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‘Respect liquidity’ and preserve alpha, says A-rated EM equity manager

‘Respect liquidity’ and preserve alpha, says A-rated EM equity manager

Market liquidity is a key concern for the long-term performance of a portfolio and must be approached cautiously, says Citywire A-rated Thomas de Saint-Seine and founding partner of Reyl Asset Management.

‘We really try to respect the liquidity constraints in the market, and respect our risk parameters,’ he said, and part of the criteria he uses to select stocks in his portfolio is whether the stocks are sufficiently liquid.

Since July 2009, de Saint-Seine has managed the Reyl (Lux) GF-Emerging Markets Equities B USD alongside Maxime Botti and Emmanual Hauptmann.

‘We have a heavy turnover of 400-500% so if we represent too much of the market, it can’t absorb our liquidity,’ said de Saint-Seine.

Consequently, expected alpha is lost as the traded portfolio becomes too large. Benchmarked against the MSCI EM TR Net USD, the fund has a target annual return of 6-9% above the index, and a volatility target of 4-5% below the index over a market cycle of 3-5 years.

According to de Saint-Seine, the portfolio uses a ‘systematic bottom-up approach’ and is diversified with ‘more than 900 positions’, which is rebalanced every 6 weeks to maximise expected alpha while minimizing market impact. With over 900 positions, meeting with company management is impractical, and for the purpose of the strategy, unnecessary.

‘We never meet with the management of companies because we don’t want stock-specific risk, and we have a very diversified portfolio.’ While the stated limit on a single position is 2.5%, in practice, the most a single position can occupy is ‘around 1%’.

Underpinning the portfolio are three familiar strategies practiced across the industry.

Three strategies behind performance

In discussing his performance, de Saint-Seine highlights the ‘three complimentary strategies’ over which the fund’s assets are allocated.

The strategy with the largest allocation is growth at reasonable price (GARP), which seeks to capture trends in emerging markets, where ‘market cycles are faster and more dynamic’.

The value cash flow strategy focuses on companies with strong free cash flow, and balance sheets, and tends to outperform during the rebound phase of a market cycle. The defensive dividend strategy, which focuses on dividend-paying companies, performs during the ‘correction phase’.

Across macro cycles, de Saint-Seine argues, the allocation of 60% to GARP, 20% to value cash flow, and 20% to defensive dividend, has achieved the fund’s performance and volatility targets.

As at end-May 2013, the fund has returned 3.12% year-to-date, against the benchmark return of -3.29%. Over a three-year time frame, the fund has returned 53.32% against the benchmark return of 18.24%.

He attributes his recent outperformance to ‘a very strong stock selection effect’, saying, ‘the current environment is more in favour of stock pickers than passive investors. We find large discrepancies in the market.’

Sector-wise, the fund is overweight consumer discretionary, industrials and healthcare, while underweight energy, consumer staples, IT, and materials. More recently, he has reduced the fund’s underweight to materials and energy, saying, ‘we are positioned for an improvement in the economic cycle.’

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Thomas de Saint-Seine
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69/596 in Equity - Europe (Performance over 3 years) Average Total Return: 42.55%
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71/596 in Equity - Europe (Performance over 3 years) Average Total Return: 42.55%
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