NTGI brings EM exposure to smaller investors
GLOBAL - Northern Trust Global Investors is extending its emerging markets quant index service to small pension funds, through a pooled quant index fund linked to the MSCI EM index.
Until now, only larger pension funds with segregated accounts were able to tap into NTGI's EM offering, but Jason Toussaint, senior quantitative strategist at NTGI, notes more pension funds are shifting some asset allocation to what is generally considered a riskier investment sector.
"When it comes to an asset allocation decision, [pension funds] will need to decide what they require as basic ‘strategic allocations," said Toussaint.
"More and more pension funds are adding emerging markets as strategic allocations but active managers, generally, under perform the indices, net of fees.
"We have launched this fund because although we manage a lot of emerging markets assets in segregated accounts, small-to-medium -sized pension funds will have fairly small allocations, so don't qualify for segregated accounts. In addition, some investors may prefer commingled vehicles over segregated accounts,"he added.
In order to minimise that risk, NTGI is rolling out a quant index - rather than quant active - fund know as the Global Emerging Market Index fund, with expected tracking error of 50 basis points, to give funds the exposure they seek but with less expected volatility than that experienced by quant active funds following the summer credit crunch.
"When people are critical of quant investing, particularly since this summer, they are referring to quant active and not quant index managers. Index managers have done
extremely well performance-wise, and as quant index managers, we are not adding risk to the portfolio versus the benchmark."
He continued: "Quant active techniques have underperformed, especially in August, because the first dramatic impact was seen when hedge funds de-levered. The value of sub-prime assets decreased dramatically and hedge funds needed to raise assets to cover their capital calls.
"In contrast, we are seeking to match the risk/return profile of the underlying index. Because we are not looking to add return, we seek to minimise risk, making it a very different approach. We also seek to minimise tracking error of the sub-industry, industry, country exposure, value, currency," said Toussaint.
Between January 1998 and June 2006, the MSCI Emerging Markets Index generated a dollar return of 648% compared with 414% on the S&P 500 and 140% on the MSCI EFA (world ex-US).
Today, the MSCI EM index is made up of 837 companies in 25 countries and covering 10 sectors. Companies based in China, Korea, Brazil, Taiwan, India, Russia and South Africa make up 78% of the geographical holdings, while financial services is the dominant sector on the index with a 21.17% weighting, followed by energy, materials and telecommunications services.
NTGI's EM index fund is variable capital company, sitting alongside its existing range of Dublin domiciled Ucits III qualifying, pooled qaunt funds, managed in London through a team of managers approach.
Rolling out across Europe and Asia, managed in London through a team approach.
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