Strategy Guide
Enhanced-Diversification
Global Emerging Markets
January 2015
This document is for investment professionals only and
should not be distributed to or relied upon by retail
clients. It is only intended for use in jurisdictions where
the relevant funds are authorised for distribution or where
no such authorisation
is required.
ED Global
Emerging Markets 1
About Standard Life Investments
Standard Life Investments is a leading asset manager with an expanding global
reach. Our wide range of investment solutions is backed by our distinctive Focus
on Change investment philosophy, disciplined risk management and shared
commitment to a culture of investment excellence.
As active managers, we place significant
emphasis on rigorous research and a strong
collaborative ethos. We constantly think
ahead and strive to anticipate change before it
happens, ensuring that our clients can look to
the future with confidence.
As of 30 June 2014, Standard Life Investments
managed £195.1 billion on behalf of clients
worldwide. Our investment capabilities span
equities, fixed income, real estate, private
equity, multi-asset solutions, fund-of-funds and
absolute return strategies.
Headquartered in Edinburgh, Standard Life
Investments employs more than 1,300 talented
professionals. We maintain offices in a number
of locations around the world including Boston,
Hong Kong, London, Beijing, Sydney, Dublin,
Paris and Seoul. In addition, we have close
relationships with leading domestic players in
Asia, including HDFC Asset Management in India
and Sumitomo Mitsui Trust Bank in Japan.
Our parent, Standard Life plc, was established
in 1825. A leading provider of long-term savings
and investments, Standard Life went public
on the London Stock Exchange in 2006 and
is now a FTSE 100-listed company. Standard
Life Investments launched as a separate
company in 1998 and has quickly established a
reputation for innovation in pursuit of our clients’
investment objectives.
Our investors rank among some of the world’s
most sophisticated and high-profile institutions.
They include pension plans, banks, mutual
funds, insurance companies, fund-of-fund
managers, endowments, foundations, charities,
official institutions, sovereign wealth funds and
government authorities.
Contents
1 Introducing the EDGEM strategy
2 What is our investment
approach?
4 How do we construct
the portfolio?
2 ED Global Emerging Markets
6 What is our investment
expertise?
7 Summary of benefits
8 Contact details
Introducing the EDGEM strategy
Global emerging markets (GEM) offer an exciting investment opportunity.
A combination of relatively lower debt burdens, supportive demographics,
an emergent consumer class and undemanding equity valuations provide a
positive investment backdrop. However, many investors shy away from the
asset class because of concerns about perceived risk and volatility. In response,
we have launched the enhanced-diversification global emerging markets
(EDGEM) strategy. Through this unique solution, we aim to deliver GEM equitylike returns over the market cycle - but with less than 70% of the volatility.
A new choice
EDGEM is not the only portfolio in the market
with an investment objective of lower volatility
returns. However, unlike alternative offerings
we do not rely on index re-weighting or other
backward-looking quantitative techniques.
We do not compromise stock selection
opportunities by limiting the universe to
perceived low-risk stocks, nor are we restricted
to assets exclusively from the GEM region,
which may correlate in times of stress.
Instead, EDGEM is a distinctive and truly
blended combination of stock-picking expertise
and diversified multi-asset strategies, drawing
on Standard Life Investments’ demonstrable
excellence in both these fields. Through this,
we aim to deliver market-like returns with lower
volatility – culminating, we believe, in superior
risk-adjusted performance.
A unique blend of stock-picking and
multi-asset strategies
Our 11-strong GEM equities team drives the stockpicking portion of EDGEM. We believe the most
consistent source of alpha comes from bottomup stock selection, and so the team focuses all
its time, energy and resources at the company
level. By doing so, we aim to ensure that only the
highest-conviction investment ideas enter EDGEM.
Working in conjunction with the GEM
equities team is our award-winning multiasset investing team, consisting of over 40
investment professionals. Its goal is to develop
a suite of multi-asset strategies that we expect
not only to earn a positive return over a longer
time horizon, but also to earn that return in a
different way from GEM equities.
