Hedge Fund Awards 2015

Hedge Fund Awards 2015 www.acquisition-intl.com 12 Investing in frontier markets naturally has its challenges. “There are many challenges in frontier markets from both business and invest- ment standpoints,” says St. Germain. “While asset allocators and investors have increasingly come to recognise frontier markets as a distinct and viable asset class from traditional emerging markets, their excitement is often tempered by a lingering perception that the asset class is ‘riskier’ than developed or emerging markets. “We assessed the validity of this claim using empirical data from country indices of 80 developed, emerging, and frontier markets over the last 10 years. Our analysis suggests that frontier markets as a group are not only less risky than traditional emerging markets, but have also exhibited comparable or lower risk to developed markets over most periods. While it is natural to fear the unknown or unfamil- iar, the prevailing perceptions about risk in equities in frontier markets appear to be unfounded. “Risk, defined as the probability of loss of capital, can stem from a va- riety of sources. In the case of frontier markets, commonly perceived sources of additional risk are attributed to greater political instability, weaker corporate governance, unstable currencies, and an over-de- pendence on commodities. Based on these factors, the presumption is that frontier markets will lend themselves to greater market risk. Our empirical analysis of common risk metrics suggests such percep- tions of increased market risk appear to be unsubstantial. “While the market risk in investing in frontier markets may be lower than perceived, there are still some unique aspects to frontier markets that need to be considered with selecting a frontier markets manager. One must scrutinise closely how a manager balances the liquidity constraints of the asset class with overall fund size. The lower risk advantages of frontier markets erode quickly in portfolios that are excessively large or offer overly frequent redemption terms. “Other challenges unique to frontier markets relate to how a manager handles the informational challenges of investing in such a diverse set of opaque markets, each driven by its own idiosyncratic dynam- ics. The first-movers to frontier markets are not necessarily the household Wall Street names that have popped up with frontier funds over the past 2-3 years. As a result, the frontier markets experience, infrastructure, and relationships of a manager may matter more than what might feel comfortable when selecting an emerging or developed markets manager.” It has been a tumultuous year for some frontier markets like Ukraine, Iraq and Ghana, says St. Germain, while others like Sri Lanka, Saudi Arabia and Egypt have seen largely a slow and steady improvement in market outlook. “The sell-off in October and November has helped expose some of the frothy valuations that had been in some of the well-known frontier markets consumer names that a lot of new money piled into. As there is a huge opportunity set found beyond these larger, ‘easy-to-research’ names, we are not concerned by the sell-off. We actually see it as a great opportunity to scoop up names at a sharp discount to where they traded only six months ago.” As bottom-up stock pickers, LR Global does not try to time markets, he says. “We try to identify the best stocks in their respective sectors from across the 50 frontier markets in our investment universe. Sometimes the best stock may be in the worst looking market. Like- wise, the fastest growing most stable markets can have this informa- tion more fully priced in.” Compared to emerging markets, frontier markets are a more attractive proposition, says St. Germain. “Frontier markets offer asset exposure similar to what emerging markets did 20 years ago. These are high growth markets with low correlation to the developing world and to each other offering greater diversification benefits than emerging mar- kets. There are few foreign fund managers picking over these markets so it is still a market segment ripe for stock pickers. “The traditional emerging markets, more specifically the BRICS, have increased their correlation to developed markets and as such are susceptible to monetary and fiscal changes outside their own board- ers. This infusion of capital helped fuel economic booms in emerging markets albeit at the mercy of their older developed siblings. The reversal of this capital flow, due to federal reserve tapering reduc- tions, has resulted in currency weakness, rising interest rates, rising inflation, growing account deficits, and slower growth. Additionally, many emerging markets failed to diversify their economies relying on their commodity industries to spur and sustain growth and sovereign wealth creation.” This year, LR Global has enjoyed success in the Hedge Fund Awards, being named Best in Frontier Market Investing – New York, Frontier Markets Hedge Fund of the Year – Cayman Islands, Best Frontier Markets Focused Fund since Inception and Emerging Manager of the Year – Cayman Islands. “LR Global is truly honoured to have won four awards in the Acquisi- tion International 2015 – Hedge Fund Awards,” says St. Germain. “LR Global has spent the past five years developing, what we believe to be, a unique and differentiated investment approach to frontier markets. To be awarded and recognised by fellow industry professionals is a proud achievement for all of us. These awards are a validation and testament to the effort, commitment and hard work our dedicated team has put forth over the years in developing an innovative invest- ment process and infrastructure. “LR Global is an ‘established start-up’ uniquely positioned to re-estab- lish itself as a frontier markets leader. As one of the first institutional investors in frontier markets, LR Global is unique in that we are not a new entrant to these markets given our 17 years of frontier investment experience. LR Global has successfully implemented a cost-efficient, institutional calibre support office of research analysts, technicians, and data specialist in our Hanoi, Vietnam office which facilitated the development of our proprietary frontier markets database and quanti- tative tools. From this database, our information processing architec- ture provides critical advantages versus our peers. “LR Global distinguishes itself as a pure, dedicated frontier markets manager and has avoided including smaller emerging countries and or blending frontier with emerging to increase the capacity of our fund to improve revenue potential. We are active managers and maintain, in our opinion, a well-diversified and risk-controlled portfolio of true frontier markets equities. “In this way, relative to the benchmark and even many of LR Global’s peers, our steadfast commitment to valuation and risk management may appear as defensive. However, LR Global is not a defensive manager, but merely ahead of our time. Until recently, the bulk of volume in most frontier markets owed to local or regional investors. Global frontier markets investing is a relatively more recent phenomenon. LR Global believes that in the future, more global investors will drive the critical vol- umes in these markets, which will abet the strategy’s longer-term, sec- tor-oriented and valuation-sensitive investment style, which is in many ways contrary to the market behaviour since inception of the strategy.” n LR Global