East Capital keeps an eye out for all types of risk
Albin Rosengren of East Capital outlines his firm’s hopes for Turkey and Russia, and notes that volatility is only one of the risks it needs to keep in mind as an emerging markets investor.
The change in the market through early 2012, when investors moved to a risk-on attitude served East Capital well, says partner, CEO and head of sales Albin Rosengren.
The European Central Bank’s long-term refinancing operation has helped remove the tail-risk associated with political decision making in 2011, and helped throw the investor spotlight back on risk assets from emerging markets of the kind under management at the firm.
The appetite for risk is yet to return fully in terms of reversing all of the money pulled out of equity across the industry last year. But any rethinking of what risk means is of benefit to specialist active managers, Rosengren says.
Looking at all risks
“Risk can be measured by volatility, but many real risks are not necessarily captured by volatility,” Rosengren says. “I believe people come to us as they want someone who understands and take all risks into account when investing.
“When people invest in emerging markets, they do not just want a portfolio steered by key financial figures, but they also want a manager that understands the real operations, challenges and opportunities linked to a certain company.
“An example of risks could be viability and sustainability of a business and its growth model – simply whether it is a good company or not to invest in. “It is another layer of risk management that is not provided by passive investments and motivates investors to go to specialised managers with local market knowledge especially regarding investments in emerging markets.”
Having a handle on risk does not mean, however, that East Capital is looking to compete against the research that services institutions may develop to compete themselves against consultants. “Our edge is being specialised and having in-depth knowledge of markets,” Rosengren says.
“Asset allocation and portfolio composition on a broader level for pension funds or other asset management are probably better handled by investment consultants or firms which specialise in that.”
Managing risk to produce reward implies a cost. While it is true that investors may be attracted to passive products on the basis this can be done at lower cost, these products entail risks that many investors do not realise exist, Rosengren says. In turn, that implies that there ought to be discounts. The challenge is that institutions think: “This is what passive costs.”
Subsequently, the price they are prepared to pay for active management is the passive plus some of the outperformance against the passive benchmark.