Against the backdrop of tougher market conditions and its overweight to private equity, $74.4 billion Alaska Permanent Fund Corporation (APFC) will only commit around $1 billion to private equity in 2023, down half what it normally invests in “busier” years. It will mean the investor narrows down the number of funds it backs and writes smaller cheques, chief investment officer Marcus Frampton told trustees in a recent board meeting in Juneau.

Smaller cheques will make it hard to get allocations with some funds, but a smaller allocation will also hold benefits like more influence with fewer relationships. It also means successful and innovative private equity investment shows up more in the portfolio.

The board heard about the risk of elevated valuations in private equity, and a lack of valuation reset relative to public markets, particularly in the venture capital space where companies are avoiding financing rounds or employing “creative financing” to circumvent mark downs.

The only other allocation to also flash red is APFC’s dwindling risk parity, where trustees heard of the investment team’s aversion to accessing the asset class via a leveraged approach given higher interest rates.

reducing PE further

APFC’s private equity portfolio has grown from $1.7 billion in 2012 to about $15.7 billion in 2022 at an annualized rate of 25 per cent. But a significant proportion of value in the portfolio is unrealised gains. Of APFC’s $11 billion in unrealized gains, almost $6.3 billion (57 percent) is from the private equity portfolio. Drilling down further, trustees’ heard that about a sixth, or $1.1 billion, of unrealized gains pertains to investments in funds made more than eight years ago.

Trustees’ heard how the changing dynamics in private equity will test manager skills. With more than a decade of low rates and rising asset multiples, managers on average have become less adept at improving the performance of their portfolio companies as reflected in the declining revenue and margin growth.

“This shift from conventional private equity strategy may prove costly when costs and rates reverse trend and rise,” said board documents.

Writing smaller cheques means APFC may lose its seat on Limited Partner Advisory Committee boards where LP investors in the fund take an oversight role.

“If you’re writing smaller cheques, you’re not offered a LPAC seat,” said Frampton. “But all else being equal, I’d rather the right portfolio exposures ahead of getting a board seat.”

APFC’s private equity fund commitments in quarter ending December 2022 ranged between $8 million to $50 million.

Today’s reduced allocation to private equity is a sign of things to come, and APFC is likely to pare back its allocation to private equity ahead. Existing investment policy targets a 19 per cent allocation to private equity in 2025 (compared to 17 per cent today) but Frampton’s CIO Recommended Asset Allocation suggests a 15 per cent allocation in 2025.

increasing Absolute Return and RE

Reflecting on other portfolio tweaks, Frampton is also seeking to increase diversification with a little less equity and boosted allocations to absolute return and real estate. In real estate, APFC can earn “CPI plus five” without taking on more equity risk, he said.

“Absolute return and real estate are areas where I suggest we increase.”

Success in the $6 billion absolute return portfolio, and its ability to run a low correlation to equities, depends on execution – and increasing the allocation to hedge funds could make execution more challenging. However, although hedge funds may not  fit in a typical pension fund portfolio, he argued hedge funds could do better than stocks, and suit APFC.

“If we can execute well, it’s worth having a bigger hedge fund portfolio.”

The absolute return portfolio has returned 6.8 per cent since inception with a volatility of 3.4 per cent.

Frampton said APFC’s public equity allocation is overweight value and small cap.

“I’ve been surprised how strong the market is given inflation and rate hikes,” he said.

The last time equities fell so much without the Fed pivoting to easing was in the inflationary ’70s. One again it makes execution, and timely rebalances, central to strategy, he said.

Reflecting on other allocations, Frampton welcomed a real return in TIPS and corporate bonds for many years. Other adjustments to the portfolio that have worked well include increasing exposure in early October to REITS in “a good trade.”

Frampton described office and retail real estate as “tough” but with good fundamentals and said the pricing “looks good” on industrial apartments.

APFC is on track to commit around $1 billion to infrastructure and private credit this year.

In private credit APFC favours drawdown, private equity style funds in contrast to open ended allocations where the capital is drawn up front and investors are redeemed on a quarterly basis.

Denmark’s AkademikerPension, the member-owned pension fund for 150,000 academics, has just notched up another important milestone in its ambitious sustainability strategy. Pressure from the fund’s CIO and chief financial officer Anders Schelde on Denmark’s Danske Bank contributed to the lender announcing plans to end new financing to oil and gas E&P companies that don’t have a credible transition plan in line with the Paris Agreement.

