Hartwig Kos, co-manager of the Dublin-domiciled Baring Dynamic Emerging Markets Fund (DEMF) says the fund has increased exposure to emerging market equities due to a more risk-favourable environment.
Kos, who co-manages the fund alongside Percival Stanion explains the catalyst for this change was strong economic data from the US and signs that Europe is pulling out of its sovereign debt malaise, supported by positive action from the European Central Bank.
A highly volatile summer and autumn period presented a scenario of relatively hostile conditions for risk assets as a whole, according to Kos. This was driven by the Eurozone sovereign debt crisis and also fears of a hard landing in China.
"In this respect, we viewed emerging market assets as highly correlated and we needed to take risk out of the portfolio. We did this by using all the flexibility we have at our disposal using our dynamic multi-asset investment approach. This included seeking what we viewed as excellent diversifiers during risky periods, such as an Australian Government bond position and, to a lesser extent, buying into the Chinese Renminbi. Exposure to gold also supported our risk mitigation objectives while helping to protect capital."
More recently, Barings identified a more risk-favourable environment. In light of this, Barings swiftly changed the complexion of the fund's portfolio by reducing the position in Australian government bonds and increasing the exposure to emerging market equities. Hartwig continues, "The catalyst for this change was strong economic data from the US and signs that Europe is pulling out of its sovereign debt malaise (supported by positive action from the European Central Bank). We have been seeing a recovery, of sorts."
DEFM aims to produce emerging market equity-like returns with less than emerging equity risk over a long-term investment horizon. The dynamic asset allocation approach allows it to react quickly to changing market conditions. Launched last June the fund mirrors the strategy behind Barings' flagship £4bn Dynamic Asset Allocation Fund. iit has returned 0.59%1 whilst the MSCI Emerging Markets index is down by 3.91% over the same time period. It has grown to £133.8m in assets under management as at 29th February 2012.
Since launch, the equity allocation has increased from a third of assets to over half at present, with the EMEA allocation in particular more than doubling. "The bond allocation has also seen some interesting changes, most notably to Australian bonds: in June of last year Australian dollar denominated notes accounted for a fifth of total assets under management while today they do not feature in the fund's allocation at all," explains Kos.
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