Focus Capital, a specialist emerging markets absolute return manager, has launched a fund of funds that invests across multiple asset classes.
The Emerging World Fund invests through other funds in emerging market equities, debt, and hedge fund strategies. It also deploys cash strategies to mitigate downside risks.
John Cleary, chief executive and chief investment officer at Focus Capital, says that by adopting a product-neutral stance the fund has greater flexibility than many of its rivals and so can seek higher risk-adjusted returns. “Most investment businesses are delineated and there are huge inefficiencies,” he says.
Focus Capital has investments in at least 45 emerging markets. It has about 600 underlying positions managed by more than 100 portfolio managers and analysts.
More than 80% of the fund’s performance comes from strategic asset allocation, says Cleary. “That’s the top-down call,” he says, emphasizing the importance of choosing the correct countries and assets. “The rest of the performance is a result of managing risk and outsourcing funds.”
The fund has produced good returns in its short life (it has been running one year although it has only just launched publicly). It achieved a gross return of 19.2% against annualized volatility of 8.2% between February 28 2007 and March 31 2008. By comparison, the CSFB/ Tremont Emerging Market Hedge Fund Index returned 13.8% with an annualized volatility of 9.6% over the same period.
In addition, the fund is outperforming emerging markets bonds, up just 5.2% over the same period, albeit with twice the volatility. In contrast it is slightly underperforming emerging market equities, up 23.3%, although the fund has one-third of that asset class’s volatility of 24.3%.
Cleary says the fund targets a high Sharpe ratio of over two for its strategy. “Most funds have a Sharpe ratio of 0.3. A good emerging markets fund might get a ratio of one,” he says. The Sharpe ratio is an expression of a strategy’s excess return per unit of risk taken.
The fund is currently 90% invested, with about 50% in long/short local-currency strategies and 40% in global emerging debt strategies. The remaining 10% is invested in cash. That contrasts with the fund’s investment strategy last year when it had no positions in debt at all and was invested in a mixture of equities and cash. That decision was driven by the then strong performance of the Indian and Chinese equity markets.
Cleary says the fund will start to dip its toes into emerging markets equity again, although probably not until the end of this year or the beginning of next. “We’ll stay out of equities for the next six months,” he says. “There will just be trading opportunities in equities but we’re not traders. We strategically allocate assets.”
The fund is worth less than $5 million, which is the firm’s own capital. Cleary says he now wants to grow it through third-party commitments.
