boutique asset manager selection in emerging and frontier markets

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LMG presentation during the Fund Manager Selection conference in Zurich, Crowne Plaza hotel, Sep 25-26 2013 This presentation is a draft version. Changes compared to the final draft presented at the event are not exluded. LMG believes that a lot of investors and their advisors suffer from a few biases: 1) They overestimate the importance of bottom-up manager selection vis-a-vis top-down asset allocation; 2) They tend to stick too often to the 'usual suspects' who basically represent well-known brand names instead of those with the most promising strategies as far as the potential for excess return is concerned. 3) Within EM and FM space some countries suffering from so-called 'foreign bias' have a far more difficult task to attract investors into local asset management boutiques than others. Often this is not correct. 4) Of course there are regulatory and corporate governance related factors that might work against the EM and FM managers. However, most of them are more than willing to set up structures in line with what investors want, even if this implies going international to let's say Luxembourg, London, New York etc. Bottom-line: do not avoid a careful analysis of interesting local managers. LMG is using quite a few of these managers already in its investment solutions.


  • 1. LMG Emerge Presentation The GLOCAL Concept Selection of Boutique Asset Managers in EM and FM Countries September 22, 2013 Erik L. van Dijk Principal

2. Abstract LMGs GLOCAL Concept is an innovative in/outsourcing system based on our belief that local asset managers are best equipped to add value bottom-up, with LMG coordinating the activities of these managers top-down Top-down: Our tailor-made GTAA advisory system is one of the most extensive of its kind. It is based on a 10-year collaboration with Nobel Prize Laureate dr Markowitz (see also FAJ March/April 2003). Clients have included pension plans and other large institutional investors. Advisory Assets under Management over the period 2005-2012 have been in excess of 35 billion Bottom-up: Best-of-Breed Manager Selection system in close collaboration with Camradata (UK) and eVestment Alliance (USA) Strong backbone partners have already embraced the concept: Banque Privee/Edmond de Rothschild (Developed Markets); Emirates NBD (Emerging Markets/Islamic Finance); Invest AD (Frontier Markets) 3. Abstract (2) Result: LMG Emerge Implemented Consultancy Extra layer for "Alpha Generation" Focus on Best-of-Breed Manager Selection Improved "Risk Control Independent Solutions Strong Partner for Local Specialists Challenging the dominant position of the giant Usual Suspects Transparent Process 4. Abstract (3) But: A lot of the specialists are not completely there yet!! Small, focused teams with less resources What about back-office? What about knowledge of the international financial markets? Willingness to cooperate is there, but how? If you want them to do what they are good at: ensure that other parts of the investment process are taken care of It is hard to convince when unfair odds are against you, so help and train those managers Beware: we are NOT implying here that locals are in all circumstances financially less strong. Local market leaders can be financial power houses in their home market, but relatively unknown internationally 5. Presentation Outline 1. LMG Emerge 1. Who We Are 2. What We Believe In 2. Structed Asset Allocation as Condition Sine Qua Non 3. LMG Emerges Glocal Concept; 1. The Process 2. The Strategy / Our Luxembourg Fund Structure 4. Overview (Boutique) Manager Selection in EM/FM 5. LMG in Emerging and Frontier Markets 1. General 2. MENA/Africa 3. Russia/Central Asia 4. India 5. Other Regions 6. 1. LMG Emerge Who we are LMG Emerge Specialist institutional investment consultant in the Continental European Market; currently staff of 6 ; additional human resources via backbone partnerships Backbone partners: Emirates NBD (General Concept, MENA & Islamic Finance and GLOCAL EM); Invest AD (GLOCAL FM; Africa); Banque Privee / Edmond de Rothschild (Developed Markets); Camradata & eVestment Alliance (database partners) Asset Allocation approach incorporates more than 75 countries Innovative joint work with Nobel Prize Laureate dr Markowitz (FAJ Mar-Apr 2003), chosen by dr Markowitz and a group of fellow Nobel Laureates as one of his best articles Monte Carlo simulations by Prof M Kritzman (MIT) confirm added-value of the underlying heuristic Advisory Assets under Management have amounted to more than Euro 35 billion over the period 2005- current Luxembourg-domiciled SIF-Sicav implemented consultancy-based Fund range established Q1 2013: i) Equities; ii) Fixed Income; iii) Opportunity; and iv) Islamic Finance (forthcoming) LMG Glocal is our specialized distribution affiliate and LMG Capital our newly established private equity/investment banking affiliate specializing in EM/FM. 7. We believe that: Real diversification is the most effective method to control portfolio volatility Asset allocation is responsible for the majority of investment portfolio returns and risk Real asset classes provide investors a risk premium vs. inflation and cash over time Markets are not efficient, and Emerging Markets are often very inefficient Emerging markets will be the growth engine of the global economy for next 50 years Local players will play a growing role in Emerging Markets asset management 1. LMG Emerge What we believe in 8. 2. Asset Allocation Gary Brinson et al.: "The bulk of investment success or failure can be explained by asset allocation decisions" 9. 