December 7, 2018
McKinley Capital Management LLC (“McKinley Capital”) has partnered with the Alaska Permanent Fund to launch what they consider to be the next BRICS (Brazil-Russia-India-China-South Africa) – and have coined it MEASA (Middle East-Africa-South Asia). McKinley Capital initiated its first of several tranches at the end of April. Rob Gillam, CEO, CIO, answers questions related to the MEASA strategy in this publication of A View from the Mountain.
How have the mechanics and operational side of the investment gone so far?
Better than expected. The most challenging aspect has been the country registration process. In many cases, McKinley Capital was one of the few institutional investors to wade into these markets. Presently, we are registered in over 99% of MEASA target markets with Sri Lanka pending. While the various operational processes are not as simple as in many developed markets the ease with which we were able to access speaks to how the region is already modernizing. From a trading perspective, we saw both commission cost as well as market impact substantially less than expected.
The timing was obviously tough for an Emerging Market/Frontier strategy – how has it performed?
Given the macro background, strong dollar, and ongoing uncertainty around international trade relations the launch timing was obviously not ideal for an Emerging/Frontier Market strategy. However, we are encouraged by how the strategy has performed in a turbulent environment – it has been a healthy test. Keep in mind, MEASA was designed specifically to provide systematic exposure to this dynamic region with less risk (standard deviation) than the MSCI Emerging Markets Index. To date that objective has been achieved.
Have you found enough clean data to drive your quantitative process?
In short, the answer is yes. The perception understandably is that there is a general lack of good, clean (believable) data. McKinley Capital has invested time and resources to develop comprehensive data sets on over 50,000 securities. We are confident in the coverage resources that are available in the MEASA markets and believe it will continue to improve. Furthermore, McKinley Capital has been investing in the Emerging and Frontier spaces for decades through its other strategies. There is no substitute for experience. Veteran investors in these unique markets are afforded an acute advantage.
Have there been any surprises or anything you would have done differently?
I spoke to the launch timing aspect, which was certainly challenging. Timing difficulties aside we believe in MEASA. Our conviction in the thesis remains robust. Emerging Market equities have low valuations compared with other asset classes. Analysts are estimating free cash flow yields at 5% to 7% over the next 12 to 15 months. The discount to developed markets is in the 30% range so it is certainly an interesting time from an entry point view.
There is no question this strategy is investing in the “Wild West” that comes with greater risks and again highlights the importance of having significant diversification and a rigorous risk control process. These markets afford a staggering growth opportunity. Nothing has occurred in the market place to cause retrospective pause in pursuing this opportunity or the circumstances around executing it.
What is the realistic maximum Assets under Management (“AUM”) for the strategy?
McKinley Capital has always been sensitive to the amount of AUM that can be successfully deployed within any strategy we manage. We use specific criteria to determine appropriate size. Based on applying this methodology to MEASA we believe the appropriate maximum AUM should be around $2 billion.
McKinley Capital Management, LLC (“McKinley Capital”) is a registered investment adviser under the U.S. SEC Investment Advisers Act of 1940. McKinley Capital is registered with the following Canadian provinces: the British Columbia Securities Commission; the Ontario Securities Commission; and the Quebec Financial Markets Authority. McKinley Capital is not registered with, approved by, regulated by, or associated with the Financial Conduct Authority (“FCA”), the Prudential Regulation Authority (“PRA”), the Securities & Futures Commission of Hong Kong or the China Securities Regulatory Commission. Additionally, none of the authorities or commissions listed has commented on the firm, the content of any marketing material or any individual suitability assessments.
This material may contain confidential and/or proprietary information and may only be relied upon for this report. All information contained herein is believed to be acquired from reliable sources, but accuracy cannot be guaranteed. This presentation is for informational purposes only, and was prepared for academic, financially experienced and institutional investors. It is not intended to represent specific financial services or recommendations for any targeted investment purposes. McKinley Capital, nor its employees, makes any representations or warranties as to the appropriateness or merit of this analysis for individual use. The data is unaudited and may not correspond to calculated performance for any specific client or investor in referenced disciplines. Investors must seek individualized professional financial advice before investing.
Investments and commentary were based on information available at the time and are subject to change without notice. Any references to specific indexes or securities are for discussion purposes only, may or may not have been owned by McKinley Capital in the past, may or may not be owned by McKinley Capital in the future and may or may not have been or be profitable. No single security, discipline, or process is profitable all of the time and there is always the potential for loss. No investments mentioned herein may be considered as an offer to purchase or sell a firm product or security.
Global market investing, including developed, emerging and frontier markets, also carries additional risks and/or costs that will be discussed in further detail as applicable. The use of derivatives trading and short selling may materially increase investment risk and potential returns. These risks may include, but are not limited to, margin/mark-to-market cash calls, currency exchange, liquidity, unlimited asset exposure, and counter-party risk. Future investments may be made under different economic and/or political conditions, in different securities and using different investment strategies.
Charts, graphs and other visual presentations and text information are derived from internal, proprietary, and/or service vendor technology sources and/or may have been extracted from other firm data bases. As a result, the tabulation of certain reports may not precisely match other published data. Specific results from calculations and formulas may be rounded up. Future investments may be made under different economic conditions, in different securities and using different investment strategies.
Data may have originated from various sources including, but not limited to, FactSet, Bloomberg, TQA, APT, Zephyr and/or other similar systems and programs. “FTSE®”, “Russell®”, “MTS®”, “FTSE TMX®” and “FTSE Russell” and other service marks and trademarks related to the FTSE or Russell indexes are trademarks of the London Stock Exchange Group companies. All rights in these Indices vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE Indices or underlying data. With regards to materials, if any, accredited to MSCI: Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof ), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI’s express written consent. Please refer to the specific service provider’s web site for complete details on all indices. McKinley Capital makes no representation or endorsement concerning the accuracy or propriety of information received from any third party.
To receive a copy of the McKinley Capital Form ADV Part 2A, or additional information on fees, composites and investment processes, please contact the firm at 3301 C Street, Suite 500, Anchorage, Alaska 99503 or 1.907.563.4488.