Performance Review 2006James Smith: "2006 proved to be one of the most volatile years in the history of emerging markets. Despite the dramatic sell-off witnessed in May and June, emerging markets finished the year with very strong returns.
The fund underperformed the index because of our aversion to Brazil, Russia and India, which we believed to be overbought and because we only invested in areas which scored highest in our country model, regardless of index weight.
We focused our allocation on Asian markets such as Taiwan, Thailand and Malaysia which had been left behind in the significant bull market of the previous few years. These markets appeared to be undervalued in both absolute and relative terms but would benefit from strong economic growth."
Performance Review 2007
James Smith: "Emerging markets had a volatile start to the year with unsupportive interest rate environments, particularly the US, impacting markets. Our portfolio continued to favour the Asian region.
Sentiment in Emerging markets improved from May onwards and despite global imbalances, appetite for higher risk assets rebounded, although there was a notable divergence in returns across the region.
The year ended with more volatility for global equity markets as continued fears surrounding the credit crunch and US sub-prime concerns dictated market direction and investor sentiment.
Russian economic growth remains firm, outweighing any concerns about the rising inflation trend. The Turkish market maintained its 2007 trend in December as the best performing market in the emerging European region. India posted another strong return with mid and small cap stocks particularly performing well."
Performance Review 2008
James Smith: "The threat of a potential US recession pushed commodities lower during the start of the year. Intense market correction affected most Emerging Markets. Being underweight China and Korea aided performance in the early part of the year. Being underweight materials and overweight banks was detrimental to performance.
Markets rallied towards the end of the year. The Fund underperformed mainly due to being underweight in China and overweight in Russia."
Performance Review 2009
James Smith: "During the first quarter of the year, the fund lagged the index as its zero weighting to Brazil impacted performance. Main underperformers were PKO Bank, Richter Gedeon, Pekao and Petrobras.
The Fund outperformed in quarter two. Most notably the fund gained from its large allocation to Hungary and Turkey where both markets bounced sharply. Thailand and Singapore were also positive. At stock level Venture Corp and KGHM were strong.
The Fund outperformed again in Quarter three, due to sizable overweights in Hungary, Turkey, Poland and Russia. Strong performance came from MSCI OPAL Russia, Banco Macro and OTP Bank.
Avoidance of markets leveraged to cyclical recovery and underweights in Brazil and Mexico contributed to fund underperformance in quarter four. Main underperformers where Orascom Telecom, ING, Citigroup and CEZ."
Performance Review 2010
James Smith: "World equity markets were strong in Q1 with emerging markets leading the way. Enthusiasm came from continued improvements in the global macro economy. The Fund’s performance was largely driven by over-weights in Hungary, Egypt and Russia with an underweight in China.
After an exceptionally difficult May, June continued to be a testing time with the fund lagging the index. Continued investor nervousness and subsequent avoidance of risk assets negatively impacted the fund. Positive performance from Argentina and South Korea was offset by negative contributions from Europe, in particular Poland, Hungary and Czech Republic. On a positive note, the fund sold its exposure to Hungary early.
The Asset class finished the year strongly. Outperformance came from an over-weight to Eastern Europe, particularly Russia and Poland."
Performance since 2006
Please refer above for commentary covering the period 2006-2010.
Investment Process and Strategy – How does the Fund Manager Invest?
James Smith: "The Ignis International Emerging Markets Select Value Fund uses a top-down value driven approach to invest in the most attractive emerging markets. This contrasts with the bottom-up stock picking approach of many emerging market equity managers, making the fund an attractive diversifier within a global emerging markets allocation.
The core concept behind the Ignis emerging markets (EM) investment process is relative value and mean reversion, applied to both top-down sector selection and bottom-up stock selection.
The Ignis Global Equity team believes that a “value” style of investing, focusing on relative value opportunities and the mean reversion principle, applied in a disciplined and consistent manner, will outperform and deliver significant alpha in the long term.
The quantitative screening provided by MASAM provides an objective framework for making investment decisions. This reduces the chances that decisions will suffer the emotional and psychological biases (such as anchoring, herding and loss aversion) that can affect fund managers. The process also recognises the weakness of a purely quantitative “black box” approach, and so the objective quantitative screen is blended with the subjective judgements that reflect the manager’s long investment experience.
