Breakout Nations Strategy
Breakout Nations Strategy

Breakout Nations Strategy

 
 
 
Summary

The Breakout Nations Strategy is a benchmark agnostic strategy that seeks to outperform the MSCI Emerging Markets Net Index over the course of a normal market cycle. To help achieve its objective, the Strategy takes high-conviction positions in a limited number of emerging and frontier market countries, applying the framework of the investment team’s proprietary "Rules of the Road" to determine a country’s future economic growth and equity return potential.

 

 
 
Investment Approach
Philosophy

The investment team believes that a country’s future economic growth rate is the most important driver of its potential equity returns. However, predicting growth is one of the most daunting challenges for investors. Drawing on nearly three decades of experience in emerging markets investing, the investment team has identified certain "Rules of the Road" variables, the presence of which provide a compelling indication of a country’s likely future economic growth path.

The investment team uses their investment approach to analyze whether these variables are likely to change for the better, and then heavily weight countries that are identified as having the most compelling potential for growth acceleration.

 

 
Differentiators
An active approach to alpha generation

Unburdened by a traditional index-tracking approach, which can lead to backward-looking biases, the investment team's benchmark agnostic approach to investing helps them to avoid value traps and identify future growth potential. The strategy seeks to generate alpha by taking robust country positions in both traditional emerging markets and frontier countries, creating a portfolio of 12 to 15 countries and excluding many of the countries which can create drag on an overall index.

An experienced investment team

Morgan Stanley Investment Management has been investing in emerging markets for more than 30 years; the lead portfolio managers for this product are among the most senior members of Morgan Stanley’s Global Emerging Markets Equity team.

An alternative approach to emerging market investing

The portfolio is composed of optimized equity baskets, futures and swaps for exposure to the chosen countries. FX hedges offer the potential of an additional source of returns.

 
 
 
Investment Process
1
Disciplined and Consistent Process

The team follows a disciplined investment process, reviewing the portfolio on a daily basis as well as conducting formal reviews each quarter, specifically to consider rebalancing the portfolio to ensure it aligns with their fundamental views.

2
The "Rules of the Road"

The team applies the Rules of the Road to the 40 countries within their investment universe as a means of determining the country weightings in the portfolio. The Rules of the Road are the factors which the team believes are important for the future economic growth of a country. They are: political cycle and reform, government involvement in the economy, credit cycle, investment and manufacturing, inflation, currency and capital flows, trade, wealth concentration, and human capital and sentiment.

3
A Rigorous Ranking System

Applying a score for each factor, a rigorous ranking system of countries is created. Combined with an assessment of each country’s liquidity, the final country weightings are determined. These weightings are translated into a long-only portfolio using a combination of optimized equity baskets, equity index futures and total return swaps.

4
A Diverse Portfolio

The final portfolio invests in 12 to 15 countries, with a maximum allocation of 30% in Frontier Markets, and is managed to a three- to five-year time horizon.

Global-Emerging-Market-Equity-Emerging-Market-Breakout-Nations_InvProcess_FINAL
 
 
Portfolio Manager  
Jitania Kandhari
Head of Macroeconomic Research, Global Emerging Markets Team
21 years industry experience
 
 
 
 

This communication is only intended for and will be only distributed to persons resident in jurisdictions where such distribution or availability would not be contrary to local laws or regulations.

There is no guarantee that any investment strategy will work under all market conditions, and each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. Past performance is no guarantee of future results.

A separately managed account may not be suitable for all investors. Separate accounts managed according to the Strategy include a number of securities and will not necessarily track the performance of any index. Please consider the investment objectives, risks and fees of the Strategy carefully before investing. A minimum asset level is required. For important information about the investment manager, please refer to Form ADV Part 2.

Any views and opinions provided are those of the portfolio management team and are subject to change at any time due to market or economic conditions and may not necessarily come to pass. Furthermore, the views will not be updated or otherwise revised to reflect information that subsequently becomes available or circumstances existing, or changes occurring. The views expressed do not reflect the opinions of all portfolio managers at Morgan Stanley Investment Management (MSIM) or the views of the firm as a whole, and may not be reflected in all the strategies and products that the Firm offers.

All information provided has been prepared solely for information purposes and does not constitute an offer or a recommendation to buy or sell any particular security or to adopt any specific investment strategy. The information herein has not been based on a consideration of any individual investor circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal or regulatory advice. To that end, investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.

DEFINITIONS

Alpha is the excess return or value added (positive or negative) of the portfolio’s return relative to the return of the benchmark.

Tracking error is the standard deviation of the difference between the portfolio and the benchmark returns. 

Annual turnover measures the percentage of securities within the portfolio that changed during the most recent fiscal year.

RISK CONSIDERATIONS  

There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the portfolio will decline. Accordingly, you can lose money investing. Please be aware that this portfolio may be subject to certain additional risks. In general, equities securities’ values also fluctuate in response to activities specific to a company. Investments in foreign markets entail special risks such as currency, political, economic, market and liquidity risks. The risks of investing in emerging market countries are greater than the risks generally associated with investments in foreign developed countries. Stocks of small- and medium-capitalization companies entail special risks, such as limited product lines, markets, and financial resources, and greater market volatility than securities of larger, more-established companies. Derivative instruments can be illiquid, may disproportionately increase losses and may have a potentially large negative impact on the Portfolio’s performance. Illiquid securities may be more difficult to sell and value than public traded securities (liquidity risk). Nondiversified portfolios often invest in a more limited number of issuers. As such, changes in the financial condition or market value of a single issuer may cause greater volatility.

OTHER CONSIDERATIONS

The MSCI Emerging Markets ex China Index captures large and mid cap representation across 22 of the 24 Emerging Markets (EM) countries excluding China. The index covers approximately 85% of the free float-adjusted market capitalization in each country.

The indexes are unmanaged and do not include any expenses, fees or sales charges. It is not possible to invest directly in an index. Any index referred to herein is the intellectual property (including registered trademarks) of the applicable licensor. Any product based on an index is in no way sponsored, endorsed, sold or promoted by the applicable licensor and it shall not have any liability with respect thereto.

The information presented represents how the portfolio management team generally implements its investment process under normal market conditions.

The tracking error, target alpha, number of companies and countries, and turnover range represent typical ranges and are not a maximum number. The portfolio may exceed these from time to time due to market conditions and outstanding trades.

Morgan Stanley Investment Management is the asset management division of Morgan Stanley.

Effective December 31st 2018, the benchmark changed from the MSCI Emerging Markets Net Index to the MSCI Emerging Markets ex China Net Index.

1422701 Exp. 2/28/2017

 

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