Governance risk, the key destabiliser

Amonis, Belgium: Tom Mergaerts, CEO

• Location: Brussels
• Assets: €1.8bn 
• Membership: 28,300
• Supplementary pension fund for the healthcare sector 

“Amonis is currently exposed to emerging market equity and emerging market debt in local currency. The equity portfolio is a global-orientated one, meaning the manager can decide freely which countries and economies to invest in. At present, the focus is on liquid stocks. The portfolio reflects the MSCI EM index in terms of country focus; the five largest representatives are Taiwan, China, South Korea, India and South Africa. 

With regard to debt, the focus is on emerging and frontier markets, and we invest in local currency debt. The exposure is mostly local currency government debt, or debt issued by intergovernmental agencies. However, the manager may use currency forwards to build exposure in a local market. The four largest holdings are Mexico, Indonesia, South Africa and Malaysia. 

We have had an emerging market equity mandate since 2001, while the debt strategy was launched in August 2013. In both cases, we invest through active managers.

The debt portfolio has performed well, despite the underlying fundamentals of some constituent countries, which may not appear too strong. The positive performance was mainly due to the fact that the fund reports in euro. So far, we have kept the portfolio position unchanged but slightly decreased the weight of the emerging market equity portfolio in the overall equity portfolio. 

Within our strategic asset allocation, investing in emerging markets serves as a long-term diversification factor, together with global equity. 

Governance risk is important when investing in emerging markets, but this is true about investing outside of them too. We require managers to assess this risk before making any investments. On the debt side, political governance is important and against  which the universe is screened.

The success of emerging market investments has been caused by macro inflows into themselves. An interest rate increase in the US or Europe may cause these investments to retract, causing a steep drop. As you can see from our positioning, we have a negative outlook on Chinese bonds. This caused the portfolio to underperform this year. However, our manager is convinced the position is justified going forward.”

BNL BNP Paribas, Italy: Manfredo Carfagnini, Chairman

• Location: Rome
• Assets: €1.805bn
• Membership: 15,800
• Pension fund for BNL BNP Paribas employees

“We allocate around 4% to emerging market debt and 2% to emerging market equities. The two asset classes are managed differently. We invest in emerging market equities through a JP Morgan fund. The fund’s benchmark is the MSCI EM index, but the fund is managed actively within that benchmark. It is the only active equity management mandate. With regard to debt, our mandated asset managers allocate a portion of their mandates to the asset class, resulting in an overall allocation of 4%.

Our emerging market sovereign debt assets are managed by Amundi, State Street Global Advisors and Generali Investments. We do not invest in frontier markets. Instead, we focus on the ‘traditional’ emerging markets. The focus of the equity investments is in Taiwan and Korea, but less on India. In terms of emerging market sovereign debt, we hold issuance from countries such as Romania, Turkey, Russia, Colombia, Mexico and Indonesia. 

Many seem to be looking for extra yield in emerging markets, to offset the impact of the ECB’s QE. There is a strong drive towards real assets, which are seen as potentially more profitable. 

For our part, we will not make any rushed judgements and keep our allocation as it is. 

We are an experienced occupational fund, among those that preceded the 1992 reform of second-pillar funds in Italy. As such, we have invested in emerging markets for a long time. Differing from our peers, we also invest in real estate and hedge funds. Currently, we are evaluating private equity and venture capital investments. However, we would invest in these asset classes in a structured manner, maintaining a focus on correlation. Furthermore, as a DC fund that offers a life-cycle strategy, we can be patient with our investments. In this sense, we see emerging markets as a diversifier, but we are not making a specific bet on this asset class or any emerging market country.

That said, emerging markets are part of both our strategic and tactical asset allocation. The strategic asset allocation is reviewed every year – the tactical one is reviewed at shorter intervals with our managers.”

UMR CoremFrance: Philippe Rey, CIO

• Location: Nantes
• Assets: €7.6bn 
• Membership: 340,000
• Mutual pension provider

“We allocate 3% of AUM to emerging market assets, 2% to equity and 1% to debt. We are going to maintain this allocation, but we have recently changed the geographical exposure. In particular, we reduced our exposure to South America in favour of Asia and especially Chinese ‘A’ shares. We also increased our exposure to Eastern Europe, but overall we are overweight Asia. 

We began investing in emerging market equities in 2004, and in 2008 we doubled the allocation to 2%.  Emerging market debt was only introduced in 2011. This year, we also introduced a microfinance fund, dedicated to financing microfinance institutions in Asia.

Our emerging market allocation totals 12% of our equity portfolio, which currently measures €1.4bn. Our manager’s strategy consists of creating alpha by selecting the best opportunities in every market segment. The manager, OFI Asset Management, also actively manages currency risk.

For our fund, emerging markets contribute to return diversification and de-correlation. As part of our emerging market portfolio, we have a significant exposure to China, which accounts for around 25% of the equity portfolio. For me, the excellent run of the Chinese market is justified. Parts of the Chinese market are expensive, but what makes me optimistic is the strong earnings growth and abundant liquidity. 

We believe financial risks are under control, and, in anticipation of monetary easing and financial modernisation, we want to keep that exposure. We want to be exposed to the transformation of the Chinese economy. The deceleration of the Chinese economy does not worry us – it is a usual phenomenon linked to monetary easing.

As for the impact of a US rate rise on emerging market debt, it depends on whether US growth continues. These assets have performed well during periods of monetary tightening and there is an economic link between the US and emerging markets, so if growth in the US stays strong, there is no reason emerging market assets should underperform. The US Fed’s communication policy is key.

The governance question is difficult to answer. Our managers use tools to control governance risks, though it is difficult to be completely insulated. Many governance indicators, however, have showed we should reduce our exposure to Russia.”

Interviews conducted by Carlo Svaluto Moreolo