2. Asset Allocation (2) Current practice: Asset Allocation Asset-Liability Management (ALM Study) Strategic Allocation (SAA) Tactical Asset Allocation (GTAA) But.. Contrary to ALM and SAA; Tactical Asset Allocation often ad-hoc and unstructured And: Over-focus on Bottom-up Manager Selection vis--vis Top-down Asset Allocation 10. 2. Asset Allocation (3) ? ? ? ALM/ SAA EquitiesBonds Other Current Practice Alpha At Risk Risk Control Gap Better structure for increased risk-adjusted returns: ALM/ SAA EquitiesBonds Other Structured GTAA 11. Structured Investment Process 1 ? ? ? ALM/ SAA EquitiesBonds Other Current Practice Alpha At Risk Risk Control Gap Better structure for increased risk-adjusted returns: ALM/ SAA EquitiesBonds Other Structured GTAA 12. 3. LMG Emerges Glocal Concept Optimal structure for higher and TAILOR-MADE risk-adjusted returns: Client-specific risk profiles & Other constraints LMG Emerge GTAA Link to LMG Emerge Manager Selection ALM/ SAA EquitiesBonds Other Structured GTAA Space for innovative boutiques and GLOCAL managers 13. Structured Investment Process 2 Optimal structure for higher and TAILOR-MADE risk-adjusted returns: Client-specific risk profiles & Other constraints LMG Emerge GTAA Link to LMG Emerge Manager Selection ALM/ SAA EquitiesBonds Other Structured GTAA 14. 3. LMG Emerges Glocal Concept Harry M. Markowitz & Erik L. van Dijk Financial Analysts Journal, March-April 2003 "Optimal Portfolio Construction is not the same as Textbook Mean-Variance Optimization" 15. 3.1 Process LMG Emerges Glocal Concept LMG Emerges Glocal Concept is the result of more than 20 years of research Essential underlying principles of the process are: Man-Machine Near Optimization and State-of-the-art GTAA Be active when you can, but passive when you have to Best-of-Breed Manager Selection Local Presence Adds Value Hardly any global asset manager outperforms in more than just 30 percent of its products and this is especially for the large, global fund houses 16. LMG Glocal Trust Fund; building blocks: Multi-manager SIF-Sicav structure, consisting of 4 sub-funds (launched Mar/Apr 2013) Equities Sub-Fund Listed equities; Developed, EM and FM Markets; balanced approach Fixed Income Sub-Fund Fixed Income, Developed, EM and FM Markets; sovereigns and corporates; balanced approach Opportunity Sub-Fund Other asset classes; Developed, EM and FM Markets and Opportunistic Equity Islamic Finance Sub-Fund (forthcoming) 3.2 The Strategy - Our Luxembourg Fund Structure 17. LMG Glocal Trust Fund; for our clients: Tailor-made, customized approach using all 4 sub-funds as components: Defensive Profile Strategic Tilt toward Fixed Income Sub-Fund and if allowed and relevant Islamic Finance Sub-Fund Balanced Profile No clear tilts over the full business cycle; profile tilt can switch between defensive and dynamic Dynamic Profile Strategic Tilt toward Equities and Opportunities Sub-Fund But Boutique EM/FM specialists included in all strategies and for all clients! 3.2 The Strategy (2) - Our Luxembourg Fund Structure 18. 4 Overview Man Selection in EM and FM Factor/Region MENA AFRICAEXSA SOUTHAFRICA RUSSIA EMEUROPE TURKEY CENTRALASIA INDIA CHINA OTHERFAREAST BRAZIL OTHERLATAM GLOBALDEV EDUCATION SKILLSET REGULATORYINFRASTRUCTURE CORPGOVERNANCE ASSETMGTPROFESSIONALISM ASSETMGTBREADTH MARKETSIZE ALPHAPOTENTIAL/INEFFICIENCY CULTURALDIFFERENCES GOOD AVERAGE POOR/QUESTIONABLE LMG: Mena, India and Brazil definitely the three regions where all-of- us should consider to look at local specialists; Africa, Russia, Central Asia and still China if you have the guts (or adviser!) 19. Glocal Concept assigns core role to EM and FM Market Inefficiencies The more inefficient a market, the bigger the likelihood that local presence will add value Market Trends / Developments Relative weight of EM and FM (as part of global GDP) grows; and so does LMGs involvement with these markets (since 2005) Ideal Partner for Globalizing EM/FM Partners and Investors Selected EM and FM Partners and Investors are ready to go abroad; LMG is their ideal, trusted partner 5.1 LMG and Emerging Markets - General 20. LMG Emerge: Key Emerging Region #1 LMG partners with regional giants Emirates NBD (Dubai) and Invest AD (Abu Dhabi) as strong backbone partners Islamic Finance is booming LMG involved with and acknowledged as specialist in Islamic Finance; first official meeting with Grand Imam already back in 2000; definitely an area where one needs the local partners! Core region due to Energy and Financial Wealth Oil and Gas Wealth; region is home to some of the most wealthy countries in the world (KSA, UAE, QAT etc) 5.2 LMG and Emerging Markets - MENA/Africa 21. LMG Emerge: Key Region #2 LMG Network Traditionally strong network through our cooperation with TLCS and our own former ties to FIDE (World Chess Federation; with strong ties to the Kremlin) Changes in Foreign Bias Traditionally least-favored region by Western investors; but foreign bias to change in a changing world in which EM and FM gain in importance (= opportunities for specialists like LMG) High growth region characterized by (natural) resource abundance Commodity-rich region (Energy, Mining and Precious Metals, Selected Agricultural Commodities); Growing interest in top-quality Diversified Financial Services; High level of technical education 5.3 LMG and Emerging Markets - Russia/Central Asia 22. LMG Emerge: Key Region #3 LMG Network Together with our new backbone partner: an Indian multi-family office that started our LMG Capital joint venture together with


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