The launch of the MEASA Strategy

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.

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