Global emerging markets roundtable
that our partner funds would not have passive exposure to emerging markets. They might be interested in a net zero- aligned variant of a passive index which is focused on emerging markets. We would not encourage it, but we could facilitate it. I prefer a fundamental active approach to make the best use of your discretionary capital. This is not only to generate returns but achieve other objectives, like investing responsibly. Mead: The majority of our clients have an actively-managed portfolio with some passive around the edges. We are seeing an uptick of clients transferring their pas- sive exposure to an ESG-aligned passive exposure or to mandates where they put their own criteria around what they can and cannot invest in. Treich: We are marketing a Paris-aligned passive fund and every supplier has some- thing along the same lines. Now there is a debate about whose metrics are best and are most relevant. This is difficult for cli- ents to unpick that and get to grips with it. Gill: We have spent a lot of time trying to work out the best way to go. We have many small clients where passive expo- sure in developed markets is the norm. Passive is not always ideal in emerging markets, but we are comfortable with its use for a small allocation. We have been looking at the best way to fold-in an ESG approach, which is a chal- lenge in EM. Things are moving in the right direction with the index providers and we are looking at transition-focused indices rather than low carbon metrics. Treich: We have a commitment to be net zero by 2040. Investing actively in emerg- ing market equity and debt is not incom- patible with that. Visavadia: When it comes to ESG and sus- tainability we have an option to look at equity and debt. We have more control over the debt, because if you do not like the debt of a company you can walk away. Where the challenge comes in is in emerging market debt, which is made up of corporates and sovereigns.
46 | portfolio institutional | May 2022 | issue 113
Some of the more cycli- cal opportunities outside of China can potentially be found in Africa and the Middle East.
Kate Mead, Cambridge Associates
The corporates may be motivated to do good, but the sovereigns may have a dif- ferent journey plan. They may want the capital to build a steel plant, which will revive the community, but will be pow- ered by fossil fuels. By investing in these products, we need to drill down and look at what we are getting into. It may not be ideal in the first five years, but the societal impact could be better in 10 years’ time. So, should we vote for that?
The decision-making framework is not there. It will get more difficult as we go through the process because there are 17 Sustainable Development Goals. We need a framework above that to help us make decisions.
These are challenging times. If the economy moves in one direction then passive investing is fine, but for the next five years there is a lot of uncertainty. Pickering: The response to the first chal- lenge is to line up with like-minded part- ners. Even if you do that, you cannot guar- antee that the line-up will be maintained until the debt matures. Visavadia: We have to go beyond the sur- face level proposition, look deeper into their philosophies and be involved in the managers’ decision making. Shihn: We tend to see trustee boards place a different emphasis on emerging mar- kets, treating them as a risky asset within
a growth bucket, compared to developed market equities which are seen as growth assets within that same bucket. Trustees seem happier to allocate to four to six global equity managers and perhaps one or two emerging market managers. In general, they want those emerging market managers to be benchmark-aware to avoid excessive volatility risk. That mindset needs to be flipped in that they should think about allocating to five or six emerging market managers with differ- ent benchmark agnostic investment approaches, but that requires time and governance budget. This is where you are going to get better bang for your buck in terms of a diverse set of asset managers operating actively as a collective to build emerging markets exposure, taking emerging markets away from being seen as just a risky element within equity allo- cations and more of a growth and return driver. This can allow allocations to more country or regional specialists and build out exposure to emerging markets beyond just the largest countries in the index. Visavadia: Improving the reporting from the advisory world could help significant- ly. We do not know if we performed well or not by having three good bets and three bad. But a report saying that this is the direction of travel, this is the trend in this organisation and this is why we are investing here would be powerful for pen- sion scheme investors. Smith: I can see the point that a great growth manager is a great growth manager, and a great value manager is a great value manager, so why push them to be too core? Why not blend that through diversification?
The parallels of diversification are also relevant in my arena, for example, when investing in green technology companies. The long-term growth opportunity here is attractive, however, there are many unknowns, including around which green technologies will prevail. Different parts of the supply chain will be subject to different forces and differing raw material
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