These strategies – covering interest rate,
currency and relative value investments – are
typically outside the emerging markets region
and are often negatively correlated with GEM
equities. This means that they can be expected
to diversify the equity risk in EDGEM. They
can also provide downside protection when
the market is under pressure. We then blend
these multi-asset strategies with the stock
picks from our GEM equities team to create
the EDGEM portfolio.
Focus on Change
Our investment process is underpinned by our
Focus on Change philosophy. Through this, we
seek to identify non-consensus change and to
exploit this before the market view comes into
alignment with our own. This applies whether
we are looking at stock-selection ideas from the
bottom up or at macro strategy development
from the top down.
From an equities perspective, due to the size
and disparate nature of the GEM investment
universe, many companies are often underresearched and consequently their scope for
improvement is under-appreciated. This means
many firms are mispriced relative to their
underlying fundamentals. Our Focus on Change
investment philosophy is therefore especially
suited to unearthing these companies.
Reasons to invest
¬ EDGEM is a unique proposition that seeks
to provide GEM-like equity returns with
substantially lower risk than equity-only
investing.
¬We utilise return-seeking, enhanceddiversification strategies to provide a more
resilient portfolio.
¬EDGEM provides access to the best ideas
of our GEM equities team and our awardwinning multi-asset investing team.
¬The strategy is based on a proven, robust
and repeatable investment process.
ED Global Emerging Markets
1
What is our investment approach?
Our EDGEM investment strategy is a fusion of bottom-up stock selection,
portfolio optimisation and multi-asset strategies.
Bottom-up stock selection
For stock-pickers, a Focus on Change
opportunity can take many different guises.
These can be internal developments, such as
a company restructuring or exhibiting top-line
growth acceleration; or they can be external,
like changes to industry competitive dynamics,
the regulatory environment or technology.
Such change often leads to upside in earnings,
but may also involve a valuation re-rating or a
corporate action that crystallises value or cash
return. Our philosophy is therefore style agnostic
and neither inherently growth or value biased
nor momentum driven. This provides us with the
opportunity to outperform throughout the cycle.
Our people
At Standard Life Investments, we combine the
role of portfolio management and analysis.
As such, portfolio managers have the twin
responsibilities of managing their individual
portfolios, as well as providing in-depth
research and stock recommendations within
their assigned sector(s) to the wider team.
These ideas are then subject to rigorous peer
review. This ensures that our insights are well
thought-out, robustly tested and corroborated,
and that all individuals contribute towards idea
generation and research.
Idea generation and research
We believe the most consistent source of alpha
comes from bottom-up stock selection. Our
equity investment process is based on capturing
and exploiting anomalies and inefficiencies
created between consensus and non-consensus
views on companies. We therefore utilise our
extensive resources to secure and analyse
information about the fast-changing corporate
prospects for companies, concentrating on the
most important factors that drive the market
price of an investment.
The importance of company meetings
The majority of our investment ideas are
generated from the information and analysis we
garner from our one-to-one company meetings.
Collectively, our GEM equities team conducts
around 1,000 meetings annually and covers
2 ED Global Emerging Markets
around 250 stocks. These meetings are used
to ascertain the company’s own views and
expectations of their future prospects and the
markets in which they invest. We also search
and test for corroborating evidence with their
competitors, their suppliers and their customers
to give us the complete picture.
Common language
In order to manage the vast array of
opportunities that our approach may present,
our investment professionals across the
business use a common investment language to
appraise all stocks. This asks five key questions.
The Five Questions - a common investment language
Analysis
¬ What are the drivers?
¬ What is changing?
¬ What is priced in?
Judgement
¬ Why will the market change its mind?
¬ What is the trigger?
This allows easy communication and comparison
of investment ideas.
