Guilherme Ribeiro do Valle, founding partner of emerging markets fund-of-funds boutique ABS Global Investments, said the strategy his firm designed two years ago to minimize the double layer of fees inherent in fund-of-funds and manager-of-managers structures has notched its first institutional win — a $200 million separate account mandate from the California State Teachers’ Retirement System.
A spokesman for CalSTRS, the second-biggest U.S. public pension plan with $349.5 billion in assets as of March 31, declined comment.
Valle, in an interview, said CalSTRS’ mandate will effectively double the client assets the firm’s ABS Insights Emerging Markets strategy has gathered since its launch as a private fund in January 2023. Over the past two years, the strategy has been made available to investors in collective investment trust and mutual fund vehicles as well.
Valle pointed to the Insights strategy as the latest milestone in a process of “continual evolution” that's seen ABS, with roughly $8 billion in assets under management, move beyond an initial focus on long/short global hedge fund managers at its founding in 2003 to a narrower focus on emerging markets — both long/short and long only.
Amid the change, however, ABS’ reliance on “local specialist partners” — experts in Mexican or Brazilian or Chinese stocks, rewarded to the extent their concentrated portfolios of 30 or so holdings outperform their country-specific MSCI index — has been a constant.
ABS launched its emerging markets long/short portfolio in 2012, with 22 to 23 local partners.
And then in 2017, said Valle, Jason Malinowski, the CIO of the $4.3 billion Seattle City Employees’ Retirement System, approached ABS for a search Seattle was conducting for a long-only emerging markets mandate, to see if ABS could offer its strategy in a long-only format as well.
Malinowski, in an email, confirmed that Seattle City ERS seeded the long-only emerging markets strategy in 2017.
That call from Seattle "was the genesis of our long-only business. We started to convert some of the investments we had as limited partners in funds … to separately managed accounts that we control” — more manager of managers than fund of funds, Valle said.
“So instead of buying shares of someone else's funds, we go … to Brazil, or India, or Korea, open our accounts, get our tax IDs, and then we hire the managers to pick the stocks for us, and what’s interesting is that in most cases, we're using hedge fund managers to pick long-only stocks for us,” even as ABS continues to invest in those managers’ hedge funds, he said.
Valle said ABS takes a “humble” approach to managing its portfolios, maintaining index-like weights as opposed to timing country-specific exposures, relying instead on the stock-picking skills of its local partners. The firm’s focus on domestic stocks benefiting from the rise in the middle class gives ABS portfolios a heavy weighting in small- and midcap stocks, he said.
The long-only product ABS launched in 2017, with more than 600 holdings — or roughly 30 apiece for the 22 or 23 underlying managers — "has been a hit," garnering good reviews from a number of investment consulting firms, said Valle. He declined to name them.
According to Seattle City's most recent report, for the quarter ended Dec. 31, the pension fund's $119 million allocation to the ABS Emerging Markets strategy has delivered an annualized return of 3.4% since inception, besting its MSCI Emerging Markets IMI (Net) benchmark by roughly 1.2 percentage points, despite underperforming for the most recent three years.
Despite that early success and warm reception, however, “there’s always one pushback,” Valle said, over the two layers of fees that fund-of-funds managers and managers of managers such as ABS charge to cover both their own fees and what they pay the managers they deploy. And that has left the firm perennially challenged to make its total expense ratio not very different from that of a regular global emerging markets manager.
Valle said ABS’ Insights — a replication strategy that relies on in-house quant models to "utilize the signals from underlying local specialists at a lower cost" — has been ABS’ answer to that challenge.
The strategy creates a representative sample of 150 to 250 stocks from ABS' larger, 600-plus emerging markets portfolio, requiring "a lower management fee to our specialists than when they fully manage the account," he said.
Once a stock is picked into Insights, “we see which manager or managers brought us that name … and now we pay the manager a much lower fee just based on that name,” said Valle. “So by using this structure, we’re able to create a strategy that has most of the same characteristics of our core strategy but doing that in a way that the overall cost of the portfolio is much lower,” he said.
"It is a matter of investor preference if they choose to go the full manager-of-manager route or if they prefer a replication strategy with similar returns," such as Insights, Valle said, adding that in the long run he would expect the performance of both products, net of fees, to converge.