Last year, Schelde stood up and challenged Danske executives at the bank’s AGM, the only institutional investor to ask the bank climate questions. Schelde, who describes his approach as “polite, constructive criticism, focused on the bank’s lending policy,” contributed to Danske drawing up a more comprehensive climate strategy that included axing large parts of its fossil fuel financing programme.

Acting on behalf of AkademikerPension and client fund LD Pensions, he says a close relationships with the Danish companies that make up a large chunk of AkademikerPension’s internally managed equity portfolio is a central seam to strategy.

“Danske Bank is now demonstrating leading practice in some areas with its updated policy. They have committed to stop asset or project finance and corporate finance of new upstream oil and gas exploration and production,” adds Kelly Shields, campaign and project manager at London-based pressure group ShareAction.

Danske Bank’s commitment is important because it restricts corporate finance which accounts for the vast majority of bank lending, and much more than project finance. “The frontier is shifting in the level of ambition of investors and their asks of banks. We are seeing a growing interest from investors to tackle the financing of oil and gas expansion.”

Now she says Danske Bank should go further still by also restricting finance to infrastructure related to new oil and gas like pipelines.

New frontier

Like Shields, Schelde is also convinced more banks will stop financing fossil fuels and believes investor pressure on bank lending to the industry is the “next frontier” in engagement and divestment. The reason, he explains, is because despite selling all its upstream, fossil fuel-related investments in oil majors bar an allocation to Italian oil group ENI, the pension fund remained exposed indirectly to the industry via investments in banks’ lending to oil groups.

“Recent shareholder proposals at HSBC and Barclays show we are influential, and that investor pressure is speeding up the process,” he says.

Last year, HSBC announced plans to cut direct financing and advisory ties to new oil and gas fields and metallurgical coal projects after coming under fierce criticism over its climate change policies from shareholders and environmental activists.

And Schelde is convinced investors will successfully influence banks’ lending policies because they are targeting bank behaviour, rather than their core business.

“It’s very difficult to persuade, say, Shell to stop taking oil out of the ground. But it’s easier to get HSBC to stop lending to Shell.”

It’s why Schelde has no plans to divest AkademikerPension’s holdings of banks with oil and gas lending programmes. “If we stay invested we can try and change their behaviour. However, one factor that might make us divest from a bank is if we got no response from the board.”

Divestment at AkademikerPension is based on two key criteria – it must have a positive, or at least neutral, impact on the portfolio’s long term returns and be “the responsible thing” to do.

Schelde says the pension fund would consider investing in oil groups again if they aligned their business with the goals of the Paris Agreement. “They can continue to produce oil and gas,” he explains, continuing. “It’s pretty clear what oil majors need to do. They need to stop exploring for new reserves; pay out that capex spending to investors or invest in renewable energy.”

Yet despite record profits, oil majors don’t seem to be changing strategy. “Some money is going back to investors and they are investing more in renewables, but it’s only a fraction compared to their fossil fuel business where we are seeing money going into exploring and building out reserves.”

ARTICLE 9

Alongside successful engagement, AkademikerPension’s sustainability strategy encompasses a new allocation aligned to Sustainable Finance Disclosure Regulation (SFDR) Article 9 whereby 100 per cent of the assets in the fund must be sustainable. The strategy uses a quant process to select equites, after which the allocation is actively managed.

“We use quantitative methods to narrow down the universe,” says Schelde.

The new allocation builds on a similar portfolio in place for the last three years. However, this allocation was unlikely to hit strict Article 9 criteria because it also had “some tech stocks” in the portfolio.

CalSTRS, the $310 billion fund for California’s teachers, has restructured the investment team with an eye on its future growth and the best people and processes to achieve its mission of securing the retirement of one million Californian teachers.

This includes examining the complexity of the portfolio and the skills required to manage it effectively in the future, in a bid to be at the forefront of “how allocators’ allocate capital”.

“Everything we do relates back to our mission, it’s always our focus,” says deputy chief investment officer, Scott Chan in an interview with Top1000funds.com.

As part of the new structure CalSTRS has split the private and public markets, appointing Geraldine Jimenez as senior investment director of public markets and Mike DiRe as senior investment director of private markets.

“As we thought about the future, we thought about what staff structure would equip us for that future,” Chan says.

But before the right structure was settled the team explored five key opportunities centred around recognising the fund’s strengths, the exponential growth of its asset base, being at the forefront of how capital is allocated, overseeing total portfolio management and evolving business functions.

