The Hedgeweek Interview: Susan Payne, CEO, Emergent Asset Management Limited
UK-based global macro manager Emergent Asset Management Limited (EAML), is a macro hedge fund that is also involved in an innovative joint venture in the Argentinian market. Susan Payne outlines Emergent's strategy
HW: What is the background to Emergent and its principals?
SP: We are a global macro fund manager and our ideas are expressed through our five long/short absolute return funds focusing on global and emerging markets, across FX, bonds, equities and commodities.
I founded the company in 1997 along with David Murrin, who is, with myself, one of the principals. Emergent is minority owned by Toronto-Dominion Bank, one of Canada's top tier banks.
I originally trained as a lawyer and, after having been called to the Bar, joined JP Morgan in 1986, working on the equities, fixed income and syndicate desks before joining the original eight-person global Emerging Markets Group. During my tenure as Head of Emerging Markets Sales, Europe, the global group grew to number over 250 people and became established as the market leader in emerging markets securities, including both debt and equities.
In 1993, I joined Goldman Sachs International as an Executive Director and Head of Sales and Trading responsible for developing its emerging markets debt business in Europe.
Emergent Asset Management Limited was launched in 1997, and I co-managed Emergent's original hedge fund for 6 years. My main focus now is business development.
David Murrin is our Chief Investment Officer and has 18 years experience in proprietary trading and analysing financial markets. In 1984, he joined a global seismic exploration company and was posted to the jungles of Papua New Guinea. During this period, he lived and worked with local tribes in the Sepik Basin and started to formulate his theories on collective emotional behavioural patterns. That kicked off his theories on price as the purest barometer of behavioural patterns.
In 1986, David joined JP Morgan, where he traded the major bond, interest rate, bullion, foreign exchange and equity index markets. Part of his responsibilities included acting as strategic advisor to the Head of Trading using his price and behavioural-based analysis techniques. In 1991, David founded and managed JP Morgan's highly successful European Market Analysis Group, which had widespread responsibility across various markets, including developed and emerging markets. In 1993, David's established Apollo Analysis Ltd to advise several bulge-bracket banks on taking directional risk in global and emerging markets.
David joined Emergent as a principal in 1997, and co-manages all our funds. In addition, David is a keen military historian, which is an important component in formulating his global macro view over the next decade.
HW: What is your current aum and what are your products?
SP: We have USD 105 million under management and we have five products comprised of two core funds and three feeder funds.
The three feeders funds are the Alternative Debt Fund, with USD 25 million in aum, Ballistic Equities with USD 45 million and Cosmopolitan Developed Markets with 35 million.
We also offer a sixth fund that is operated as a joint venture with an Argentine bank.
HW: How does the Argentinian joint venture work?
SP: We're working together with a bank in Argentina called Merchant Bankers Associados (25% owned by Templeton in the US), which was just voted by Global Finance as the top investment bank in Argentina. We discovered we had many synergies with them in terms of how we worked. The Argentine Patagonia Fund, which was launched last year with MBA, is similar to many Russian-focused funds that did well after the Russia crisis. However, however the magnitude of the default in Argentina - USD100 billion - dwarfs that of Russia's in 1998, which was USD 30 billion.
There are many assets in Argentina that are worth investing in and the returns are considerable, averaging +950 basis points. The fund does not invest in defaulted, external Argentine debt. The unusual part of the fund is that investors can invest cash or cash equivalent in defaulted Argentine external debt, so that holders of these defaulted Argentine bonds can swap them into the Patagonia Fund and have an actively managed holding, as opposed to a passive holding of defaulted debt. The fund is projected to return 100% over three years, and is up 13.7% in the last eight months since launch, up 11.2% YTD. The fund currently has USD 30 million under management and we are currently distributing it.
HW: How do you generate ideas for your funds?
SP: Our internal ideas are generated through a fairly unique perspective on the world based on price analysis validated by geopolitics, macroeconomics and historical cycles.