Choosing the stocks
Our process for further evaluating our highestconviction ideas is team-based, with robust
debate both encouraged and incentivised
throughout this process. This means only the
best investment ideas make it into our portfolio.
The Winners List
The culmination of the equities team debate
is a GEM Winners List of our top 20 stock ideas.
We choose these irrespective of thematic
or factor influences, and they represent our
highest-conviction investment ideas at any
given time. These will form the core of the
equity portion of EDGEM.
Relative value strategies – we take advantage
of differences between equity markets, where
one is expected to rise relative to the other.
Portfolio optimisation
WIth EDGEM, we seek to capture as much as
possible of the stock-specific risk of our GEM
Winners List ideas, while neutralising exposure
to unwanted risks arising from various factor
influences, such as country, sector or style bias.
We do this by adding around 180 additional
stocks identified by a proprietary optimisation
tool. These will be additionally filtered by
our GEM equities team. Overall, this process
facilitates the identification and position sizing
of stocks that are optimal at diversifying away
undesirable risks. These stocks will account for
approximately 20% of the stock-specific risk,
while having the potential to earn additional
market returns.
Currencies – we identify currency pairs where
one side is expected to appreciate relative to
the other.
These strategies act as shock absorbers for
EDGEM because they behave differently
from GEM equities. The graphic below shows
the direction that different investment positions
would be expected to take if GEM equities
were falling.
For example, adding emerging market debt to
a GEM equity portfolio would have negligible
impact on a portfolio’s risk profile given the
high correlation to GEM equities. By contrast,
the other three types of investment positions
that are included in EDGEM can make money
even in declining GEM equity markets and are
therefore excellent diversification strategies.
We then combine these stocks with the Winners
List to create the equity portion of EDGEM.
Multi-asset strategies
The multi-asset investing team develops
bespoke return-seeking strategies to work in
conjunction with EDGEM’s equity portfolio. This
adds a robust layer of diversification and can
substantially reduce the risk in EDGEM. The
strategies used are typically selected from three
main investment groups.
Enhanced-diversification strategies are only
included in EDGEM once we have subjected
them to peer scrutiny, and once we are
convinced of their capacity to earn a positive
return. The Strategic Investment Group,
made up of senior investment professionals
from across Standard Life Investments, is
responsible for assessing, debating and
approving proposed strategies for EDGEM.
Interest rates – strategies based on our
expectation for changes in interest rates across
major world economies.
Macro: adding value and reducing risk
Greater diversification
-1.0
Correlation to GEM equity index
-0.8
-0.6
-0.4
-0.2
0.0
0.2
Interest
rates
0.4
0.6
Relative
value
Currencies
US Equity Technology
v Small Caps
US Dollar v Canadian Dollar
Enhanced-diversification
0.8
1.0
EM Debt, local currency
Australian v UK Interest Rates
Sources: Standard Life Investments, APT, 30 November 2014
ED Global Emerging Markets
3
How do we construct the portfolio?
The EDGEM management team (comprising GEM equity and multi-asset
managers) is responsible for overall portfolio construction. It blends
together a portfolio encompassing the most suitable ideas from the equity
Winners List, the equity diversifiers from the optimiser and a selection of
multi-asset strategies that are hand-picked to work best with the equity
portfolio.
Typically, the final equity portion of the portfolio
holds around 200 stock positions accounting
for some 70% of the overall cash allocation.
These will be chosen by our GEM equities team
and will consist of two distinct sections.
1. A central portfolio of 20 of our highestconviction stocks used to harvest the finest
of our alpha generating capabilities. This will
be based on the GEM Winners List and will
account for a vast majority of EDGEM’s stockspecific risk.
2. The 180 GEM equity stocks from the
optimisation process.
This will be complemented by a range of multiasset strategies, accounting for around 30% of
the cash allocation.
These strategies are implemented effectively
and efficiently using a variety of market tools
and instruments (direct investment, index
futures, currency forwards, swaps, etc.). Once
employed, we regularly monitor and review
each strategy to ensure its continued suitability
for inclusion in EDGEM.