“We had built solid strengths across asset classes, and we have deep expertise. I think we have the number one team in the country – I’m bullish on our team,” Chan proudly explains. “We want to make sure we build upon that. And what stands out is we have such a strong culture, focused on the mission and a great set of values in how we operate.”

This translates to delegated authority and plenty of time and money spent on training, not just for technical skills but in how to manage teams. Chan said the idea was to build on that culture and value proposition.
Every eight to 10 years the fund doubles in size, which Chan describes as “creating a whole new CalSTRS every decade”.

“We have $310 billion in assets today, but we will be $600 billion in the future. To prepare for that we will be managing more assets, so we will be managing more people to manage those assets. We have to be forward thinking for that structure and how to build the team,” he says.

Cutting edge allocator

CalSTRS has an aspiration that Chan describes as “being at the forefront of how allocators’ allocate capital”. [See also Investors prioritise governance, tilts and liquidity]

This includes leveraging the fund’s outsourced asset management partners alongside bringing more investment inhouse.

“We have saved $1.2 billion in five years in fees. In public markets most of our assets are inhouse. On the private side we won’t build a private equity firm within CalSTRS because of compensation but we leverage our partners, and we own asset managers either partially or wholly.”

CalSTRS also engages in co-investments and joint ventures and is creating innovative structures to boost returns, save costs and manage risks.

“The cost savings is a chart of beauty,” says Chan.

At the end of 2018 the fund had about 100 collaborative-type structures and about $150 million in cost savings. Now that has jumped to more than 300 collaborative model transactions, and last year alone the fund recorded annualised savings of $437 million.

“The aggregate number looks good but also the graph looks good, it’s linear. We want to attract folks with more direct investing skills, and skill sets that fit increasing complexity and the ability to transact in innovative structures. It’s a big opportunity.”

The total portfolio

Like many large institutional investors, CalSTRS is paying more attention to overseeing management of the total fund including short and medium tilts and whole of portfolio challenges like taking advantage of the energy transition and diversity of managers and internal teams.

“We are looking at the fund as a total and the power of one platform. Combining asset classes together to do great things and do them at scale, these are some of the opportunities in front of us,” he says.

This total fund view includes looking at investments across public and private markets, and within and across asset classes.

“If we can do that in the future it will unlock a lot of opportunities. As we were thinking about organisational resources it starts to make it structurally easier to think about the total portfolio. As we double every 10 years, we want people who can operate in a multi asset class framework and we are preparing for that future.”

This total portfolio view also ties into the evolving business functions for the fund including the framing of enterprise risks alongside HR practices and improved communication.

“As we grow, we need to become more sophisticated in those functions. Also, things like balance sheet management, being able to manage liquidity, how we think about leverage and the denominator effects.”

Asset liability study and future asset allocation

CalSTRS has just embarked on its four-yearly asset-liability study and while it is yet to recommend any future asset allocation to the board, the fund has identified some important areas for investigation.

“We are under allocated to the broader area of private credit and we think this is a great opportunity in the next 12-18 months,” Chan says.

Other US public fund peers have around 6-7 per cent allocated to private credit but CalSTRS sits at around 2.5 per cent.

“We will expand our direct private lending and as we think about the long-term future we are studying whether it should be well north of that.”

It is also examining whether to expand the “opportunities” portfolio from a target of 0-2.5 per cent to 5 per cent.

“We believe being more flexible in an environment where there could be a paradigm shift in the volatility of markets,” Chan says adding that geopolitical events, a more volatile and structural shift in inflation and funding the transition to net zero are top of mind.

“In a more volatile environment we want to be more flexible to take advantage of opportunities. With a total fund platform we want to have flexibility to work across asset classes, in between asset classes and scale things up.”

A larger allocation to the opportunities bucket would allow the fund to scale into positions a little more assertively.

In the past the opportunities allocation has acted as a testing ground for new investment ideas and this is where direct private lending started before moving to fixed income.

“All of the directors in the asset classes are seeing opportunities and we are working with some of the premier partners in the world. They could find things that don’t fit in their asset class and benchmarks but could be an amazing opportunity for the fund as a whole. Or they might want to allocate $200 million but we think we should allocate $400 to $500 million and we can use the opportunities allocation for that. We haven’t used it to scale into positions but that’s the aspiration.”

The final asset class under consideration is fixed income and whether to increase its size. At the end of January, it had 10.26 per cent allocated to fixed income against a strategic allocation of 12 per cent.

“After years of moving from fixed income to infrastructure and risk mitigating strategies, at higher interest rates we are thinking should we be allocating more to fixed income?”

