Russian Issuers target Asia for the next investor opportunity.

Co-authored with Elena Biletskaya, EQS group, Moscow

ARFI (the Russian Investor Relations Society) most recently held an event in Moscow discussing Asia’s investment landscape and its attractiveness for Russian issuers. The discussion on this topic is timely given the recent wave of investment outflows from the market as well as sanctions imposed on a number of companies with government as a shareholder. A number of speakers from the companies side shared their thoughts, comments and case studies about their approach to Investor Relations in Asia. While there was general agreement about the scale of the opportunity, there are a number of considerations worth taking note of.

1- Although changing, Institutional investment investment mandates of Asian investors are broadly biased towards domestic opportunities. There is evidence of the investment market quickly evolving (developments ranging from global AUMs perspectives, to infrastructure/trading landscape, to reforms in pension funds).

2- Retail investors who play a large part in the market are interested in names and brands they can easily relate and identify with, an element worth considering in any future listing discussions.

3- Cultural differences often mean that Asian approach to investing is a longer game which requires commitment and a permanent place in the IR calendar.

From our experience, Investors in Asia expect same (if not higher) level of disclosure and excellence in communication as investors in Europe or US. They are diligent and opportunistic investors who see investing in EMs an important theme for this decade.

For us, the IR teams in Russia- It is certainly long game worth playing. As always we believe technology and digital tools can play a big role in supporting our efforts.

EQS Group_Presentation_Non-deal Roadshow

EM Investor Alert: DFM & Goldman Sachs to hold London roadshow, 21-22 April

Dubai Financial Market is hosting its biggest roadshow since inception in London on the 21st and 22nd of April 2015 in collaboration with Goldman Sachs. Attending the roadshow will be the C- Level executives of DFM’s top 20 companies who will be giving the latest updates on the developments and strategies of their companies.

Participating companies:

Air Arabia
Aramex
Damac Real Estate
Drake & Scull
Dubai Investments PJSC
Dubai Islamic Bank
Dubai Parks
Emaar Malls Group
Emaar Properties
Emirates REIT
GGICO
Gulf Finance House-GFH
MARKA
Mashreqbank
Shuaa Capital
DFM
Orascom
DEPA

If you are an institutional investor and wish to be part of this event please send an e-mail to rchamut@dfm.ae

Drivers of Innovation in Fund Management

research study published last week by London-based think tank Create Research deserves a closer look. Amin Rajan, who is both CEO of Create and an early mentor to Closir, conducted a study into how digitisation, and the intrusion of internet and mobile players, looks set to reshape the asset management industry during the coming months.

Fund managers themselves have been slow to embrace technological innovation, although in the last 12 months a number of global trends have started to help the process along:

  • An exponential growth in number of affluent investors
  • An increasingly tech-savvy population
  • Greater flexibility in pension contributions and longer life expectancy
  • Increasing demand for transparency and synchronisation from regulators
  • Growth of geographically ‘portable’ investment products such as ETFs
  • The popularity of social media channels spilling over into the finance community

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The report outlines the emergence of several new models:

In the evolving marketplace, virtual advisors offer the mass affluent market a streamlined communication process through mobile and digital media, enabling them to take advantage of technology while retaining some of the personal touch.

Online advice platforms, or ‘robo advisors’ as they are being called by some, have already started to offer retail clients the chance to build personalised portfolios using proprietary algorithms.

Fund consolidation portals will help them to aggregate and manage investible funds across multiple platforms.

Given the obvious opportunities these trends present for ambitious and resourceful technology players, it’s unsurprising to hear Google and Apple mentioned as potential disruptors. Create’s report suggests mobile phone providers may also be well positioned to enter the fray.

Although industry players have been losing sleep over the tech giants for some time, there are obvious hurdles for data-sharing social technology companies in an industry which is defined by a strong risk culture, regulatory oversight and the importance of data security.

Strategic partnership with finance players may be a good option for technology and mobile companies, as it offers them a way to mitigate these concerns while making the most of complementary skill sets. There have already been some high-profile collaborations, with Aberdeen Asset Management forming an alliance with Google and Canadian mobile provider Rogers Communications partnering with Canadian bank CIBC.

Change may be gradual in an industry traditionally resistant to technology. Create points to the airline industry as a successful model, where both customers and providers quickly adapted to the increased efficiency offered by technology as concerns over security proved to be exaggerated.

Source: Create Research

ETFs in 2020

A comprehensive paper published by PwC last month entitled ‘ETFs in 2020’ paints a very detailed picture of how the Exchange Traded Fund business is likely to evolve globally over the next five years. According to the analysis, the market will double to $5tn by 2020, and its impact has the potential will be felt much more widely within our industry than previously imagined.

