Process

Selecting Asian and emerging market managers: Philosophy & Process


While emerging markets can provide extraordinarily high directional returns from time to time, for most investors, hedged or absolute return managers provide a better risk-return trade-off.  Downside risk management is crucial in the emerging market world, and typically it’s in the difficult parts of the cycle that good managers create their outperformance. Such “skill-based” managers aim to extract returns primarily from the inefficiencies specific to their markets, and can generate high returns, at low correlation to other assets.  Furthermore, as emerging capital markets continue to develop, the nature of the inefficiencies change, meaning that skill-based managers can continue to extract returns over many market cycles.

GFIA’s skill set, developed over 13 years, is in understanding such managers. The principles underlying GFIA’s research and investment approach are:


Philosophy


Information is everything…
•    Without information there’s no understanding
•    Access to managers is a prerequisite


Qualitative information is usually more useful than quantitative…
•    If it’s quantifiable, it’s already happened; however investment is about thinking about the range future outcomes. Hence quantifiable information is naturally of limited use.
•    Historical data tell you about the experience resulting from a specific set of circumstances, which will change! Qualitative information can give some insights into how an organization or a strategy might behave in various possible circumstances


Risk management is the source of return…

•    Returns can rarely be predicted; conversely risk can often be modelled.
•    Risk in skewed investments is generally tail risk – volatility is a return indicator not a risk measure
•    Empirically, outperformance of good alternative investment strategies comes more in difficult market periods


Successful research and decision making is a result more of hard work than genius…

•    Intensive manager assessment & due diligence is the key to good decisions
•    Genius is fleeting and unstable.  We rarely acknowledge its utility in our work.
•    Front-load the research to ensure the right allocation decisions, which will remain stable. Continue assessment throughout the relationship with the manager

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