Sergei Strigo, of Amundi, speaks about Emerging Markets portfolio construction

>>Sergei Strigo: Ladies and gentlemen, I’m here to give you a brief presentation about
Amundi Asset Management, our investment process,
and some of the views on the market ,on fixed income in emerging markets.
We’re very excited to start managing a new fund for Excel,
a new retail product for Canadian investors.
Basically, Amundi Asset Management , it’s a new name for a fairly old company.
We used to be called Credit Agricole Asset Management.
And as of 1st of January 2010,
we have merged with Societe Generale Asset Management.
Obviously, two leading banks in France.
The company is owned 75% by Credit Agricole and 25% by Societe Generale.
We are a very large company; Number 3 in Europe and Number 8 in the world.
You can see that in mutual fund management,
we’re Number 1 in France and Number 2 in Europe.
And also very large on institutional client base.
Very big - represented in over 30 countries in the world.
Our head office is based in Paris. I’m based in London.
And we’re also part of the global fixed income team on emerging markets.
We have a presence in Asia, in Singapore.
This is a chart of our London and Singapore office.
We are part of global fixed income team in London
which gives us an advantage of having a global views on fixed income
such as on the interest rates in the US, commodities, et cetera.
It’s fairly unusual for emerging market expertise
to be part of global fixed income team.
This is our performance of one of our flagship funds.
It’s a hybrid fund; invests in all three asset classes:
external debt, local debt, and foreign exchange.
We’re top-down active asset manager focused on the long term.
I would say a minimum investing horizon for us is 2 to 3 years,
that gives enough time for investor to realize value and potential.
We are value-based in identifying missed price opportunities in the market.
Very well diversified by assets, regions, horizons, and manager's background.
Always within our risk budgets and a highly proactive
and have a consistent investment process over the past 5 years.
This is some of the statistics of the benchmarks for the new fund.
The fund will be 50% external debt,
hard currency debt denominated in mostly in US dollars.
And 50%, it will be a debt denominated in local foreign exchange
of different countries in emerging markets.
You can see geographical diversification, estimated yield of the benchmark
which is fairly high for what you can get comparably in the US
for the similar duration of we suggest under 6 years.
Tracking error will be around 10%, which gives us enough room to,
arbitrage between 3 different asset classes;
the external debt, foreign exchange, and local rates.
This is a snap shot of currently what I have in my portfolio;
one of the funds that we manage in London.
As you can see the geographical diversification, you can see certain exposure.
The funds invested both in sovereign and corporate debt.
Slightly have more sovereign debt at the moment
but very active on the corporate universe as well
because this is where I think the yield is
and this is where we can extract more value.
These are some of the positions we have on the foreign exchange,
I will talk about it a bit later.
We like high yielding effects,
high yielding bonds for the next year to 18 months.
So hence, we overweight some of the currencies
that offer us this pick up versus US dollar yields or Euro yields.
Investment process.
It’s a 3-step investment process.
The first part on your left, you can see it's a directional view,
which we formulate together with the global fixed income team.
We differentiate between 3 asset classes credit,
which is hard currency-denominated debt, currencies and bonds.
After the view has been formulated, we know directionally
whether we think that emerging market debt is cheap or expensive.
We move in to the next part of the investment process
which were we look at emerging market relative value.
And if you look from top to bottom in the middle of the chart,
in credit, we look at things like country allocations.
This is in hard currency debt.
Which countries offer us more yield or more returns potentially?
Obviously, adjusted for risk.
We’ll look at the curve allocation.
What kind of part of the part of the curve you want to be invested,
the long end of the curve? Do you want to buy more 30-year bonds.
Do you want to buy more 5-year bonds?
It depends on our viewers on duration.
And we also look at corporate exposure.
A corporate exposure in this context, we consider
as additional yield pick up versus the government debt.
On foreign exchange, we do interblock allocation,
where we look at conceptually where is the value in foreign exchange.
Is it in Asia emerging markets affects in Asia, in Latin America, or Eastern Europe.
Once we have done that regarding to interblock allocation.
So within each region for example in Asia,
which currencies we want to be overweight
and which ones we want to be underweight.
So for example, look at the position at the moment,
we're overweight Korean won and underweight Malaysian ringgit
because we think the value of Korean won has much more
appreciation potential versus the Malaysian ringgit.
And in the middle of the chart on the bottom,
you can see in bonds, it’s very similar to the top
where basically we look at country allocation.
This is the local currency denominated instruments.
So again, where do we think depending on, for example,
on monetary policies cycle in each particular emerging market countries.
Where do we think that the bonds offer attractive yield pick up?
And we also look at the curve allocation similar,
do we want to be in the long end of the curve or the short end of the curve?
And finally, we move into the last part of the investing process,
where we actually have to choose specific instruments
through which we express our views.
So we look at specific corporate bonds.
We look at specific government bonds.
On currencies, we look at the currency forwards.
We look at some options and then, we have to look whether
do we want to do more support foreign exchange
or do we have to do a forward long-term forward.
On the bottom of the chart on the right hand side, on bonds,
similar thing is a corporate bonds in local currencies
as an additional yield pick up versus the government debt.
We look at also government debt bonds;
you know, which particular bonds we need to buy.
And all of these, you can see we do a bit of a short-term trading.
As I said earlier, our investing horizon is minimum 2 to 3 years.
But we also have short term trading which can be a month or two,
a few months, sort of horizon.
This is as investment manager, we create additional alpha by doing short term trading
where we extract mispricing opportunities in the market for one reason or the other.
Some of the things we look at sort of we call them filters.
You can see that as part of a very large asset manager,
we have a lot of resources that we can draw upon.
We have a large global strategy team based in Paris.
We also have a large team of credit analysts.
So every corporate bond we have in our portfolio
is continuously followed by one dedicated credit analyst.
We’re a team of five people.
We’re two portfolio managers based in London and three dedicated analysts.
Two corporate analysts; one is financial and one does non-financials.
And we also have one sovereign analyst.
We also employ an independent company who does more of long term macro views.
So by long term, I mean, 10 to 20 years macro view on a specific country of our choice.
And they do it on a monthly basis on our request.
Macro factors which we analyze in order to take specific views and positions.
Obviously you know, we look at global themes like growth,
commodities, regional issues; extremely important for emerging markets.
And we look at country specifics,
quantitative tools like solvency, liquidity affects models.
We look at qualitative tools like politics and economic cycle, monetary policy cycle.
And we also look at very important things like market factors.
We like to call them technicals.
So this is, for example, general risk aversion for emerging markets.
Our investors. How do they proceed with emerging markets currently?
Are they risk averse or not?
We look at valuations.
We look at technicals such as flows into the asset class
that has been very important this year for our asset class. I will highlight it later on.
The inflows have been staggering; a lot of new money coming in.
We’ll look at positioning and we also look at different instruments,
for which instruments we want to express our views.
So based on that, we formulate our view on each specific asset class;
external debt, foreign exchange, and local debt.
They are all separate asset classes.
And as I said earlier, we arbitrage between the three.
So if we’re thinking if one is expensive currently, we don’t have any investment.
We move into the other one; so it really depends.
Then just very briefly, our range of positions vary from neutral view,
underweight, overweight, or strong underweight and overweight.
Obviously, being a real asset manager, we cannot short anything.
We’re not the hedge fund.
So our negative view on a country or an asset class
will be expressed through basically no exposure.
So we either be in cash or just having no exposure
which will automatically make us underweight versus the respective benchmark.
That is the negative view that we express.
But we don’t short anything.