New team

If CalSTRS filled all of its vacant positions the investment team would number around 225 people. It’s halfway through a five-year plan which saw the hiring of an additional 91 people.

Chris Ailman, the fund’s long-time CIO, oversees the entire investment division including middle and front office. As deputy CIO, Chan is focused on the front office and implementation. Part of the new senior hires is a reflection that the deputy’s role has expanded so much in the four and a half years Chan has been in the role.

“It makes sense to have them overseeing the asset classes, and me overseeing the investment division reporting to Chris.”

Chan says about 60 per cent of the time Jimenez and DiRe will be leading and overseeing the public and private markets respectively, with 40 per cent of the time focused on working through and managing the total portfolio issues with the rest of the team responsible for the total portfolio that also includes investment strategy and risk director (Jimenez’s old position) and the director of sustainable investment and stewardship strategies, Kirsty Jenkinson.

“We used to meet with all of the asset class heads but now we can save them from being in meetings. We want them to focus on investments and we have a group now focused on the total fund.”

CalSTRS is also looking to recruit some senior portfolio manager positions that will sit between the asset class heads and portfolio managers.

This is partly for succession planning but also a reflection of the volume of more complex transactions, and the expansion and growth in the leadership.

“We have thought very deeply about how to do this and what each of the positions will be doing. This is really exciting for CalSTRS. It makes me really excited about the mission and what we can accomplish.”

And for Chan thinking about the mission does not stop when he closes his computer each evening, his wife is a California educator and a member of CalSTRS.

Talk about skin in the game.

Rebalancing back to asset class strategic ranges after a market rise or fall is one of the most vital seams of strategy at the $70.1 billion Los Angeles County Employees Retirement Association (LACERA). Rebalancing ensures the investment team remain consistent with investment policy statements, don’t try and time the market and avoid behavioural bias.

“Rebalancing really is the best long-term strategy we have,” said chief investment officer, Jonathan Grabel, speaking in a recent board meeting at the fund.

Rebalancing forces the investor to sell when asset prices have gone up and buy when they have gone down to stay within asset class bands in a strategy that has come to the fore in today’s volatile and unpredictable markets. In stark contrast to December 2022, all major asset classes have climbed higher in January in a lock step trajectory that is a source of alarm for Grabel, telling board members that he is instinctively cautious when asset classes move in tandem in either direction.

The rules-based approach removes the temptation to follow trends and media fads – it avoids the tendency to follow strategies that “worked yesterday,” he continued.

It led Grabel to reflect on the importance of avoiding peer comparisons and rankings too. His focus is on LACERA’s actual performance versus the benchmark, for the investor to “run its own race” and focus on its ability to pay benefits to members. “Peer ranking is not really related to our mandate,” he said.

According to its latest annual report, LACERA’s 2022 target asset allocation comprises a 51.1 per cent allocation to to growth (global equity, private equity and non-core private real estate) 11 per cent allocation to credit, 17 per cent allocation to real assets and inflation hedges and a 21 per cent allocation to risk reduction and mitigation.

The pension fund’s cash levels currently sit around $900 million, equivalent to around three months-worth of benefits.

“Any cash above this is used to stay invested and rebalance,” he said.

Risk management

LACERA’s investment team is midway through a review of operational due diligence processes in a bid to improve risk management. Recent horror stories at JPMorgan Chase, now suing executives at recently-acquired startup Frank for creating nearly 4 million fake customer accounts, illustrate what can go wrong and underscores the importance and timely nature of LACERA’s review.

“Diligence is the place even the best investors can fail,” said independent board member Gina Sanchez.

So far, the process has already tightened operational effectiveness. For example, historically LACERA’s investment division was siloed into individual asset class teams. Now two new teams focused on portfolio risk management and asset allocation, and corporate governance and stewardship across the portfolio work alongside the asset class teams.

Elsewhere, new technology is supporting the risk function, developed internal investment committees are helping standardize processes and operational due diligence assessments are included in all investment recommendations.

LACERA also appraises properties in the real estate allocation annually rather than every three years. Other incremental changes include a daily NAV with a custody bank.

“We are focused on trying to have consistent procedures,” said Grabel, who told the board providing relevant material to the consultants is a time-consuming process but wholly in line with the investor’s “mantra of continuous improvement.”

“It will help us be better investors,” he concluded.

 

Despite a challenging few years, countries across the Asia-Pacific region are entering 2023 with some momentum. Easing pandemic conditions and improved mobility have boosted domestic demand and retail sales. The region has also enjoyed strong export growth, most notably across South-East Asia.

