Emerging markets deliver goods
Absolute Return Funds (ARFs) returned on average 3.2% for the month of November and an impressive 9.5% for eleven months of the year. Within the Absolute Return universe, Eurekahedge has categorised funds into bottom up, top down, dual approach, and diversified debt, of which over 150 are listed in its Absolute Return Fund Database. Among these strategies, dual-reporting funds, which combine a value, fundamental-driven stock picking approach with more top-down macro exposure than bottom-up funds, achieved the best returns in November - 5.03%. Most of these gains came from emerging markets in Asia Pacific, India and the Baltic States.
The year’s most generous returns have come from the Baltic States. According to Eurekahedge, Absolute Return Funds invested in the Baltic region funds gained 6.77% in November. The CEE countries such as Poland, the Czech Republic, and Hungary have gained well over 50% this year, while Eurekahedge has the entire Baltic region up 28.36% for the year (and 74.7% in 2003). These returns are due largely to companies in the region that continue to expand through acquisitions and yet retain growing profit margins. Baltic countries are working hard to push down budget deficits below 3%, in line with Euro-zone requirements and will likely benefit from continued economic integration with western Europe. While European countries farther east were hurt in November by unrest in nearby Ukraine and former Soviet satellite states, the region’s success is on par with the Baltic states – ARF returns have been upward of 28% for the year there as well.
According to Eurekahedge, Russian-allocated funds have returned 24.48% over the last three months and have been an emerging market hotspot all year, but saw an abrupt turnaround in November with the recent political turmoil in the Ukraine and the impending collapse of Russian oil giant Yukos. The Russian mandate lost 5.91% for the month.
Asia Pacific focused funds, both top-down and bottom-up strategies, benefited across the board from the declining dollar and the continued strength in equities in all countries – Indonesia, Hong Kong, and Korea were particularly buoyant in November. Overall, the ARFs allocated to the Asia Pacific ex-Japan region gained 7.88% for November. Japan, Taiwan, and Korea, however, owe their returns mostly to differentials between their local currencies and the sinking dollar. Funds invested in this region continued to gain from strong regional markets and increased liquidity in their markets as funds flowed away from the US dollar. Clearly, China is the engine behind Asian growth, although the slowed economy and likely revaluation of the Yuan given dollar weakness is putting pressure on local manufacturers.
Among its conclusions for 2004, Eurekahedge comments that the elusiveness of alpha has demonstrated which managers truly embody absolute return investing: by making a profit in poor market conditions through experience and dexterous portfolio management. The low activity and inconsistency in the markets has forced most managers to chase fewer market inefficiencies and has consequently eroded those opportunities, particularly in equities. In short, too many dollars have chased too few potential gains in identical capital markets and a fixed universe of vehicles, and has squeezed margins as a result of its sheer weight in those areas.
The need to find new profitable avenues has seen many managers diversify their approaches, with distressed debt expanding into private equity, convertible arbitrage moving into derivative products and swaps, and sector funds creeping away from their areas of specialisation into the businesses that are providing returns. These trends have interesting implications for funds of funds, which often pick managers that can boast a steadfast, knowledgeable and patient approach to a specific discipline.