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Fund Manager Focus: Ayaaz Allymun

Allymun runs Tobam’s Anti-Benchmark Emerging Markets Equity Fund and outlines his strategy in comparison with peers

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David Robinson
Ayaaz Allymun, Tobam

What is your strategy?

Our investment philosophy is to provide the most diversified portfolio for any given universe. Our diversification ratio process aims to maximise this measure.  We basically construct a portfolio that is a combination of stocks that are the least correlated to each other in order to capture all the available sources of risk in the emerging equity markets universe.

Why should fund selectors invest in your fund vs your peers?

Passive approaches and active managers tend to follow benchmarks very closely and carry very strong concentrations of risk. In emerging markets equities, for example, investors are currently highly exposed to the financial and IT sectors. We often highlight to our clients that even though they might have a perception of being diversified, their exposure to certain risks can often be unconsciously accumulating in the allocation. Investors allocated in US and emerging equities in a passive manner, for example, need to realise that their current exposure to the FAANG stocks is incredibly high, whether directly or through the correlation of their holdings.

Why does your strategy stand out from your peer group?

By maximizing diversification, the goal of the anti-benchmark equity portfolios is to both demonstrate greater returns and lower risk vs market cap-weighted benchmarks.  The EM equity strategy has outperformed in seven out of the last eight calendar years and has had on average 17% lower volatility vs the market cap-weighted benchmark since its inception. Because what we do is significantly different from what the others are doing, we tend to be lowly correlated to most traditional approaches.

How do you protect investments against market volatility?

The strategy aims to lower portfolio risks, not by concentrating in low-volatility stocks, but by combining lowly correlated stocks. In other words, our process constructs the portfolio by picking up securities that complement each other and therefore diversify the portfolio, which will result in a volatility reduction of the portfolio on average, when compared to the cap-weighted benchmark. Since inception, the average volatility of our strategy is 17% lower than that of its reference index.

How does your fund prosper in a bear market?

Our investment process seeks to build the most diversified portfolio without any bias or bets on a particular stock, sector or factor. Traditionally market declines happen when what we call excessive concentrations have been building up, which is by construction how market cap-weighted indices work. Our strategy doesn’t have any of these biases or concentrations of risk. As a result, it when the market is correcting these excesses, the impact on our strategy also tend to be much lower.

As the global growth outlook darkens and US-China trade war risks remain high, is it really a good time to increase exposure to emerging market equities?

Our motto is “diversification is our only bet”, meaning that we do not forecast, we never make economic assumptions or determine economic scenarios in advance. We believe, as US economist Harry Markowitz said, that diversification is the only free lunch. Emerging equity in general is a diversifying asset class in terms of allocation, as long as you don’t build up significant exposures in the same sectors or type of industries. We see our approach as a tool to collect the risk premium of an asset class. With regards to EM equities, risks are sometimes perceived to be higher than on developed markets, and so is the potential for growth. Collecting the risk premium with lower risk in such an environment seems attractive to many investors.

What is your professional biggest fear at the moment?

The rise of passive management is worrying. It feels as if investors have given up on their responsibility. One of the most fundamental purposes of the industry is to invest savings back into the economy in a way that maximises the scale of reward investors can achieve for a given level of risk in order to drive future economic growth and stability.  Passive management is, by definition, the absence of management.

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