14 October 2017

Diversifying Away from Rising Benchmark Risk Concentration in Mega Cap IT Names


We’ve observed lately a disproportionate amount of the MSCI EM index weight and risk concentrated in the largest stocks within the IT sector. The MSCI Emerging Market Index’s performance has been largely driven by its exposure to specific mega-cap names in the IT sector, causing an over-concentration effect here. While the market has enjoyed a strong 2017 so far, our defensive profile has behaved as it was designed to.

Our RAM (Lux) Systematic Funds - Emerging Markets Equities continues to lag given its high levels of diversification and its flexible cap fundamental approach that helps us uncover the most attractive fundamental opportunities across the universe, and this strong diversification leads to a lower volatility profile than the one exhibited by the more concentrated benchmark. Both our flexible cap approach and our strong risk diversification play an inherent role in the way we capitalize on recurring sources of inefficiencies over the medium and long term, but can penalise our Fund relative to a market-cap weighted index in these risk-on phases.


**Note: The RAM EM Broad: our investable universe contains all stocks which have minimum market capitalization of US $150mn and a minimum average daily volume of US $500,000.


An equally-weighted portfolio of our liquid All Cap EM stocks’ universe returned 20% over the last 18 months, while the MSCI Emerging Markets Index rose by 34% (52% for the MSCI EM 50 Index) over the same period. This underperformance is almost entirely due to the MSCI EM’s high concentration in just a handful of mega cap names. The IT sector accounts for nearly 24% of the index’s total weight over this time period (28% as of today). Again our diversification and quality bias hurt us, with our Fund maintaining its underweight here.

Within the IT sector just 4 heavyweight names accounted for more than 30% of the outperformance over this period; while also accounted for over 15% of the IT sector’s weight (our Fund had just around a little more than 0.82%) to these same names:


Source: RAM Active Investments, Factset MSCI indices as of 29.09.2017, Past performance is not a guide to future performance

The Top 10 stocks within the MSCI Emerging Markets Index represent only 1.2% of the total number of index constituents, but have a weight of 25% in the index.


Source : Risk Metrics, RAM Active Investments , as of 12.10.2017


Our RAM (Lux) Systematic Funds - Emerging Markets Equities has continued to outperform over the long-term, providing diversification for investors amid a higher beta and more concentrated environment in emerging market stocks (see above).


Looking at the last 5 years, the Fund offers an alternative profile for investors who want exposure across market caps in emerging markets, but want a more defensive, lower-volatility approach. Relative to both the MSCI Emerging Markets and MSCI EM Min-Var indices, our Fund has exhibited both strong returns and lower volatility, as well as a significantly higher Sharpe ratio. This low volatility has enabled the Fund to maintain its long-term performance targets. Our attractive dividend yield and our diversified all-cap approach give our Fund a relatively defensive profile.


Note: RAM Emerging Market Equities Fund performance net of fee (Class Ip-USD, 1.0% of MF+15% of PF- prior 02.2012 performance are simulated on realised track record) / Source: RAM Active Investments, MSCI indices as of 31.08.2017 / Past performance is not a guide to future performance.


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