A few takeaways from the report we found particularly interesting:

  • Despite fragile economic growth in developed markets, the global AM industry is predicted to grow at a healthy pace. Having doubled over the past decade (to $70tr), PwC predicts professionally managed financial investments will grow by 6% per year , due to both asset inflows and value appreciation. The US & Europe will dominate asset flows in absolute terms, but the highest rates of growth are likely to come from developing markets. Passive funds currently account for around 35 per cent of all mutual fund assets in the US.
  • New types of indexing (also referred to as ‘smart beta’) are perhaps the most important area of innovation within theproduct class. As they continue to evolve, a growing number of investors are likely to opt for index weightings based on factors other than market capitalisation, which by itself can lead to overly concentrated exposure to certain markets, sectors, or securities. The size and scope of actively managed ETFs are also set to grow (there are currently 55 actively managed ETFs listed in the US with AUM of $9.6 billion).
  • The regulatory environment in the US and Europe is expected to have a significant impact on the evolution of ETFs. New regulations could spark further growth if they permit further product innovation or lower distribution barriers, but they could also dampen demand, particularly if new tax rules make ETFs less attractive or convenient. For instance, MiFID II could be a game changer in Europe, where the adoption of ETFs by retail investors significantly lags behind the US.
  • Firms offering ETF products to investors will need to consider rapid changes to the way asset management services are created and consumed, with the most dramatic changes enabled by technology.

If the predictions do come true, they will no doubt have an impact on a future shareholder register structure and consequently on corporate IR strategy.

A few questions for companies to consider:

  • Do I monitor my shareholder register on a fund level, for the activity of the largest three ETF fund providers: Vanguard, Blackrock (iShares), and State Street (SPDRs)?
  • Am I familiar with which are the largest and most active ETFs in my asset class? I am aware of key trends and drivers of their growth?
  • Do I know which indices is my security a constituent of?
  • Am I staying on top of developments in the active ETF space?

Top 10 Emerging Market ETFs

Name of Fund Assets Average Volume 2015 Performance
Vanguard FTSE Emerging Markets ETF $46,331,830 13,908,497 +4.40%
iShares MSCI Emerging Markets Index Fund $31,702,630 55,250,906 +3.51%
iShares Core MSCI Emerging Markets ETF $6,254,856 2,344,426 +3.91%
iShares MSCI India ETF $2,822,917 1,059,985 +10.02%
WisdomTree India Earnings Fund $2,308,956 4,828,908 +8.34%
WisdomTree Emerging Markets High-Yielding Equity Fund $2,256,093 914,679 +5.69%
iShares MSCI Emerging Markets Minimum Volatility Index Fund $2,093,439 446,303 +4.36%
Market Vectors Russia ETF $1,610,733 20,284,920 +23.38%
WisdomTree Emerging Markets SmallCap Dividend Fund $1,470,268 273,755 +3.34%
Schwab Emerging Markets Equity ETF $1,182,924 536,871 +4.23%

Sources: PwC, ETF Database. To download a copy of the PwC paper visit: www.pwc.com/etf2020

Activist Investor’s influence on Passive Funds

The cover story from this week’s Economist caught our attention, particularly as it relates to a number of IR themes we have been observing closely. Academic literature* examining the recent track record of US activist investors concludes that despite their reputation and short term focus they are more often than not a force for good, at least in terms of driving greater operating performance and shareholder returns.

The article draws attention to a polarity in today’s average shareholder structure, one that is particularly evident in the US. On one side of the spectrum is ‘lazy money’ which comprises a growing number of computer-run index tracking funds, ETFs and mutual or pension funds, which generally prefer not to get too involved in radically altering the strategic direction of the companies they invest in. On the other are large funds which buy entire companies, often taking them private and actively dictating strategy.

Activist investors can fill a key corporate governance void by influencing passive funds and ‘lazy money’ to take an interest and support either the activist investor or management’s chosen course of action. The long-only funds holding the majority of the free float generally assume the role of ‘blocker’ or ‘enabler’ for activist campaigns so the more involved they are the better. This involvement looks set to increase as activist funds grow in popularity. In 2014, a fifth of flows into hedge funds went to activist investors, resulting in their AUM rising from $55bn to $120bn over a 5-year period.

The two largest providers of passive products, Blackrock and Vanguard, have already pledged to work more towards ‘long term interests’; this will inevitably include increased contact with company boards. Company management and IR teams may also make a more proactive effort to establish relationships with passive managers, something which was not really considered as recently as a few years ago.