The diversification of global supply chains away from an over-reliance on China has seen a number of beneficiaries, particularly in South-East Asia and India. Asia also has a gigantic pool of tech talent leaving countries well poised to tap cutting edge growth industries.

But 2023 will be characterised by stronger headwinds that are predicted to slow growth. With the European Union entering recession and low growth forecast for the United States, countries across the region will no longer enjoy the export boom of recent years.

Inflation and the response of central banks will also cast its shadow, disproportionately hitting balance sheets in countries where households and businesses are highly leveraged.

This year will also see the continuation of geopolitical concerns dampening market enthusiasm. An escalation of the war in Ukraine could deepen the impact on commodity prices. North Korea has rejected overtures from South Korea and is likely to continue with its nuclear development and testing.

China’s domestic economic problems could, conversely, see it adopt a more conciliatory approach to diplomacy and ease geopolitical tensions somewhat.

The Economist Intelligence Unit forecasts regional growth of 3.5 per cent in 2023 which is marginally slower than 2022 and significantly short of the pre-pandemic trend of 4 to 5 per cent.

Rising cost of debt

With the exception of China and Japan, central banks across the region increased their policy rates over 2022 to tackle inflation and support local currencies, and the impact of these increases will mostly be felt in 2023.

Countries with high levels of household debt – such as South Korea and Australia – will be hard hit, with the EIU giving below-consensus GDP growth forecasts of 1.3 per cent and 1.5 per cent for Australia and South Korea respectively. The high household debt levels of Malaysia and Thailand will also drag on these economies somewhat.

Higher debt servicing costs will “add to the squeeze caused by the higher consumer and producer prices generated by the war in Ukraine,” EIU said, and hit consumer spending and business investment.

Conversely, the gigantic emerging markets of Indonesia and India both have low household debt levels, as does the advanced economy of Singapore, and these markets are less likely to be impacted by forced household deleveraging.

Uncertainty across South-East Asia

Investors have been keenly watching South-East Asian nations as manufacturers seek alternative destinations to China. The region has seen a boom in physical and digital infrastructure, while mega-regional free trade agreements have helped smooth supply chain linkages.

But political risk will increase uncertainty, and conditions will depend on how countries navigate their own individual challenges. Thailand faces a highly contentious election this year, and if forces loyal to exiled former prime minister Thaksin Shinawatra gain the upper hand, controversy and discord are likely to follow.

Malaysia saw an indecisive outcome to its November 2022 election, with hopes that a “unity” government led by Prime Minister Anwar Ibrahim may bring new energy and reforms, but also fears long-running instability will continue.

The large and diverse country of Indonesia is also gearing up for an election in 2024, and electing leaders in over 270 provincial, district and city governments simultaneously in November 2024 will be no mean feat.

“With negotiations and coalition-building dominating the political agenda, the Jokowi government may become a lame-duck sooner than expected, even though his term continues until October 2024,” writes Hana Satriyo for The Asia Foundation.

India to gain ground

India may be a beneficiary of instability in South-East Asia and investor concerns about China, which may enable it to draw greater numbers of global manufacturers looking to relocate.

India has a large and youthful labour market, and EIU notes “incremental progress in addressing weaknesses in terms of transport infrastructure, taxes and trade regulation.” The EIU now ranks India above China in its global business environment rankings.

Investment has accelerated in India’s electronics sector, which the country has previously struggled to cultivate, aided by government support. Electronics exports rose by around 50 per cent to $14 billion in 2021, and had matched that value over the first nine months of 2022.

Taiwan’s Foxconn, an Apple supplier, is among others planning significant expansion in India. India’s presidency of the G-20 in 2023, and its likely conclusion of bilateral trade agreement negotiations with Australia and the UK, will further strengthen its hand.

China’s long road back from Covid-zero

Continued weakness in China’s property market, and the impact of weak international consumer demand on Chinese exports, will continue to put pressure on China’s economy, according to the Asian Development Bank’s Asian Development Outlook.

While easing pandemic measures have given much of the region a running start into a difficult year, China is only beginning this journey, and a smooth transition back to normality is far from certain.

The EIU cautiously forecasts China’s economy to grow more quickly in 2023, but also notes several significant members of Xi Jinping’s new leadership team, notably the incoming premier Li Qiang, lack experience running the organs of China’s central government.

Challenging domestic circumstances could persuade China to ease its increasingly combative approach to international relations, which has impacted China’s economy due to sanctions, trade tariffs and heightened geopolitical risk, and led to a rising aversion from international firms to expand business operations in China.

