Advance Emerging Capital – Best Diversified Fund of Funds Manager
Advance Emerging Capital Limited is a London-based investment management company with a dedicated focus on global emerging and frontier growth market equities. The firm was established in 1996 by former Bank of England executive Nigel Wilson. In the early years, Advance Emerging Capital focused exclusively on emerging market equities. This remit was extended to include frontier market equities when Dr Slim Feriani (piuctured) took over the reins as CEO and CIO in 2005.
Currently, the firm runs six funds and one segregated mandate. Four of the six products are long-only fund of funds, the other two being direct equity investment mandates. The firm’s flagship fund is the Advance Developing Markets Fund, which launched in June 1998. It has delivered outperformance in 11 of the last 15 calendar years.
The ability to generate alpha within its funds is predicated on three key criteria:
• Investee manager selection;
• Geographical asset allocation;
• Discount opportunities.
At a global level, Advance Emerging Capital conducts analysis on emerging and frontier market countries by assessing quality (balance sheet, FX reserves), value, growth and change (socioeconomic and political) factors. This helps form a macro view on which markets to focus on in its funds before the manager identification process.
In respect to this, Advance Emerging Capital’s team rigorously selects best of breed managers by conducting in excess of 300 manager meetings a year, half of which are conducted on the ground. Key considerations include: manager experience, sustainability of investment process and performance, as well as environmental, social and governance considerations.
“Our Advance Developing Markets Fund strategy targets 25 to 45 holdings, whilst our frontier markets strategy targets 20 to 40 holdings. The on-boarding of managers is a long process with extremely strong due diligence and several meetings on the ground,” says Feriani, noting that the average holding period of open-ended manager is 4.5 years.
There are myriad discount opportunities within emerging and frontier markets given their diversity and inefficiency. A balance of closed and open-ended funds is achieved depending on where these discount opportunities arise.
Key factors that drive the removal of managers include: negative change in management; re-balancing of the Fund’s asset allocation; narrowing of discount of a closed end fund to an unsustainable level; breaching of performance limits without satisfactory explanation; failure to achieve corporate activity within assigned investment horizon; switching to a higher conviction bottom up idea, or corporate activity such as tender offers.
With respect to risk management, within its funds Advance Emerging Capital will generally keep positions within each portfolio to between 1 and 10 per cent of the NAV. The team takes care to ensure that there is no duplication of fund styles and strategies within its portfolios. None of the firm’s funds uses leverage or hedging.
“The main portfolio risk measures include: maintaining a high degree of diversification; mixing styles (growth, value, large cap, mid cap etc) in the underlying holdings; altering the balance of closed end versus open end funds in the portfolio; investing in defensive managers when appropriate, and raising cash in the portfolio (generally not above 5 per cent),” confirms Feriani.
On winning the Hedgweek award, Feriani comments: “This is an appreciation and recognition of our strong and unique investment process, encompassing three engines of alpha generation and huge local informational advantage of more than 50 expert investment teams in 23 countries.”
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