The Strategy manager believes that in the long-run the majority of the variance in stock prices can be attributed to overall market conditions, and in particular how the market perceives the country in which a stock is domiciled. Our belief is that over time a smaller part of the variance is explained by stock specific factors. There is considerable long-term empirical evidence to support this within the EM asset class. Given this view, the portfolio is driven by market selection, rather than stock picking.
The MASAM screen lies at the heart of the Ignis EM investment process. The model ranks all of the 22 emerging market countries in the MSCI EM Free index plus some additional countries which have been downgraded to “frontier” level, taking the total to 25. We believe that EM performance tends to be driven more by country allocation than sector allocation, unlike developed markets where sectors are much more important. That is why Ignis focuses on country rather than sector selection.
These countries are scored and ranked on a variety of measures that fall into eight broad categories: Value, Earnings, Quality, Capital, Technical, Momentum Reversal, Macro and Monetary (see table below for examples). Data in the model is refreshed daily, while changes in rankings are usually examined on a weekly basis.
The data that goes into MASAM is drawn from a long list of reputable and well-known data vendors including MSCI, IFC, IBES, Consensus Economics and Starmine. The quality of information available for emerging markets has improved steadily since MASAM was first designed in 1988. The data is still not perfect, however, as one would expect given various aspects of emerging markets including state controlled economies and variable government statistical standards. Therefore the Ignis Global Funds team still crosschecks and “cleans*” the data where necessary in order to generate as fair and accurate a basis for market selection as possible.
The unavoidable limitation provided by the quality of emerging market data is one of the reasons that it is beneficial to supplement the quantitative MASAM screen with a qualitative aspect utilising the fund manager’s many years of expertise.
The portfolio typically has high conviction exposure to at least eight markets, selected on the basis of the MASAM screen. There is, however, a judgemental aspect to the process, so a market may not be bought or sold immediately after entering or exiting the top eight in the MASAM rankings. Experience has taught the team that markets often continue to get cheaper/underperform for a while after entering the top eight, and similarly can continue to outperform strongly after exiting. As a result of the portfolio will not automatically own the most highly ranked countries at all points in time, although these countries will always be heavily represented in the portfolio.
At this stage, Ignis’ regional equity teams and market economist are also consulted to get a broader picture of any potential issues impacting the markets being considered. This helps the manager to make sure there are no issues affecting the markets or stocks therein that the valuation metrics could not have identified (e.g. political risk).
Ignis believes valuable top down information can be uncovered by visiting emerging markets. As such, research trips are regularly carried out by the Global Funds team. These research trips give the manager a “flavour” for the main factors currently affecting a country and its market. This is crucial for emerging markets, which are much less well covered by sell side analysts, particularly at the macro level. These trips provide important information that goes into the qualitative judgement that supplements the quantitative signals from the MASAM model, as well as providing an opportunity to double check some of the data locally.
As indicated, market selection is the driver of portfolio returns and where available and suitable we will gain exposure to markets via Delta 1 instruments (e.g. futures, ETFs, OPALS etc). Where Delta 1 products are not available or best suited, we will hold representative stocks to gain broad country exposure. Our high conviction country bets are equally weighted and are the major contributor to tracking error.
The strategy’s buy and sell disciplines flow naturally from the MASAM screen. For example, a rapid drop in ranking is usually a very strong sell signal. There is, however, as described above, a qualitative and judgemental element to the process that allows for some flexibility of the precise timing of the decision. This is based on the fund manager’s many years experience of managing global equity portfolios using this process. The strategy does not therefore set explicit price targets for markets, but instead waits for them to return to the model’s assessment of fair value. Portfolio turnover is typically around 50% and because the team is not dependent on sell side investment ideas, trades are usually made at execution only commission rates, which minimise the trading costs to the strategy."
*Although our data vendors are usually reliable we naturally cross check for errors, and make occasional adjustments to any outliers which may distort the overall ranking process. For example, should the Price/Book (Relative to history) ratio of a stock be excessive, either positively or negatively, we apply a default value to reduce the net impact of this stock specific metric on the overall country.
James Smith: "Looking ahead to 2011, equities are expected to outperform based on valuations and liquidity support. While the growth story in emerging markets remains impressive, the fund retains its cautious view on valuations. Perhaps the most prominent risk is the effect that monetary tightening in places like India, China, and Brazil will have on investor sentiment and consequently growth trends."