By Ian Bickis
Canadian pension plans have a new way to invest in the growing potential of emerging markets as Bridgehouse Asset Managers and Ninety One Ltd. open a new fund aimed at the segment.
The launch comes as emerging markets have evolved dramatically over the last decade, said Bridgehouse CEO Carol Lynde in a statement. And while not the focus of the fund, it also comes as emerging markets require major investments to help with the climate transition.
The fund will be managed by Bridgehouse with the guidance of investment manager Ninety One’s North American arm. It’s being created with $350 million in seed capital from an unnamed Canadian corporate pension plan based in Alberta, said Katherine Tweedie, co-head of the North America institutional client group at Ninety One.
“Essentially what it does is, it invests in around a 70-stock portfolio of public emerging market listed companies. And it plays a very particular role in portfolios, in that it’s designed to be kind of a core, all-weather allocation to emerging markets,” said Tweedie.
The fund works well for smaller plans that might be making a first time or single allocation to emerging markets, she said, as well as larger funds that want to have a core segment and then add on specific exposure elsewhere.
Historically, Canadian institutional investors have not been heavily exposed to emerging markets, generally between five and 15 per cent of equity allocation, said Tweedie. Pension plans like CDPQ and the Public Sector Pension Investment Board have also been investing in emerging market fixed income.
There is the potential to invest more, with Ninety One noting that emerging markets generate 58 per cent of global GDP while representing just nine per cent of equity portfolios.
The segment does come with greater risk though, and on a passive approach, it has been a challenging investment return relative to the very strong U.S. market, said Tweedie. But with investments overly concentrated in the U.S. and developed markets, there is value in diversifying through an active investment approach, she said.
“We carefully assess risk, particularly on the ESG side, and we tend to invest in very high conviction active portfolios that take a very strong bet on a few companies, and then leave the rest.”
She said there are a wide range of equity investment opportunities for the fund, including some major multinationals that are sometimes overlooked simply because their headquarters are in places like Mexico or Brazil.
“So they’ve actually got a diversified revenue stream. Their postal code just happens to be in an emerging market.”
Ninety One, which was founded in South Africa and has been operating in Canada since 2018, has been working extensively on the climate side of emerging markets as well. While they haven’t historically been a big source of emissions, they will be the biggest source of emissions growth, said Tweedie.
The work comes as calls grow louder to increase the funding towards such necessities and opportunities.
Mark Carney, the United Nations special envoy on climate action and finance, and former Bank of Canada governor, highlighted the funding gap at a Toronto conference earlier in October.
Emerging economies, excluding China, need to see climate funding go from around $250 billion a year currently to $1.25 trillion by 2030.
“This is not hyperbole, this will require radical reform of the international financial system,” said Carney.
He emphasized the need for big institutions not to just sell off their high-emission investments and instead work to help companies bring them down.
“What we can’t have for the system is portfolio decarbonization,” said Carney, “The big investment return you’ll find is to go where the emissions are, and get those emissions down.”
Canadian pension plans are also working on that effort.
In July, CDPQ, OMERS and other institutional investors along with Ninety One helped launch the Emerging Markets Transition Debt initiative, with commitments of US$400 million to help build clean infrastructure, clean technology and for decarbonization.
The fund will help target high-emission sectors, which some funds have been hesitant to invest in because it increases a portfolio’s emissions. Some pensions have created a specific transition envelope focused on decarbonizing industries to help make sure such areas get funding, noted Tweedie.
“For example, CDPQ has this, and others, where you can invest in a higher emitting company today, provided that they have a very clear path to decarbonize,” she said.
“That’s where the real-world change is going to come from.”
