Photographer: Joel Rogers/Getty Images

Quant Firm Gets Alaska State Investment for Frontier Market Fund

  • McKinley Capital to invest in Middle East, Africa, South Asia
  • Systematic fund wagers on demographic-driven growth in region

Now this is global finance: An Alaskan quant investment firm is starting a fund in Abu Dhabi to buy stocks across the Middle East, Africa and South Asia.

It’s the outcome of an effort by Alaska’s $62 billion state investment pool to gain exposure to economies with greater growth potential. The Alaska Permanent Fund tapped Anchorage-based McKinley Capital Management to develop a systematic strategy and will be the anchor investor in the long-only MEASA Fund.

“This is a generational bet, like the BRIC countries 25 years ago,” McKinley Chief Investment Officer Rob Gillam said in an interview. “This region accounts for only 6 percent of the global market cap. We believe that’s going to increase, just like it did with the BRICs.”

Quant funds have been moving into parts of Europe and emerging markets as returns erode in the U.S., which has become crowded with strategies like statistical arbitrage. McKinley, which was founded in 1990 and manages about $6 billion, plans to raise several hundred million dollars for the fund and invest in stocks in about 25 countries starting in early 2018.

Gillam said the strategy has the capacity for $7 billion to $8 billion of capital and McKinley will open the fund to investors in the Gulf region and, through a master-feeder structure, globally via the Cayman Islands.

Data provided by McKinley show a market-cap weighted portfolio of stocks in the Middle East, Africa and South Asia -- MEASA -- generated a 13.6 percent annualized return from January 2003 through September 2017, compared with 9.2 percent for the MSCI World Index.

‘Growth Opportunities’

“As those stock markets develop and reflect the economic scale of those regions, McKinley’s quantitative approach is geared to capture those growth opportunities,” Alaska Permanent Fund CIO Russell Read said.

One challenge in stock markets this small is liquidity: big trades can cause prices to spike. In response, Gillam said, the MEASA Fund, like private equity, will draw on capital commitments from investors as opportunities arise.

“Most frontier managers are small, low-capacity and fundamentally driven,” Gillam said. “A sovereign like the permanent fund can’t deploy capital that way. We partnered with them to find a way of capturing exposure in these illiquid markets.”

According to McKinley research, seven of the 10 fastest-growing economies will be in the Middle East, Africa and South Asia. Thanks to a median age under 23, the region will contain a growing share of the world’s working-age population. It’s also rich in natural resources, with several of the world’s top oil-producing nations, as well as mineral wealth and agriculture.

McKinley’s business partners in the Gulf region include Abu Dhabi Global Market, which supports the financial sector, and the Al Maskari family, Gillam said.

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