Institutions eye benchmark-free Asian equity strategy

UK-based boutique Origin Asset Management is weighing up demand for a benchmark-free Asian equity strategy on the back of inquiries by institutional investors in the region.

Origin is a UK partnership spun out of Investec Asset Management in 2005. Its former majority owner, Icap chief executive Michael Spencer, sold his and others' 74% stake in the business to US firm Principal Global Investors last year, while Origin's partners retain 26% of the equity.

Origin now finds itself as one of the 10 boutique managers owned by Principal Global Investors, whose chief executive Jim McCaughan targeted the firm due to its funds focused on small companies and emerging markets.

Headquartered in London, Origin’s 11-strong team contains five fund managers but with no analyst or economist in sight. It is a global long-only equity specialist that chiefly assembles its portfolios irrespective of benchmarks.

Origin manages about $3 billion overall for 35 institutional clients, some in pooled vehicles and some in segregated accounts. Over 50% of its investors are UK-based, which is why the firm wants to diversify its investor base and has embarked on two tours of Asia in the past six months since its acquisition was finalised.

Its pooled products are dominated by a global equity unconstrained strategy, which accounts for over half of its AUM. It also runs specialist global equity, EAFE (Europe, Australasia, Far East), global smaller companies, global emerging markets and UK equity unconstrained.

Unconstrained essentially refers to benchmark-agnostic investment, although the performance of its products are ultimately measured against an index. Its global unconstrained strategy, for example, aims to outperform the MSCI World by over 3.5% per annum gross of rolling fees.

This product’s investment universe is global stocks with a market cap of over $1 billion and average daily volume of at least $5 million. Typically it holds between 100 and 150 stocks and has an indicative tracking error of 5-8%.

Its allocation for the flagship fund at present is heavily skewed to the US (around 64%), followed by 13% for Asia and emerging markets, 12% in Japan, 11% in Europe including the UK.

In terms of performance, in the year to end-January it is up +5.6%, against +5% for MSCI World. Just a month before it was down -7% in the year to end-December, against -5% for the index, which illustrates the market volatility. But since inception in May 2005 the fund is up a relative 3.8 percentage points against the index.

John Birkhold, a partner at Origin who joined three years ago from Credit Suisse HOLT, explains that it assembles portfolios from a bottom-up perspective, having narrowed its universe to 4,000 stocks based on four factors he says matter historically in terms of capturing outperformance.

It identifies firms that earn above their cost of capital; those that have demonstrated an ability to generate asset growth by reinvesting; it uses discounted cash flow as a valuation metric and targets firms with positive earnings revisions from analysts; and it looks for confirmation from the marketplace in the form of a rising stock price.

Initially its investment process is based on systematic scoring. It then goes through a qualitative assessment on whether the scores make sense, before its fund managers assemble the portfolios.

Asked what had emerged from his tour of Asian institutional investors so far, Birkhold notes: “One question we have been asked, and it is very much driven by the Asian market, is whether we would do an Asia-only strategy,” he responds. “We have been approached by investors in the region and asked if we would consider it, and our response is, ‘yes, we would consider it.’”

However, he does concede that this goes against the grain a little, given that one of the principles behind an unconstrained strategy is not to limit it.

“It is interesting because that [limiting the investment universe] is not the right way to manage money,” he adds. “The reality is the broader your investment universe the better your opportunity for an unconstrained product that can go where the action is.

“You might argue that if you want exposure to growth stocks, don’t limit yourself by forcing it into some sort of regional mandate. Right now our global product is heavily overweight the US. And guess what, it was the right call.”

Birkhold moved to Australia two years ago partly as a lifestyle choice but also to focus on the country’s mature pensions market.

As of now Origin does not manage any money for Principal Global Investors but Birkhold is certain the fledgling partnership will bear fruit. He notes that the tie-up enables Origin to retain its investment structure while providing it with the ability to scale up.

“What [the acquisition] provides us from a boutique perspective is the ability to have a much larger source of resources to assist in managing the difficulties of setting up money management relationships in simple terms,” he says.

“There is client support, legal, administration, compliance as a whole – all of those functions vary from country to country, so for an 11-person boutique our ability to address this market without some sort of partnership has basically been non-existent.

“But we now have the resources to come into a market like Asia and address the institutions, because the amount of support required to keep a client happy is significant and, for a small firm, daunting.”

Birkhold was previously a managing director at Credit Suisse HOLT and prior to that an investment analyst for the Ameritech Pension Fund in Chicago.