Information Asymmetry in Emerging Markets
Gavin Smith and Patrick McDonough discuss how using information asymmetry can lead to alpha generation in Emerging Markets.
Investing in Emerging Markets
WHY PGIM FOR EMERGING MARKETS
Institutional investor interest in increasing allocations to emerging markets (EM) continues to grow rapidly, not surprising given the sheer size and economic growth potential. The expansion of the working-age labor force, changes in consumption needs of the rising middle class, opportunities presented by digital disruption, increasing urbanization trends, and improvements in healthcare will all play a vital role in the economic expansion of EM in the coming years.
As a result, navigating the risks and opportunities offered by EM will be an increasingly important driver of portfolio returns as it continues to offer long-term investors an array of attractive opportunities across asset classes. But tapping into those opportunities will require taking a significantly different approach, and investors need a partner who understands the complexities of investing in EM. At PGIM, we believe investors need to abandon the old top-down country view in favor of a bottom-up approach across sectors and themes.
INVESTING IN EM ACROSS ASSET CLASSES
Through Everbright PGIM Fund Management Co., a joint venture with the Everbright Group, one of the largest state-owned conglomerates, we have served Chinese investors since 2004. Everbright PGIM, based in Shanghai, currently manages over US $21 billion¹ in assets for institutions and individual investors through long-standing relationships with local institutions and intermediaries, including top-tier banks, insurance companies, securities firms, and e-commerce platforms. Everbright PGIM’s experienced investment teams in China manage an array of strategies across various asset classes, combining local expertise and a global perspective to help investors meet their investment objectives. We are committed to strengthening Everbright PGIM’s competitive positioning and to providing investors with high-quality and differentiated investment solutions and capabilities.
Strong structural tailwinds continue to position emerging markets as a source of long-term opportunity for equity investors—and they are expected to continue to lead global economic growth higher.
The Jennison emerging markets strategy takes a concentrated and unconstrained approach to investing in emerging markets. Portfolios consist of 35-45 holdings and are benchmark, sector, and country agnostic, which has led to a historically high active share. The portfolio managers believe that investing in emerging markets companies with strong secular growth can lead to significant alpha generation over time. Emerging markets offer numerous high-growth companies, and ongoing demographic changes and innovation should lead to constantly evolving investment opportunities, which we believe are best identified from the bottom up.
Jennison’s emerging markets team has an exceptionally deep knowledge of emerging markets companies, industries, and the operating environment. Their research often leads them to identify secular trends early and engage opportunity sets that are different than the index.
We believe PGIM Fixed Income offers the following competitive advantages in the management of emerging markets debt strategies:
- Our team is well-resourced, stable, and offers a suite of EMD strategies. The team is comprised of 30+ portfolio managers, economists, and corporate analysts, many of whom are exclusively dedicated to emerging markets. Our stable team manages EM Hard Currency, Local Currency, EM Corporate, Total Return, and Blended strategies, providing options for our clients.
- A state-of-the-art sovereign analysis framework has been developed by our in-house economics team. Rather than using Moody’s or S&P ratings, PGIM Fixed Income’s economists produce their own proprietary credit rating for each country using 21 independent quantitative factors supplemented by our factor qualitative assessment. These ratings tend to lead the rating agencies, providing a critical edge.
- ESG is embedded in the investment process. ESG factors are integrated into our credit rating and relative value process for sovereigns and corporates.
- Our proprietary risk framework is fully integrated between the portfolio management and risk management groups and is completely independent. This can ensure portfolios are managed within predetermined risk thresholds.
- Significant market presence: PGIM Fixed Income manages $70+ billion across dedicated emerging market bond strategies. We believe the resulting scale and our strong relationships with brokers / dealers enable us to take advantage of market opportunities.
PGIM Real Estate’s global platform, combining a global perspective with local expertise, uniquely positions us to deliver innovative solutions to our clients in both developed and emerging economies. Our history of operating in emerging markets around the world – from pioneering the logistics space in Mexico to establishing an on-the-ground presence in Singapore more than 20 years ago – is backed by longstanding relationships with local partners, consultants, banks and brokers.
This deep local knowledge, rooted in research and backed by decades of investing and financing experience, enables us to capitalize on short- and long-term opportunities across both real estate equity and debt in the emerging markets and sectors in which we have the highest conviction.
At PGIM Quantitative Solutions, we’ve carefully designed a framework that allows us to capture alpha opportunities in Emerging Markets (EM) across securities, industries and countries, while balancing against adverse risk outcomes.
Adapting to company fundamentals
- The starting point for PGIM Quantitative Solutions' framework is to recognize that fundamentals matter. As markets move, different fundamentals become more significant measures for different types of companies. Consequently, different types of signals will be more effective at detecting investment opporutnities/mispricings.
- In determining which fundamentals are the most important for which types of companies, we turn to valuation theory to guide us. We find that valuation-oriented signals are more effective at evaluating the future performance prospects of slower-growth companies, while growth signals are more effective at evaluating the future performance prospects of fast-growth companies.
- PGIM Quantitative Solutions' research and investment experience has shown that an adaptive bottom-up stock selection framework is essential to capturing inefficiencies within equities, and to driving consistent performance over the long term.
Blended approach of top-down dynamics and bottom-up selection
Within EM, a top-down investment approach can complement bottom-up stock selection as the return opportunities that arise between countries and industries can be significant. We combine a top-down element to our investing framework and believe this combination positions our EM strategies to better navigate even more varied market conditions.
Within our overall investment approach, we believe that bottom-up stock selection is of primary importance in exploiting inefficiencies within EM equities and in driving consistent performance over the long term. Therefore, we maintain a dominant weight towards bottom-up insights.
Diversified, style-pure portfolio with risk controls
At PGIM Quantitative Solutions we recognize that implementation is key to success and we believe the most consistent way to deliver alpha in EM is within a well-diversified, style-pure portfolio with risk controls. Our portfolios maintain strict limits on security active exposures, and controls on industry and country exposures. These controls are calibrated to balance alpha opportunities with protection against adverse security, industry and country outcomes. Our final portfolios have a high level of diversification.
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Sources of data (unless otherwise noted) are as of 06/30/2021.
1. Assets cited above include assets managed by joint ventures in which PFI does not have a controlling interest, and therefore does not correspond to assets under management and administration as reported by PFI. AUM for each business may also include assets sub-advised by other PFI units. Total AUM may differ from the sum of the underlying business AUM due to rounding.