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Rock Creek's Winning Bet on Hedge Funds, Emerging -2-

24 Jun 2017 4:10 am

The U.K. market isn't looking sufficiently at the risk from Brexit [the U.K.'s planned exit from the European Union]. Even before this month's general election [in which no party won an overall majority], we thought the picture might not be so pretty, with housing and manufacturing slowing. There are two scenarios: Prime Minister Theresa May will have a harder time negotiating with the Europeans -- a disadvantage for the U.K. -- or her fellow conservatives will push her aside and replace her with someone who takes a more centrist approach on Brexit.

We have been early, but Europe is a good place to invest. It is even stronger after President Emmanuel Macron's win in France. Novo Nordisk [NOVOB.Denmark], a market leader in global diabetes care, and Immofinanz [IIA.Austria], a commercial real estate firm, are in some of our funds.

What other market risks do you monitor?

North Korea is one. You can't hedge those kinds of risks, but when we invest in South Korea, we consider it. Another is inequality around the world. If you invest in areas where there is a lot of inequality, especially in emerging markets, there is more likelihood of political strife. Nigeria, for example, has almost 200 million people and is growing fast. Where are people going to work? Those kinds of risks aren't measured properly.

You've said that ESG investing can help with risk management. How so?

Investing with ESG factors in mind means you're taking a long-term, and often value-oriented, approach. You are still looking at a company's financial results, but also its safety records, staff turnover, the company's risk management, and how much it is investing in it. You are also looking at governance, shareholder practices, and whether there is diversity of thought on the board. These factors help create a culture of long-termism that encourages innovation and stability, and generates higher returns over time.

Lots of companies and funds adopt the ESG label. How can investors differentiate among them?

We counted 2,200 funds globally that regard themselves as ESG. If a company's mission is investing in clean air and water, renewable and efficient energy, or affordable housing, even if it doesn't say it is ESG, or have a sustainability officer, its mission might be real. Meanwhile, a big company with a sustainability officer and little else might be more likely to be included in the various ESG indexes.

Give us an example.

BRAC Bank [BRAC.Bangladesh], which was founded to finance small and midsize businesses that couldn't obtain loans, has strong governance and a division that assesses environmental and social risks of potential borrowers' projects. Over the past three years, it has returned over 300% more than the local Bangladesh equity market.

Thanks, Afsaneh.

Email: editors@barrons.com

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(END) Dow Jones Newswires

June 24, 2017 00:10 ET (04:10 GMT)

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