In recent months, Pacific Investment Management Co. LLC, TOBAM and Acadian Asset Management LLC have introduced equity-only strategies. RCM Capital Management LLC, AllianceBernstein LP, Baring Asset Management and Franklin Templeton Investments have created emerging markets multiasset strategies designed to lower volatility or provide protection against major losses.
“For those people who are cautious about volatility, in both an absolute sense and versus funding ratios, a multiasset approach makes a lot of sense,” said Philip Dawes, director and head of sales and consultant relations at RCM, London. The firm's multiasset strategy launched in February.
Although consultants see sense in the theory of lowering volatility and providing downside protection, they say implementation is key. Consultants are wary of costs and skeptical that managers are trying to time markets in multiasset strategies.
The theory behind these strategies is not new — managers have run similar equity and multiasset approaches in other geographical areas for years. But the desire by investors and consultants for greater exposure to fast-growing emerging markets — tempered by investor wariness of risk — has fueled the recent boom in strategies, managers say.
“Institutional investors know they're underexposed to emerging markets, but they're apprehensive about risk,” said Morgan Harting, senior portfolio manager and emerging markets multiasset team leader at AllianceBernstein in New York.
Downside protection is particularly important in emerging markets equity “because when you look at emerging markets returns, every five to six years you have an event that erases over 50% of your value,” said Maria “Masha” Gordon, executive vice president and lead portfolio manager in emerging markets equity at PIMCO in London.
PIMCO limits losses in its strategy at 30% — or 1.5 standard deviations from the long-run average volatility in emerging markets equity of 20% — but doesn't give up any returns to do so, Ms. Gordon said. “You're not giving up upside; you're capping downside,” she said.
That's because PIMCO looks for the cheaper ways to hedge against major losses. One example is the Australian dollar: AUD options won't hedge against minor performance bumps in the road, “but it is an asset that correlates with a rise in risk aversion in a global meltdown,” Ms. Gordon said.
Also, PIMCO pays for this downside “insurance” with other investments, such as currency carry trades. That adds 75 basis points of additional return to the portfolio, defraying insurance costs.
Assets in the strategy totaled about $1 billion as of June 30; it was launched in April.
Earlier this month, TOBAM announced it had created an emerging markets equity strategy using its anti-benchmark approach. Although designed to provide maximum diversification among a universe of stocks, the approach typically reduces volatility by 30% a year, said Christophe Roehri, managing director and head of business development at TOBAM in Paris.
By maximizing diversification, investors get the fullest exposure to the equity risk premium, he said. Because market-cap-weighted indexes will be concentrated in certain sectors, removing those concentrations lowers the volatility. The emerging markets strategy was seeded by a European public pension fund with $135 million, its total assets to date, Mr. Roehri said. He wouldn't identify the pension fund.
Investment consultants say there's value in limiting risk in emerging markets equity strategies.
“We've found that very few emerging markets equity managers can outperform on the upside consistently,” said Ulla Agesen, U.K. head of equity manager research in London for Aon Hewitt. “If you look at it over a full market cycle, the philosophy is that you get better performance by consistently protecting on the downside than you do by outperforming on the upside.”