ Sector specialists
¬ Dedicated quantitative analyst support
¬ Team manage total of US$8.7bn assets*
*Source: Standard Life Investments, as at 30 June 2016
6 ED Global Emerging Markets
¬ MAI Team manage US$217.0bn*
Summary of benefits
Through the EDGEM portfolio, we offer a number of benefits for investors.
¬ The portfolio gives investors the potential for GEM equity-like returns over the investment
cycle with substantially lower risk than equity-only investing.
¬ EDGEM provides access to experienced and established teams with proven track records.
¬ We strive for excellent bottom-up stock selection and alpha capture expertise from our highly
experienced GEM equities team.
¬ Our industry-leading multi-asset specialists seek to produce return-seeking enhanceddiversification strategies to create a more durably diversified portfolio.
¬ We have a dedicated team of risk experts that create superior risk management and
control frameworks.
The strategy may be suitable for
investors who:
The strategy may not be suitable for
investors who:
¬seek capital appreciation over the
long term
¬do not want to take any risk with their
capital – equity investments are not
risk-free
¬would like to invest in an actively
managed portfolio
¬have an investment time horizon of
at least five years.
¬are not prepared to accept temporary
losses as a result of the nature of
equities, bonds and currency markets.
ED Global Emerging Markets
7
Find out more
For more information, please visit www.standardlifeinvestments.com where you will find contact
details for your location.
Visit us online
standardlifeinvestments.com
8 ED Global Emerging Markets
Important Information
The opinions expressed are those of Standard Life Investments and are subject to change at any time
due to changes in market or economic conditions.
This material is for informational purposes only. This should not be relied upon as a forecast, research
or investment advice. It does not constitute an offer, or solicitation of an offer, to sell or buy any
securities or an endorsement with respect to any investment vehicle.
The value of an investment can fall as well as rise and is not guaranteed. An investor may get back
less than they put in.The fund uses derivatives extensively to seek its investment objective.
Standard Life Investments Limited is registered in Scotland (SC123321) at 1 George Street, Edinburgh EH2 2LL. Standard Life Investments Limited is
authorised and regulated in the UK by the Financial Conduct Authority. Standard Life Investments (Hong Kong) Limited is licensed with and regulated by
the Securities and Futures Commission in Hong Kong and is a wholly-owned subsidiary of Standard Life Investments Limited. Standard Life Investments
Limited (ABN 36 142 665 227) is incorporated in Scotland (No. SC123321) and is exempt from the requirement to hold an Australian financial services
licence under paragraph 911A(2)(l) of the Corporations Act 2001 (Cth) (the ‘Act’) in respect of the provision of financial services as defined in Schedule
A of the relief instrument no.10/0264 dated 9 April 2010 issued to Standard Life Investments Limited by the Australian Securities and Investments
Commission. These financial services are provided only to wholesale clients as defined in subsection 761G(7) of the Act. Standard Life Investments
Limited is authorised and regulated in the United Kingdom by the Financial Conduct Authority under the laws of the United Kingdom, which differ from
Australian laws. Standard Life Investments Limited, a company registered in Ireland (904256) 90 St Stephen’s Green Dublin 2, is authorised and
regulated in the UK by the Financial Conduct Authority. Standard Life Investments (USA) Limited is registered as an Exempt Market Dealer in Canada
and as an Investment Adviser with the US Securities and Exchange Commission. Standard Life Investments (Corporate Funds) Limited is registered as
an Investment Adviser with the US Securities and Exchange Commission. Calls may be monitored and/or recorded to protect both you and us and help
with our training.
www.standardlifeinvestments.com © 2017 Standard Life, images reproduced under licence
INVBBRO_14_1264_ED_GEM_Fund Guide_TCM
12 ED Global Emerging Markets
0517