The challenges and opportunities with Global Emerging Markets

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  • 06 mins 33 secs
Lu Yu, Emerging Markets Portfolio Manager, discusses the aims and objectives of the Allianz Emerging Market Equity fund, approach to risk, the challenges and opportunities in emerging market equity, what makes this fund different and how clients can use the fund in portfolios.


Allianz Global Investors

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This strategy invests in emerging market equities. Our objective is to outperform MSCI emerging market index by 2 to 4% on an annualised basis, with tracking error controlled between 4 to 5%.

We believe investor behaviour biases contributes to market inefficiency. So we build our preparatory quantitative based alpha model using behavioural finance and intrinsic and evaluation factors. This alpha model is then integrated with a highly responsive and adaptive risk model. And then we have an optimisation process, where we will take information from the alpha model and the risk model to construct a portfolio. When we’re constructing a portfolio we also take consideration of country, industry security level active bonds, as well as tracking error, which is between 4 to 5%, and control the total volatility of the portfolio to be slightly below the benchmark.

This whole process is automated, and after that the portfolio managers will conduct we call traditional overlay in which we will go through each of the buy and sell names to make sure we’re not missing any late breaking information, or we’re not capturing any false positive signals. And in the end we will build our client a very active portfolio with high conviction between 80 to 100 names in the portfolio.

Risk is very important in managing emerging market portfolios. We have a risk model which will identify what are the emerging sources of market risk, or we call systematic risk factors in the marketplace. This risk model will tell you for all the stocks you have in the emerging market investment universe what are the exposures of all these stocks to the systematic risk factors in the marketplace. It also tells you the correlation between the stocks in your investment universe. So when we viewed the portfolio this risk forecast is a very important critical part of the portfolio construction process. We also control the portfolio exposure at a country level, industry level, security level, and also the liquidity of the security is also considered as well.

There are abundant opportunities in emerging market equity markets. In our investment universe we have more than 2,400 stocks, and we can build a very active portfolio for our clients, because we believe this market is still inefficient. And when markets are inefficient active management can add value for our clients. Of course along with the opportunities there are many challenges in investing in emerging markets as well. Geopolitical risk will be one of them, and there will also be sentiment changes very quickly in emerging markets as well. Therefore we need a risk model that can capture the emerging sources of risks in the marketplace to help us build a portfolio for our clients that can protect our clients’ money in the downmarket, which is a focus for our investment process.

We believe there are three areas that differentiate us from our peers. First and foremost is our investment philosophy, which is behavioural finance. We truly believe human behaviour has been the same for thousands of years, and it’s not going to change any time soon. And it leads to the market inefficiency, which allows us to explore alpha opportunities for our clients. And second is our investment approach, which is a repeatable risk controlled process. We have an alpha and the risk model, and we have an optimiser that can help us optimise the portfolio for our clients. And lastly is our ending portfolio is a portfolio with high conviction, and at the same time protect our clients’ money in the downmarket. We have an alpha model and also an investment process built in such a way that we can do better in the downmarket than the more upmarket for our clients, which allows us to add more value for our clients in the longer term.

90% of the world’s population lives in emerging countries. Emerging countries also own more than 80% of the natural resources globally, and 70% of the land. Emerging economies contribute to almost 50% of the world GDP. We recommend clients, any long-term investor to invest in emerging market equity markets. Our emerging market fund is a core style equity fund, which we believe can be a core allocation for any long-term investor. Our team have more than a decade investment experience in emerging markets. Our behavioural finance based investment philosophy differentiates us from our peers, and can add value for our clients in the long term.