August 2019 - Emerging Markets at RAM: A 10-year perspective - Systematic Fund Manager's Comments

5 things that have underpinned our investment case.

1.  An Unwavering Systematic Solution

• We capture persistent fundamental inefficiencies that deliver sustainable alpha. This is our conviction as fund managers. We look at fundamental factors through a quantitative lens. Our research in this space enables us to build multi-factor models which are the foundation for our engines. These engines look to capture a specific type of inefficiency in their respective universe. Our edge lies in taking a fundamental approach by amalgamating Value and Defensive strategies, playing the convergence with the market. The behavioural component then is expressed via our GARP/Momentum strategies that tend to outperform in trending markets, playing dispersion within the market.
• Our philosophy remains unchanged since we began investing here. However, our process is adaptable and evolutive, meaning we do make incremental changes to our alpha engines. We believe our systematic approach is more robust over time as it removes any discretionary inputs. We’ve seen this negative effect of “herd mentality” during the 2008 Global Financial Crisis and the Dotcom crash in the 90’s. This is the tendency of investors to mimic the behaviour of other market participants, which can lead to “bubbles” and price trends in particular asset classes, sectors or even individual stocks. As systematic investors, we eliminate these emotional biases.

 2.  Emerging Markets: The Long-Term View

• It’s all too easy to become absorbed by the shorter-term geopolitical and macroeconomic influences that punctuate markets daily, long-term structural changes continue to create a fertile selection opportunity for active managers.
• We’ve been investing in Emerging Markets for over 10 years. Our models are constantly updated with the very latest market information. It has been our experience, and it is born out in our performance numbers that this approach extracts alpha over the medium term.

 3.  Research Inspires Our Conviction

• Our research here at RAM is an iterative process. Our aim is to ensure we never neglect any possible relevant information source that could be integrated into our process and thus enable us to better-capture the inefficiencies we seek to exploit. Our most recent research initiative is the implementation of a machine learning infrastructure. In April last year we deployed our Machine Learning “ML” Strategy within our Emerging Markets Strategy (see chart below).
• Thanks to the ML Strategy we have a higher degree of diversification across our main portfolio building blocks. The ML strategy takes a broader perspective on inefficiencies that helps us identify names that we were not considering due to their “non-pure” characteristics. ML has enabled us to add to our portfolios between 80 and 100 names in our selection. This enables us to further diversify our risks, and it represents a positive alpha contributor, as illustrated below.

4. Go All-Cap, Be Active

• Our approach to capturing fundamental inefficiencies lies within a flexible market cap approach, with as little stock-specific risk as possible. Over the long-term our all-cap approach has provided an important source of alpha to our investors. Small and mid-caps, owing to the domestic orientation of their revenue, tend to display a different behavior than their large-cap counterparts (aside from market shocks), acting as a true portfolio diversifier.
• Small and mid-caps have lagged since the beginning of 2016, largely owing to the growing phenomenon of liquidity-hunting ETFs and other passive investors, distorting valuations and the pricing of risk. However, historically, outperformance of large caps at the beginning of a recovery is typical. In the past, SMID caps have tended to catch up once Central Banks’ rate tightening cycle ends. For us, it’s indicative of an attractive entry point for investors.
• While ETFs and other passive vehicles offer cheap and convenient access to emerging markets, they represent unwarranted risk and an inability to profit from the dynamic and idiosyncratic nature of the asset class, and hence the significant opportunity for alpha.

 5. Performance Put in Context

• The RAM Emerging Markets Equities Strategy uses a fundamental systematic stock selection
  approach to capture a wide array of fundamental inefficiencies in an all-cap universe of stocks, highly diversified across small, mid, and large caps as well as Value, Low-Risk and Growth/Momentum investment styles.
• We offer access to unique opportunities across market cap segments quasi absent from ETF allocations. We aim to maximise the long-term alpha generated within a broad EM Universe, with strong liquidity and market risk management, helping us to achieve excess returns over the longer-term vs more concentrated indices like the MSCI Emerging Markets Index, with less volatility.
• Our achievements are evidenced below: