Quant-based fund shop, Acadian, has warned emerging markets investors off themes and memes as asset allocation tools in a genre notorious for inspiring acronyms built on empty concepts.
While emerging markets (EM) are not alone in producing catchy letter-based investment thematics (see FAANGs, for example), the sector has thrown up some of the most alluring – but ultimately disappointing – iterations from BRICs – Brazil, Russia, India and China – to BATTS (Baidu, Alibaba, Tencent, Taiwan Semiconductor and Samsung) and beyond.
And the latest EM theme doing the rounds is also likely to fall flat, according to a new Acadian paper authored by portfolio manager, Christopher Covington, and senior investment strategist, Ram Thirukkonda.
Despite lacking the linguistic attraction of the BRICs or BATTS, bets on long India, short China (LISC anyone?) are increasingly popular amid diverging macro prospects for the respective first- and second-largest populations in the world.
Covington and Thirukkonda dub the recent EM phenomenon ‘Rising Tiger, Falling Dragon’ in a faded reference to the 2000 vintage movie, ‘Crouching Tiger, Hidden Dragon’.
“Rising Tiger, Falling Dragon has become the EM investing theme du jour. At a superficial level, the thesis makes sense, because the underlying sentiment that it captures is consistent with the macro picture,” the paper says. “From an economic perspective, India and China appear to be at polar extremes. China, at one end of the spectrum, faces headwinds from the 3Ds – Debt, Demographics, and Deglobalization. The same factors seem poised to benefit India – no debt overhang that could inhibit economic growth, a growing working age population, and an emerging destination for global corporates seeking to diversify their supply chains (reglobalization).”
However, the macro-economic extremes obscure investment nuance across the two big markets while the approach also ignores other opportunities in the wider EM space, the Acadian study says.
“In chasing broad macro themes, investors often focus on high-level views and overlook variation in fundamentals within the cross section, neglecting opportunities for near-term stock selection. Rising Tiger, Falling Dragon is no exception,” the paper says. “Investors who embraced the theme without scrutinizing variation in fundamentals within each market left opportunity on the table: fundamentally grounded signals, including value and quality, have paid off handsomely in both India and China.”
Instead of latching on to vague thematics, EM investors should “stay invested, stay diversified, and embrace active strategies that cast a wide net and employ a broad information set”, the Acadian report says.
The Boston-originated ‘systematic’ investment manager has offices in several global locations including Sydney. Last year Acadian reported about A$144 billion under management in total, of which about A$10 billion was sourced from Australian and NZ clients (primarily institutional but also indirectly to retail clients via the Mercer multi-manager global equities fund).