“While China is not about to conduct a foreign policy U-turn, especially with Mr Xi still in charge, we believe that it will seek more favourable international conditions in 2023 as it manages domestic challenges,” says the EIU.

The return of big-spending Chinese tourists will be widely welcomed across the region, but so far, numbers have been anecdotally lower than expected even during the lunar new year.

Experts pin hope on technology

Asia has a gigantic pool of tech talent, producing a large proportion of the world’s STEM graduates according to the McKinsey Global Institute. Project Syndicate reports Asia has accounted for 52 per cent of global growth in tech-company ventures, and 87 per cent of patents filed, over the past decade.

The region shows strong development in next-generation electric-vehicle batteries, innovation in consumer electronics, 5G development, and digital information-technology services. Vulnerability to the effects of climate change is also driving an enormous push in technological solutions and renewable energy.

But technology gaps in the region remain significant and intra-regional collaboration and investment will be critical. The just-signed Regional Comprehensive Economic Partnership is likely to foster closer ties.

Global market researcher Forrester argues wise technology selection may help investors in the region build resilience and set the stage for future growth, pointing to digital industrial platforms, industrial metaverse initiatives, process intelligence, and automation and robotics as key areas to watch.

And with organisations in Australia, Singapore and India investing, supporting and championing cybersecurity startups and investment, there will be strong growth in cybersecurity startups which have previously been notoriously scarce in the APAC region, Forrester says.

The Fiduciary Investors Symposium in Singapore from March 7-9 will explore the importance of Asia in the global economy and the risks and opportunities in the region. To view the stellar lineup of speakers and to register click here.

If inflation subsides this year, 2023 could be a strong year for growth equities, according to Raj Shant, London-based managing director and equity portfolio specialist at Jennison Associates, a fundamental equities manager owned by PGIM.

Shant said 2022 has been “a terrible year for growth equity investing, probably the worst in absolute and relative terms for a couple of decades,” in a conversation with Conexus Financial managing editor Julia Newbould on the ‘Market Narratives’ podcast.

This was because an upward drift in inflation expectations through the year was bad for growth equity valuations, with a sharp downward adjustment in prices despite earnings for most growth equities continuing to come through, Shant said.

Consequently, growth equities have lost the valuation premium gained during the pandemic in 2020 as well as during outperformance in 2018 and 2019, and returned to relative valuations that were below the long-term average, he said.

Last year was a very difficult year, but it does mean that we are now going into 2023 at a lower than long-term, average valuation, Shant said, “an environment where the expectations for inflation and interest rates globally may have peaked.”

Companies that show the fastest sales and profits growth will be strong contenders to generate the best returns for investors in 2023, he said, if interest rates stabilise or start to be reduced. Whether that will happen is “up to each individual listener or reader to decide for themselves,” he said.

Investing successfully in growth equities requires active investment with strong bottom-up research, Shant said, pointing to Jennison Associates research which shows market expectations for which companies will be the fastest growing companies over the next five years are wrong 80 per cent of the time, when compared with the fastest growing companies in the market over five year rolling time periods.

“You don’t have to be exactly right, you just have to be more right than the market,” Shant said.

Different growth companies can have different characteristics that lead to different risk and reward profiles, Shant said.

What he termed “emerging growers” are younger companies that typically have more upside potential but also more risk and volatility in their growth. These could include cloud-based applications companies which invest in products, R&D and marketing at the expense of short-term profits.

“Stable growth compounders,” on the other hand, are larger companies with more mature growth rates that offer lower volatility and less risk. Examples of these companies are famous global luxury brands, and healthcare companies, Shant said.

In periods where interest rates and inflation expectations are relatively stable, emerging growers will often outperform. But in periods like 2022 where interest rates are rising or the backdrop is more risk-averse, stable growth compounders tend to outperform emerging growers.

Fintech in emerging markets is one of the biggest growth opportunities in the world at present, Shant said, owing to the incumbent banks tending to be more bureaucratic and cumbersome with less investment in consumer experience on their websites, apps and customer service.

Luxury goods also have strong growth prospects owing to emerging middle classes in major markets like India and China, and a desire among younger consumers to get “entry-level luxury goods” promoted by celebrities and influencers on social media.

Electric vehicles are also promising, Shant said, with huge growth over recent years, superior safety and driving experiences and strong environmental credentials, but still extremely low penetration in terms of the global fleet of vehicles.