Old Mutual Investment Group’s (OMIG) ‘Thriving in an ambiguous world’ themed Tomorrow Investment Summit highlighted the increasing influence of evolving technology and Artificial Intelligence (AI) in shaping the future of the world and the asset management industry.
Pointing to the pivotal period the world is currently going through, the Summit unpacked the many facets of the ambiguity facing asset managers and society at large, including technological advancements, market volatility, regulatory changes, geopolitical events and a changing interest rate environment, and focused on topics such as emerging versus developed market opportunities, transformation and responsible investment as all being key areas that need to navigate the current changing landscape.
OMIG Managing Director Tebogo Naledi opened the event by underscoring the critical conversation that needs to be had about how we adapt and utilise our human intelligence in combination with AI. “AI is constantly learning. It can analyse millions of data points, identify deep insights and produce predictive analytics that humans might miss, he said. “But imagine the potential when you blend analytical rigor and data driven insights with human intuition and conviction.
“At this critical juncture that we find ourselves in as citizens of the world and allocators of capital, I'm reminded of what John Templeton said, that the four most dangerous words in investing are ‘this time, it's different’. We have to ask ourselves, are the times really that different to what history has always shown us: that humans have always thrived in ambiguous times,” he added.
“And here we are today, bringing you this summit in a year where uncertainty, instability and the unexpected have become par for the course. Through all of this as an industry, we have to remain brave, mindful, adaptable, and at the forefront of change.”
OMIG Chief Investment Officer Siboniso Nxumalo painted the picture in his panel on emerging markets, focusing on investment opportunities transpiring out of rising ambiguity in the markets.
Nxumalo highlighted that while emerging markets offer only 20% of global market value, they contribute around 45% of global GDP.
“And if you look at energy consumption and carbon emissions, over 60% is consumed in emerging markets, with emerging markets land area at over 80% and population closer to 90% of the global population,” he highlights. “What strikes me is that all of these factors are the fundamental drivers of productivity. Therefore, shouldn't we naturally expect that over the coming decades its market cap will also positively change?”
Nxumalo says that investors need to be prepared for the next investment wave, which belongs to emerging markets. “Just because we've seen 15 years of outstanding performance in US equities does not mean that that this is a permanent situation,” he said. “Despite the huge outperformance over this period, if we look further back, prior to 2008 and especially in the late 1990s to compare developed versus emerging market equities, it is clear that markets are cyclical and emerging markets outperformed developed markets and US equities during these periods.”
What is important to note from this data is that the turning points are usually driven by some form of crisis. The crisis creates a defining moment and then a regime change, says Nxumalo. “If we look at the period after the global financial crisis, particularly during 2009 at the bottom of the market, there was huge pessimism around developed markets,” he explains. “But from that point onwards, global equities, or rather US equities, outperformed emerging markets by a factor of three times.
“This is where emerging markets finds itself, given the current junction we’re at,” he says.
Co-Portfolio Manager of the Old Mutual Global Managed Alpha Fund Reza Fakie also shared his views on the current investment environment in a presentation on factor investing within a global market context.
“We all know the weighting of developed markets in the MSCI All Country World Index is roughly 90% compared to emerging markets’ 10% allocation. However, if you look at opportunity set, the index is split nearly evenly between developed and emerging markets by number of shares,” he explains.
“And it goes further than that. You would assume that the US, which makes up 64% of the weight of the index, would have the highest number of stocks. But in reality, the US’s 600+ stocks are superseded by China having just over 700 stocks. If we continue going down the list then next is Japan with just under 300 stocks, but the next biggest countries by number of constituents are all emerging markets and includes India, Taiwan and Korea,” he adds.
“So ultimately, it’s not just about weight in the index, but rather about the opportunity set and how spread across the world it is. And to invest in this current world, you need a scalable process.”
Making the argument for factor and quantitative investing in this large and evolving world, Fakie points out that there is a scalability issue on two levels when using the traditional approach. Firstly, to cover the ~3000 stock universe one would need a large number of analysts. Even if the first the hurdle is overcome, without a clear indicative preference across all shares, how does a portfolio manager mentally select across all 3000 stocks for their portfolio?
“By taking a global systematic approach that is based on factors, we can focus on what is driving the global market at large, and what will continue to drive it,” he says. “Your drivers would typically include volatility, growth, quality, momentum, value or size. Ascertaining these drivers and the exposure that every share has to these drivers, gives us a measure that quantifies the overall attractiveness of a share relative to all others in the universe. Putting it all together you’ve still got a portfolio manager, however rather than working in isolation, they are utilising a glass box, which is powered by the research and tools developed in conjunction with the team of analysts, which aids in constructing a diversified portfolio and delivering client outcomes.”