Last updated: 09:08 / Tuesday, 23 September 2014
RAM Active Investments

Liquidity: Size Matters, Remain Nimble

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Liquidity: Size Matters, Remain Nimble
  • RAM Active Investments manages an Investment Market Equity strategy which is currently on roadshow in Chile, Peru and Colombia with Capital Strategies
  • Emmanuel Hauptmann, Senior Equity Fund Manager, Emerging Equity Markets, RAM Active Investments gives his opinion about Liquidity in Emerging Markets

Generally speaking growth markets are more vulnerable to downturns and changes in the cycle. Emerging market equities are no exception, on average presenting a significantly higher risk than equities in developed countries, as we have seen in previous downturns. Risk therefore should be the most important dimension of any investment process in this universe. RAM Active Investments manages an Emerging Market Equity strategy which is currently on roadshow in Chile, Peru, Brazil and Colombia with its distributor in Latin America, Capital Strategies. These are the views of Emmanuel Hauptmann, Senior Equity Fund Manager, Emerging Equity Markets, RAM Active Investments.

Know your market impact

Liquidity in Emerging markets has developed favourably over the last ten years, at the same time as it dried up in developed markets around the world. Lately, less mature frontier markets saw an even stronger liquidity trend driven by large investor inflows into the space. This improvement of liquidity can give a false sense of security which investors typically pay for in deleveraging phases of the cycle. The volatility of volumes on local stocks, the vulnerability of many Emerging markets still dependent on foreign capital inflows mean we can’t compromise on liquidity management within the portfolio. To tackle this risk and to ensure we don’t give away the alpha generated by our investments through trading costs, we have developed a robust market impact model and portfolio construction process that aims to dynamically adjust and scale positions in our Emerging portfolio based on the recent volatility and volume characteristics of each stock. That process helps us maintain good risk and liquidity control at every point in time, which is crucial in periods of outflows like last summer, and will help prevent investors from being hurt in case of a sudden deleveraging in the future.

Manage your liquidity actively

The temptation is to think that a passive investment help reduce market risk more than an active one, given its usual diversification. Not necessarily if one selects an active strategy with strong risk management. Actually, the issue with market-cap based benchmarks is that they don’t give any attention to stock-specific risk. The bigger the company, the better. That can often lead to a too high concentration of risk on a few names and a sub-optimal allocation of risk in the fund. Overly concentrated equity exposures or insufficiently active liquidity management could make it impossible for an asset manager to provide its investors with cash within a reasonable timeframe or at a respectable price. As investors wishing to withdraw from emerging market equity (and debt) ETFs have unfortunately learned the hard way, the same can happen with passive management strategies if too many requests are received. A healthy selection must pay just as much attention to a position’s liquidity risk as to the fundamental opportunity that it represents or the market risk that it carries. Our philosophy, on daily liquidity funds, is to do everything we can to ensure liquidity to all our investors in a matter of days (not weeks, nor months…).

Emerging market equities still abound with inefficiencies and opportunities but with risks also and it is through a fundamental, disciplined approach to these markets, conscious of all risks incurred, that an investor will maximize his chances of a high return on investment there over the long term.

Article by Emmanuel Hauptmann, Senior Equity Fund Manager, Emerging Equity Markets, RAM Active Investments.

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