EDGEM portfolio
25%
¬ Total return seeking
investment risk is 23.3%
— 131% of GEM equity
benchmark volatility
Risk exposure
20%
15%
Diversification benefit
11.5%
¬ Equity exposure accounts for
55% of total risk
10%
Expected volatility
11.8%
17.8%
5%
0%
GEM equity Currencies Relative
portfolio
value
Interest Diversification Expected
rates
benefits
Volatility
¬ Substantial diversification
benefits of portfolio results in
expected volatility of 11.8%
— 66% of GEM equity volatility
MSCI GEM
Volatility
Source: Standard Life Investments, APT, 30 November 2014
The value of the EDGEM approach to risk reduction is illustrated above. While EDGEM has an
aggregate return-seeking risk allocation of 23.3% (131% of GEM equity index volatility), the
predicted volatility of the overall portfolio is just 11.8% (66% of current GEM equity market levels).
The allocation to return-seeking risk should therefore ensure at least equity-like returns, while the
diversification benefits mean these returns are achieved at substantially lower risk than equity-only
investing. In addition, the diversification benefits of the multi-asset strategies are markedly greater
than could be achieved by using equity or GEM market strategies alone.
4 ED Global Emerging Markets
The model portfolio
In order to test our investment approach, we ran a model EDGEM strategy in real time. It was
managed with strict accordance with EDGEM’s investment philosophy and process. Since inception,
the strategy has outperformed the index by around 3.8% per annum with around 65% of the
volatility. It did so across a period that included both strong and weak equity market conditions.
EDGEM: model portfolio
Model portfolio performance (01 December 2011 – 30 November 2014)
135
130
125
120
115
110
105
100
95
Nov 11
Feb 12
EDGEM
May 12
Aug 12
Nov 12
Feb 13
May 13
Aug 13
Nov 13
Feb 14
May 14
Aug 14
MSCI GEM
Return* p.a.
Volatility** p.a.
EDGEM Portfolio
8.9%
9.7%
MSCI EM Index
4.9%
15.0%
Relative performance
3.8%
65%
*Costs of trading and other fund costs excluded.
** Ex post Volatility based on model portfolio return
Sources: Standard Life Investments & MSCI, 30 November 2014
Past performance is not a guide to future performance. The value of your investment
may go down as well as up and cannot be guaranteed; an investor may receive back less than
their original investment.
“The performance of the model EDGEM is testament to the benefits that
this new and unique strategy can deliver to investors.”
Ronnie Petrie, Head of GEM & Asian Equities
ED Global Emerging Markets
5
What is our investment expertise?
The enhanced-diversification equity investment group oversees EDGEM. It
consists of investment professionals from across Standard Life Investments,
with a range of backgrounds and areas of expertise.
The group’s role is to review, debate and, where necessary, challenge the investment decisions
within EDGEM. This will include assessing the overall structure and diversification dynamics of the
portfolio. Throughout this process, the group will also draw on the insights from our global asset
class teams, benefiting from the collective skills of hundreds of investment professionals within
Standard Life Investments. The result is a more comprehensive and rigorous EDGEM strategy.
Our reputation as a leading investment manager is based on the exceptional quality of our
people. We have never embraced a ‘star fund manager’ mentality. Our EDGEM investment group is
testament to the benefits of this collegiate approach.
Enhanced-diversification equity investment group
Name
Role
Ronnie Petrie
EDGEM co-portfolio manager
26 years
Andres Allende
EDGEM co-portfolio manager
12 years
Jason Hepner
EDGEM co-portfolio manager
17 years
Scott Smith
EDGEM co-portfolio manager
9 years
Wes McCoy
Investment Director, Global equities
14 years
Euan Stirling
Investment Director, UK equities
18 years
Simon McCallum
Quantitative Analyst, UK equities
22 years
Matt Monach
Quantitative Analyst, Global equities
7 years
Owen McCrossan
Investment Director, Multi-Asset Risk and Structuring
18 years
James Esland
Multi-Asset Business Management
7 years
6 ED Global Emerging Markets
Investment Experience
Summary of benefits
Through the EDGEM strategy, we offer a number of benefits for investors.