The final angle of the debate centres around the potential for transferring the US-style activism model across the Atlantic, particularly given the arguably limited opportunities in the US (only 76 companies in the S&P 500 registered a poor 5-year Return on Equity and only 29 trade below their liquidation value). European investors will argue that they already have more say than their American counterparts on corporate governance issues such as renumeration and board appointments, and differences in culture as we move east mean that many activist fund demands are often settled discretely and diplomatically.

* Long Term Effects of Hedge Fund Activism, Lucian A. Bebchuk,  WSJ

US fund managers launch their own dark pool

Some of America’s largest asset managers are looking to launch their own trading venue, allowing them to buy and sell large blocks of shares without the involvement of exchanges or high speed traders. The new venture is majority owned by Fidelity and includes some of the largest money managers including JP Morgan AM, BNY Mellon, Blackrock, Capital Group, MFS, T Rowe Price, Invesco and State Street. The platform is looking to formally launch later this year. Recent articles in WSJ and FT provide some additional context to this development.

Active encouragement for fund managers

A number of eye-catching recent statistics have reignited the ongoing debate around active vs. passive investment. Passive funds now account for 35% of all mutual fund assets in the US, up from just 2% 20 years ago. As illustrated in the Financial Times charts below, in 2014 less than 15% of US large-cap mutual funds outperformed their benchmarks, marking a low point for an industry under increasing scrutiny. 

 

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When even Warren Buffett is telling his wife to put 90% of his fortune into an S&P 500 tracker fund after he dies, it’s difficult not to pay attention.

Morningstar recently posted an interview discussing some of the key reasons behind the growth of passively managed funds during the last 12 months. The 3 main themes highlighted are:

  • Lower-cost products
  • Wider choice of index funds
  • Strong global index performance

To a certain extent, these themes go hand in hand – the better the main indices perform, the more interest passive funds generate and the more products are tailored around them. With returns under greater scrutiny than ever, the cost advantage to index investing from a fund management point of view looks increasingly attractive to investors.

Vanguard’s own blog puts the role of these costs into perspective. Given the small margins, reducing the execution cost of the actively managed fund significantly increases the likelihood that it will outperform the benchmark. In fact, for funds with a cost lower than 50 bps this number rises to 39%.

 

vanguard

Perhaps inevitably, 2014 saw a substantial increase in the prevalence of alternative investment strategies such as smart beta. These strategies are a logical half-way house, offering investors the lower-cost security of index investment with the flexibility of an active weighting strategy. It may be too early to evaluate the long-term success of this approach, but after such a difficult year in the press, active fund managers are increasingly taking advantage of the additional opportunity to demonstrate that skill still has a huge role to play in chasing alpha, even if this does herald a more general trend towards cost reduction across the investment management industry.

Closet tracking

Many have pointed to the dubious practice of ‘closet tracking’ as a drag factor on active investment return figures. Closet trackers are actively managed funds which track the index either entirely or to a significant extent, meaning that investors lose out on both counts, as they are charged high fees for what are effectively passively managed funds. In fact, Informed Choice point out that over three quarters of the IMA UK All Companies sector funds correlate with their benchmark index to a degree of 90% or more. An FT article recently highlighted that as much as a third of actively managed UK funds can be classified as such. Some correlation is probably a good thing, particularly given index performance in 2014, but given the higher fees there comes a point where it makes more sense for investors to bypass the middleman and go straight for the index.

The case for active management

Active and smart beta funds still offer some obvious advantages over their passive counterparts. A Times article published on Saturday cites a study by HFM Columbus which suggests that active funds in the UK have actually prospered during the last 12 months, although the study does not take into account the execution costs of the respective strategies.

The article highlights the fact that control over investment provides protection against macro industry trends such as the falling oil price, as the performance of companies like BP and Royal Dutch Shell drag indices down and provide the active fund manager with an opportunity to outperform. The strong performance of small- and mid-cap stocks in 2014 also offered investors a good alternative for getting ahead of the market. Skilful fund managers continue to exploit this opportunity to good effect to stay ahead of their benchmarks. As the Novel Investor chart we posted up over the weekend shows, emerging market equities are the other big performers as an increasing number of active fund managers look internationally for value. Opportunities are often found within segments of the market not covered by mainstream research analysts. 

The wider performance margins emerging markets and SMEs offer can reduce the impact of execution costs for high return funds (the impact of macro trends can be similarly amplified). The higher volatility of these stocks coupled with a more lenient disclosure environment and an often unpredictable economic or political climate means that it’s particularly important for investors to be actively engaged with the companies in their portfolios, and to stay on top of and react to the latest developments to maintain an edge over their passive rivals.

If they can manage this, 2015 may yet be the year of the active investor.