Commentaries

July 2021 - Mega-Cap rout hurts Market-Cap based indices - Systematic Fund Manager's Comments

9 August 2021

Emmanuel Hauptmann

 

China’s crackdown on Big Tech

In recent months, China's tech industry has been under pressure due to government’s willingness to tighten its control from an antitrust and data security perspective. The starting point of this move was the suspension of Ant Group’s IPO in November 2020 after the enforcement of an antitrust law in place since 2008.

The victims of the so-called “Big Tech Crackdown” were 34 firms mainly in sectors like Consumer Discretionary, Communication Services and Information Technology, among which index heavyweights such as Alibaba, Tencent and Meituan lost significant value in market capitalization. To better illustrate the extent of the impact, the Hang Seng Tech Index, which is covering the 30 largest Chinese tech firms, lost close to USD 800 billion in market value from its February peak.

The following table shows for the MSCI Emerging Markets Index the YTD performance contribution by country (restricted to those with a weight over 2% in the index). The performance lag can been explained by for instance Alibaba, Tencent, Meituan and JD:Com, representing 13.43% of the index and detracting -2.35% from YTD performance.

MSCI Emerging Markets Index

From 31-12-2020 to 31-07-2021

                 Source: MSCI Indices, Bloomberg, RAM AI, as of 31.07.2021

 

 

Diversification beyond the Mega Cap Growth segment

After years of the concentration of risk in mega-caps luckily benefiting the index, recent weeks remind investors of the lack of diversification offered by a market-cap based approach, which tends to be costly over the long-term.

We illustrate below the lack of diversification of the MSCI EM index, the vast majority of the index VaR being explained by the mega-cap segment of the market, itself representing a fraction of the investment opportunities existing in EM. We thrive to offer our investors access to high alpha opportunities in All Cap EM while preserving large risk diversification, with an investment process targeting significantly higher long-term risk-adjusted returns than the index thanks to much less risk concentration.

 

VaR (1-day, 99%, MC) contribution by market cap

 

Source: RiskMetrics, RAM AI, as of 31.07.2021

 

 

Strong sustainable alpha capture YTD

Our RAM Emerging Markets Equities strategy has been designed to capture market inefficiencies and generate sustainable alpha in a diversified manner across strategy, market cap, sector and country segments. The fund (IP USD share class) exhibits a YTD outperformance of 12.46% versus MSCI Emerging Markets TR Index, which is the result of a strong stock picking stemming from various strategies and market cap segments.  

 

RAM Emerging Markets Equities vs MSCI Emerging Markets TRN USD Index

From 31-12-2020 to 31-07-2021

 

         Source: Bloomberg, RAM AI, as of 31.07.2021

 

Through our systematic process, we select companies exhibiting the highest alpha potential based on a wide array of fundamental, sentiment, risk, technical and sustainability aspects. Thanks to our continuous ESG data integration efforts, we have a truly diversified All-Cap portfolio in Emerging Markets with a strong sustainable bias, typically a challenge for EM Small- and Mid-Caps. Our RAM Emerging Markets Equities strategy exhibits an overall MSCI ESG rating of A, compared to a BBB rating for the MSCI Emerging Markets Index.

 

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