30 October 2018
Alongside his long-time colleague, Joaquim Nogueira, GAM Investments’ Tim Love has been managing emerging market (EM) equity portfolios for 22 years - and another 8 before that. It has proved a partnership that has prevailed through bad times and good and Tim is now optimistic that we stand on the cusp of a secular period of growth for EMs, questioning whether developed economies will be able to keep pace.
“If you are not interested in EMs then you should be!” This is Tim’s bold assertion as he outlines why his early life experiences set him up for a career focused on emerging markets. As the son of a diplomat, Tim believes his experience of growing up in Hong Kong, Argentina, Egypt, Russia, Washington and Brussels provided him with some invaluable perspectives to incorporate in the decision-making process.
“I was brought up in Hong Kong up to the age of 10, before returning 12 years later at the start of my fund management career. My initial stay came during the Mao period and I was fascinated to have lived through this time of cultural revolution. The writing of Jung Chang – known worldwide for her autobiography ‘Wild Swans’ – had a significant impact on me, with her descriptions of Mao’s impact on China and her personal tales of drama and struggles, especially since it was told from a female perspective.
“I used to spend my weekends camping across from a small fishing village that would later become Shenzhen – home to one of China’s stock exchanges. I was therefore able to witness the early seeds of development as a child and then return as a young adult and see it become the blueprint for the special economic zone – it was wonderful to observe such a transformative project.
“In 1982, I was in close proximity to another significant period in economic history as I lived in Argentina at the time of the Falklands war. On this occasion, I found myself caught up on each side of the conflict, having friends from the UK in the military and also local contemporaries that were being drafted for national service. Being in the middle of such a storm served only to underline that wars can be unnecessary and painful on both sides.
“By virtue of my father’s diplomatic status, I also had the opportunity to listen to embassy rhetoric in my formative years. I heard lobbyists attempt to turn the ears of prominent politicians and corporate CEOs air their views in different countries involving different religions. I became fascinated by the concept of developing an understanding of various cultures and how they interact, I have actively built on my understanding of fundamental cultural differences that I developed in my youth and broadened this to incorporate ‘local’ drivers of liquidity and regulation. I believe this is imperative because these differences often reassert themselves at times of stress.
“Upon completion of my education, I worked in audit and consulting strategic divisions of PwC before returning to Hong Kong and managing equity portfolios, post a transfer from London. I also spent six years on the ‘sell side’ as Head of strategy at ING / Barings. It was here that I first recruited Joaquim, whose skills are diametrically opposite to mine, and this complementary aspect helps explain why we have managed to forge a partnership that has worked well for so long. I consider myself to be privileged to monitor the developments of the EM universe at the coalface itself and this drives my passion for the job."
“There is no such thing as a typical day!” Tim asserts as we try to get a handle on the challenges that are posed by such a vast investment universe. “We analyse 30 core countries (and keep a macro watch over 35 frontier markets) on an ongoing basis. In USD terms, any one of the local currencies can move by +/- 65% over the course of a full cycle. EMs tend to be clustered together in one huge silo by investors and asset allocators, but the universe is incredibly heterogeneous. As such, we believe the EM beta trade is vastly outdated. It is also the case, that changes in the macroeconomic climate can completely swamp alpha generation at times. As such, we spend a lot of time on risk management through top-down overlays.
“The composition of the MSCI EM index has also morphed considerably over the last five years with the energy and materials weighting falling from around 45% to 14%, so there is no point in expecting the index to behave as it has in the past. For example, it is now much less sensitive to US dollar strength than used to be the case. While EMs in aggregate have endured a difficult 2018, the size of the drawdown is much less than would have been the case during previous periods of rising bond yields and greenback strength.
“The first thing I like to do every day is to address the tail risk in our portfolio in terms of breaking news. The best deciphers of political or external risks are the credit and FX markets, which are both materially bigger than the equity universe. By virtue of the wonders of modern technology, I can retrieve portfolio metrics and all research published by ‘the street’ on my hand-held mobile device. So, I undertake this task during my 40-minute train journey to central London. Once I reach the office, I try not to spend too much time sitting down and I am a total convert to the ‘standing desk’ concept. This is a more agile way of working and helps to keep the mind fresh.
“One of the great features of GAM Investments is the ability to exchange information with credit and FX specialists. I find the collegiate spirit really valuable and the unstructured nature of the interactions is the secret sauce that makes it work. We don’t schedule meetings for the sake of meetings, but just touch base with each other as and when we need to.”
The rest of Tim’s day passes by in a blur of analysis and corporate meetings, which he likens to mixing the game of Monopoly with 3-D chess. Tim takes time to reemphasise that risk allocation, mitigation and portfolio construction are more important than alpha generation and provide a ‘better chance of winning’. But what are his favourite ways of winding down after a ‘full-on’ day?
“I either go for a swim or I run in Wimbledon woods. This is the old stomping ground of Henry VIII and it hasn’t changed one bit through the centuries. What could be more relaxing or healthy than losing yourself in thought as you run through a time warp of a full Oak forest?”
As we have just touched on methods of relaxation, the conversation moves naturally towards holidays, especially since Tim is looking forward to a richly-deserved week off.
“When I think about holidays, I want to avoid airports at all costs as so much of my professional life is taken up with long-distance travelling. As such, I really enjoy the opportunity to holiday in the south west of England (Cornwall or Dorset) with my family. Here, I enjoy surfing, music festivals, reading and walking.
“It is difficult to switch off entirely and I continue to read my electronic news feeds from the South China Morning Post and English-language dailies from Dubai, Turkey and Argentina. However, I do find time to do the quiz in The Times every day and to enjoy a bit of recreational reading – I particularly savour reading short versions of West End plays.
On a recent holiday, I read ‘Trash’ by Andy Mulligan which I ‘ate alive’ in its entirety in just one day. The story is about young children living on a scrapheap in the Philippines. This was particularly good to share with all the family as an adult interpretation would focus on poverty and politics, while a child would read it as an adventure story.”
Tim firmly believes the adventures for emerging markets will continue. “We believe that there are grounds for optimism over the likely trajectory of EM equities. Unlike the case in the US, valuations are not stretched and, given years of progress in terms of corporate governance and economic stability.
"We also believe that medium-to-long term investors in EM equities need to ensure that they are on the right side of local structural reform programmes. In China, ‘One Belt, One Road’ is an economic and diplomatic programme with the capacity to reshape global trade, while Indian, PM Modi’s reforms of the banking sector and the introduction of digital ID have effectively transitioned the nation. From one of the data-poorest countries in the world to the richest in a matter of weeks.
“In the years ahead, I believe we will see such a huge transition that it could be likened to a tsunami sweeping across the landscape. If there is indeed a tsunami coming, I intend to surf it.”