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Allianz Global Investors bets on off-benchmark stocks in search for alpha
Allianz Global Investors (AllianzGI) relies on a combination of benchmark and off-benchmark stocks in order to expand its investable universe of stocks as well as to enhanced alpha generation for its global small cap equity fund
Bayani S Cruz 11 Nov 2015
Allianz Global Investors (AllianzGI) relies on a combination of benchmark and off-benchmark stocks in order to expand its investable universe of stocks as well as to enhanced alpha generation for its global small cap equity fund.
 
The company prefers small-cap companies in US and Europe economies that show gradual growth despite uncertainties surrounding the US Fed’s decision on interest rates. AllianzGI has a total of US$2.2 billion assets under management (AUM) in small caps of which about 59% is invested in US companies, 24% in Europe, 12% in Japan, and 5% in the rest of Asia.
 
The fund picks mostly from a universe of 4,500 small cap companies belonging to the MSCI World Small Cap Total Return index, whose market capitalization is around US$500 million to US$5 billion. 
 
Although the investment strategy is to invest in small cap companies in the benchmark, in reality about 20% of the stocks in its portfolio are off-benchmark shares. Some of the stocks in its portfolio are from emerging and developed Asian markets including Australia, New Zealand, Singapore, and Hong Kong.
 
By exploring off-benchmark bets, the fund expands the universe of stocks in its portfolio to 10,000 stocks. 
 
“Our team in Hong Kong has good capability to find investments ideas in Thailand, Taiwan, Philippines, and Indonesia. So we have about 4% our fund in what we would call emerging markets in Asia. We also hold a lot of off-benchmark stocks in Japan, Europe and the US,” says Andrew Neville, portfolio manager of global small caps for Allianz Global Investors.
 
Based in London, Neville is in charge of managing UK small cap equities for AllianzGI and also heads the firm’s 14-member team that researches and invests in small cap companies. Its members are based in San Diego, Frankfurt, Tokyo and Hong Kong.
 
“We allocate money to each team in line with our global benchmark. Last year when the consensus was that US companies were overvalued and Europe was the place to be, US companies were actually the best performing asset class,” Neville says.
 
AllianzGI’s global small companies fund is managed on a geographical basis with the US team based on San Diego managing the US portion of the portfolio, the European portion is managed by the teams based in London and Frankfurt, the Japanese portion is managed by the team in Tokyo, and a team in Hong Kong manages those in Asian markets outside Japan.
 
“The way we decide how much money to give to each team is based on stock selection. We believe that’s where we get the most consistent source of alpha. If each team runs their portion of the fund to outperform the local benchmark, the performance of the best global small cap fund will be fantastic. That’s all we’re trying to do,” Neville says.
 
As team leader, Neville’s role is to monitor and control the risks within the overall portfolio.
 
“There are currency risks or style risks or economic risks, but we want all the risks to be stock specific. And if any one of those factor risks gets too high, and if I can’t persuade any of the teams to do a trade, then I will step into the Asian fund or the Japanese fund, for example, to do a trade. I’m also the person responsible to our clients and regulators around the world,” Neville says.
 

    

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