PARSUMO Capital is pleased to announce the launch of the PARemerging Markets Equities Fund. The fund allows investors to exploit the potential of companies in the high-growth emerging markets. The PARemerging Markets Equities Fund aims to outperform the benchmark in the long run. This is achieved purely through stock selection based on our successful Quantitative Stock Selection approach.
Why invest in emerging markets?
The emerging countries, in particular those in Asia, are the fastest growing economies in the world. The main drivers of economic growth are the favorable demographics, better education, urbanization, more stable governments, more business-friendly conditions, and a rapidly growing middle class that is consuming increasingly high quality goods and services.
Although driven by the same dynamics, China occupies a special position among the emerging countries, due first to the size of the country’s economy and population (China produces 70% of Asia’s economic output), and second to the country’s excellent infrastructure, which facilitates rapid implementation of new business models, such as e-commerce. The transition from an investment-driven, often inefficient production economy to a consumption and service-oriented economic model is in full swing. Furthermore, China’s stock market is the second largest in the world. Anyone wishing to invest in Asia’s emerging countries should therefore pay particular attention to China.
Special case China
China has big problems: persistent over-capacity in heavy industry, rapidly growing debt, continuing heavy discrimination against private companies in favor of state-owned enterprises, and a lack of corporate governance, to mention just a few. But the Chinese government has recognized these problems and is addressing them strategically – step by step, first in test zones and then nationwide. Economic growth and the equity market have been influenced considerably by the government in recent times. However, there is a real chance that urgently needed reforms will be implemented after the transition to the next five-year political generation (in spring 2018), which will strengthen the market forces.
In June, the index provider MSCI supported the government’s efforts to open up the financial markets. Chinese A-shares were included in the MSCI Emerging Markets Index for the first time; although their weighting in the index is still small and does not reflect the power of the Chinese economy and equity market, the move sends out an important signal.
Cyclical emerging markets are the biggest beneficiaries of the global economic recovery. The low inflation also enables the central banks to keep interest rates low, which generally leads to robust growth prospects. The hitherto very high growth rates appear to be slowing down. This is not a sign of economic weakness, but rather an indication of the maturity and development of the economies.
Inefficient equity markets with big potential
In recent years, emerging market equities have performed less well than those from developed countries. A trend reversal kicked in at the beginning of 2016 and suffered a severe correction in the fourth quarter of last year. Since then, the emerging markets have confirmed their great potential, performing very well in absolute terms in comparison with the developed markets. But it is not only macroeconomic factors that speak in favor of equities from emerging countries, the valuations of the equity markets are also attractive. The ratio of the price to the predicted 12-month earnings is just under 16 for the MSCI World (industrialized countries) and just under 12 for the MSCI Emerging Markets. Although equities from emerging countries have always been traded at a discount compared with those from industrialized countries, the discount currently should be lower, as the emerging countries are less affected by the persistently lower interest rates than before, and because such high risk premiums are no longer justified as corporate management has become more professional.
However, the equity markets of the emerging countries are inefficient and not all companies will be able to benefit from the high-growth markets. Active and careful share selection is therefore essential in the emerging markets. The stocks for the PARemerging Markets Equities Fund are selected on the basis of our own QSS approach.
PARSUMO Quantitative Stock Selection (QSS)
Not all markets are efficient, even though information about companies is publicly available. Many markets and market segments are inefficient. Equities in inefficient markets approach their fair value at a slower rate than equities in efficient markets, even when all market participants have access to the relevant data. The active QSS approach is a comprehensive stock screening process that systematically exploits market inefficiencies or stock mispricing.
In inefficient markets, the benchmark can be outperformed significantly with a rules-based, quantitative approach free from emotional and arbitrary decisions. That is why the QSS approach for investment in emerging countries is particularly suitable for creating added value for investors.
PARemerging Markets Equities Fund
The PARemerging Markets Equities Fund aims to outperform the benchmark in the long run. This is achieved through pure stock selection in which market inefficiencies are exploited on the basis of publicly available information about companies in the emerging countries. The stock selection for the PARemerging Market Equities Fund is based on a stock screening process involving more than 120 factors. The aim is to achieve a neutral position against the benchmark in terms of regions, countries, sectors and currencies, thus avoiding undesired and uncontrolled risks.
With this model-based approach, a long-term outperformance can be achieved with a ranking in the top decile of the comparison universe:
since inception *
|Peer comparison |
as of 31.12.15 **
|PARglobal Equities||01.01.2004||+2,26%||+1,92% p.a.||8th rank (out of 100)|
|PARglobal High Dividend Equities||01.01.2012||+4,46%||+2,51% p.a.||4th rank (out of 100)|
|PARemerging Markets Equities||01.01.2013||+5,62%||+3,51% p.a.||4th rank (out of 100)|
|* Performance after fees and in CHF. Generated with identical approach (QSS) at a large Swiss insurer.|
|** Comparison conducted by a leading Swiss consulting firm for institutional and private investors.|
In recent years, the PARemerging Markets Equities Fund has impressed with excellent relative performance (rank 4 out of 100 in the peer group comparison) and a high information ratio (excess return/tracking error). It is the best rule-based fund in the comparison universe and, at 0.8% p.a., has a very low management fee.
Synthetic portfolio 31.12.2015 – 30.06.2017
|Realized Risk||PARemerging Markets Equities Fund||Benchmark|
|Realized Tracking Error (%):||5,04%||0,00%|
|Realized Alpha (%):||17,66%||0,00%|
|Realized Beta (%):||0,94||1,00|
|Risk Adjusted Returns||PARemerging Markets Equities Fund||Benchmark|
|Treynor Ratio (%):||0,39%||0,20%|