3 takeaways from year one on the job
Author: Regina Chi
July 6, 2018
It’s been almost one year since I joined AGF as lead portfolio manager of its emerging market equity strategies and in that time our team has established a solid process aimed at reducing volatility and delivering excess returns on a consistent basis over the long term.
As with most transitions, much of the heavy lifting on this front was done during my first three to four months on the job, while now the team’s focus has turned more squarely on execution.
Here below are my thoughts on some of the decisions made during my time so far and three takeaways from the experience:
Be patient and put the work in.
Most portfolio managers making a transition to a new firm and/or mandate have a pretty good idea about the holdings they are about to inherit well before their official start date. In my case, there were several names I thought were keepers, some I was on the fence about, and others that I quickly added to my sell list. My new colleagues, as it turns out, felt the same way about this latter bucket of names and by the time my first day rolled around, most of them were already sold. This was encouraging because it meant that our investment thought process, especially our sell discipline, was philosophically aligned. As for the remaining holdings, we spent the majority of our time speaking to management teams at companies we had a stake in to get a better understanding of their longer term growth profile, sustainable competitive advantages and capital allocation decisions. Our patience and due diligence helped us recognize that some of what we owned was being mispriced by the market, leading us to buy bigger positions in several stocks that have outperformed ever since.
Be open to new ideas
There needs to be a certain amount of flexibility when transitioning to a new mandate and this often means adopting new ideas and tools. I didn’t have a country allocation framework before starting at AGF, but I was very open to it once I learned more of its advantages and how it could complement my own investment philosophy. The multi-factor framework, which helps to identify which country stock market will outperform based on the appropriate valuation, low risk characteristic and attractive growth/momentum factors, has been used in the firm’s global products since 1995, but not for emerging markets before I got here. The decision to incorporate it followed weeks of analysis, including extensive back testing which gave me confidence that a country allocation framework could be a distinct source of alpha, separate from bottom up stock selection. To that end, the framework has proven its worth since implementation by leaving us less exposed to countries with current account deficits that are presently experiencing FX weakness.
Don’t be afraid to make your mark
Adopting our broader global team’s country allocation framework wasn’t the only big change that was made to the EM management team’s process in my transition stage. Taking from my own experiences, I introduced very early on the concept of fundamental catalysts in order to improve our stock selection process. There are plenty of high quality stocks that are priced inexpensively in emerging markets, but there has to be a reason why a company’s shares will re-rate from being mispriced to fair value. This demanded a new way of thinking for some of our team, but has allowed us to focus on quantifiable measures such as innovation that potentially drive sales, margins and/or asset turns higher that will lead to longer-term outperformance.
While time will tell whether these decisions lead us toward our longer term objectives, their implementation highlights our team’s successful transition to new ways of thinking and has been integral in our ability to manage through an increasingly volatile market landscape so far this year.
Regina Chi is a vice president and portfolio manager at AGF Investments Inc. She is a regular contributor to AGF Perspectives.