HW: What is your approach to managing risk?
SP: Strict risk controls are structured within EAML's Trade Tracker risk system, which was designed in-house and uses a proprietary methodology.
HW: What is the investment process of the Ballistic Equities fund, which recently won an award?
SP: Ballistic Equities is our emerging equities fund that has returned 110.8% over the past three years. The return compares well to the MSCI EM +32%, the S&P -15.7% and the Nasdaq -18.9% over the same time frame.
The investment style is global macro long/short and directional. We look at price analysis actively, which drives much of our idea generation and helps us to quantify risk.
We take a very long-term approach to markets and then telescope in through time frames to maximise our risk rewards.
As an example of the big picture perspectives that enlighten our view: we look at equity markets since the 1929 crash and how they have performed from that time to 2000. Over that 71-year timeframe, you see an uninterrupted increase in the value of equity markets, with rampant price increases in the 1990's. The price pattern analysis over the period reflects very few draw-downs.
Then in 2000, we note a peak coincident with the Nasdaq bubble and the Iraq war. War often manifests itself at the end or the start of peak cylcles. Even the administration of President Clinton was symptomatic of the end of the bull era: more casual and relaxed, even with regard to a heightened disregard for corporate regulation heading into the 2000 peak, which became obvious in various cases like Enron, World Com and Tyco at the start of this decade.
Going forward, we are facing far less security globally than ever before in a decade characterised by war and nuclear proliferation. President Bush is a more formal, protectionist leader at a time when America's priority is increased security against an asymmetric enemy - terrorism. We see more cold wars forming around the world, like Japan and China, and America's drive will dictate economic policies around the world with widespread implications.
The genie of WMD is out of the bottle with few safeguards in place.
HW: How will these changes impact on your own portfolios?
SP: In the big picture, we are looking at a lot of volatility going forward in a decade that we expect to see a large scale equity correction in both Europe and the US.
The three themes driving all our funds are:
1) US foreign policy and the impact it is having on both developed (France, Germany, for example) and emerging countries (Turkey, Pakistan). As a sub-set to this, there is also the issue of the House of Saud vs Al Qaeda that is already causing waves worldwide, and over the next year will influence how we take risk.
2) The ascendancy of the Asian basin. The fact that China is its own growth and consumption story, and that we should see growth there of 6-7% this year, doesn't indicate a hard landing to me.
3) Oil. We believe that oil will hit at least USD 50 per barrel in the medium term. 20% of the world's oil production comes from 14 oilfields, and the remaining 80% comes from 4,000 oilfields. There have not been any major fields - expect one discovered in 1979 in Kazakhstan - discovered for 20 years. At the same time as having dwindling oil supplies and no excess capacity in refining, we have dynamic growth in Asia, including India, which is a regional oil importer, and consistently strong and growing consumption in America.
HW: What do you expect to see in the year ahead?
SP: We see significant geopolitical risk over the next year. We are bearish on equities. We are also bearish on fixed income, where we think that there has been a very obvious hunt for yield for the last year - creditworthiness is now likely to become critical, leading to a sell-off in emerging markets, perhaps within 2-3 months.
I think there will be some inflation in the US with stronger oil prices. Interest rates will probably go up more quickly than expected though, whatever the pace this year and next, the threat of rates increasing is sufficient to impact markets.
HW: What sectors are you looking at right now?
SP: Equities from the short side, particularly with regard to semi-conductors. We like oil and alternative energy sources, like natural gas. In essence, we are adding to positions as we se confirmation of our views.
HW: What differentiates you from other global macro managers?
SP: We take a more holistic view than most managers and we do see strong correlations between a whole different variety of asset classes. This giant holographic format is imperative to the way in which we take our investment decisions.
We are seen to be independent thinkers with a big picture focus and we are not correlated to our peer groups, so we represent real diversification for investors.
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