Summary of benefits
¬ The strategy gives investors an opportunity to gain GEM equity-like returns over the
investment cycle with substantially lower risk than equity-only investing.
¬ EDGEM provides access to experienced and established teams with proven track records.
¬ We strive for excellent bottom-up stock selection and alpha capture expertise from our highly
experienced GEM equities team.
¬ Our industry-leading multi-asset specialists seek to produce return-seeking enhanceddiversification strategies to create a more durably diversified portfolio.
¬ We have a dedicated team of risk experts that create superior risk management and
control frameworks.
The strategy may be suitable for
investors who:
The strategy may not be suitable for
investors who:
¬want to achieve capital appreciation over
the long term
¬do not want to take any risk with their
capital – equity investments are not
risk-free
¬would like to invest in an actively
managed portfolio
¬have an investment time horizon of at
least five years.
¬are not prepared to accept temporary
losses as a result of the nature of
equities, bonds and currency markets.
ED Global Emerging Markets
7
Contact details
For more information, please visit www.standardlifeinvestments.com where you will find contact
details for your location.
Visit us online
standardlifeinvestments.com
The opinions expressed are those of Standard Life Investments and are subject to change at
any time due to changes in market or economic conditions.
This material is for informational purposes only. This should not be relied upon as a forecast,
research or investment advice. It does not constitute an offer, or solicitation of an offer, to sell
or buy any securities or an endorsement with respect to any investment vehicle.
8 ED Global Emerging Markets
Important Information
The opinions expressed are those of Standard Life Investments and are subject to change at any time due to changes in
market or economic conditions.
This material is for informational purposes only. This should not be relied upon as a forecast, research or investment advice.
It does not constitute an offer, or solicitation of an offer, to sell or buy any securities or an endorsement with respect to any
investment vehicle.
The value of an investment can fall as well as rise and is not guaranteed. An investor may get back less than they put in.
Standard Life Investments Limited is registered in Scotland (SC123321) at 1 George Street, Edinburgh EH2 2LL. Standard Life Investments Limited is authorised and regulated by the
Financial Conduct Authority. Standard Life Investments (Hong Kong) Limited is licensed with and regulated by the Securities and Futures Commission in Hong Kong and is a wholly-owned
subsidiary of Standard Life Investments Limited. Standard Life Investments Limited (ABN 36 142 665 227) is incorporated in Scotland (No. SC123321) and is exempt from the requirement
to hold an Australian financial services licence under paragraph 911A(2)(l) of the Corporations Act 2001 (Cth) (the ‘Act’) in respect of the provision of financial services as defined in
Schedule A of the relief instrument no.10/0264 dated 9 April 2010 issued to Standard Life Investments Limited by the Australian Securities and Investments Commission. These financial
services are provided only to wholesale clients as defined in subsection 761G(7) of the Act. Standard Life Investments Limited is authorised and regulated in the United Kingdom by the
Financial Conduct Authority under the laws of the United Kingdom, which differ from Australian laws. Standard Life Investments Limited, a company registered in Ireland (904256) 90 St
Stephen’s Green Dublin 2 and is authorised and regulated in the UK by the Financial Conduct Authority. Standard Life Investments Global SICAV is an umbrella type investment company
with variable capital registered in Luxembourg (no. B78797) at 2-4, rue Eugéne Ruppert, L-2453 Luxembourg, Grand Duchy of Luxembourg. www.standardlifeinvestments.com © 2014
Standard Life, images reproduced under licence
INVBBRO_14_1264_ED_GEM_Fund Guide_TCM
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