Goldman Sachs Asset Management (GSAM) registers its mutual funds throughout Europe, but it finds that a local touch is key when it comes to distributing and explaining them to clients.
Eyes on risk
With a chairman responsible for coining the acronym ‘BRIC’ for the four leading EMs in 2001, it is not surprising GSAM is also discussing these, plus the so-called ‘Next 11′ countries, with European clients.
Patel says they are “generally interested, and trying to assess how to get exposure”.
The bank’s Global Investment Research unit suggests the 10% EM exposure of mutual funds is underweight, not only against 13% in the MSCI AC-WI index, but also to these markets’ 31% weighting by global equity market capitalisation, 37% of nominal global GDP, and the 50% of global GDP growth EMs will provide this decade.
Patel says: “We think that an allocation to growth markets requires the same consideration that investors currently give to developed-market fixed income and equity.”
Investors might ask, based on such measures, is it risky to be involved in EMs, or riskier not to?
A survey commissioned by GSAM and conducted by the Economist Intelligence Unit late last year found three-quarters of European investors thought risk designations on investment strategies should generally be reconsidered since the financial crisis.
Patel concedes that as the boundaries between these fields overlap, the conversations with clients increase in complexity.
Categorising a portfolio simply as ‘European equities’ because that is where its holdings are listed, for example, might mask the fact that they derive much of their earnings – and much of the fund’s total return and risk – from exposure to EMs.
In GSAM’s case, the holdings in its European equities portfolio derives 25% of their revenues from EMs.
“In defining a product, part of the effort to differentiate between developed growth and EMs might be to use a different set of axes for assets: where the assets are situated in the world,” Patel says.
“Advisers need to ask, for example, if a US equities portfolio is outperforming, what percentage of the earnings are coming from EMs, and what do I do about the exposure to growth and EMs in terms of risk of my client’s total portfolio?
“There is no definitive answer. The important thing is to factor it into considerations and conversations.
Similarly, many people are thinking about sovereigns versus corporates,with US treasuries as the safety option.
But how should we think about high yield in the context of fixed income and investing in EMD?”
In many cases, Patel says the discussion advisers have with their end-clients goes no further than using the traditional definitions, which can be misleading.
Another area that has attracted interest from many European investors since the crunch has been regulated absolute return funds. It is also a fund category that is uniform in name only, while covering a multitude of asset classes, financial instruments, factor exposures and risks.
Some asset managers have rushed to launch absolute return products across this spectrum, resulting in a bafflingly broad range of returns.
Lipper predicts they will be one of the two major investment themes this year, alongside EMs.
GSAM has Ucits absolute return funds in its Luxembourg Sicav range, but Patel says it is important not to try to force inappropriate strategies into the constraints of Ucits: for example, the rules governing liquidity, diversification or leverage.
She says: “A lot of work right now is determining what types of strategiesand products fit within the Ucits framework. Just because we can fit a strategy into Ucits does not mean we should. There is a difference between a Caymans and a Ucits hedge fund – it is important to acknowledge that.
“Absolute return can come in a number of guises. We want to make sure we do not simply take something from Caymans and call it ‘Ucits’ and distribute it just because we can.”