On last week’s podcast, we spoke to Tim Reynolds, emerging markets portfolio manager at Employee Retirement System (ERS) of Texas. Reynolds has worked in investment management for 25 years. His start was in real estate investing, managing REIT portfolios, before he gravitated to domestic growth investing, where he would look for management tone changes in evaluating opportunities. ERS presented him with an opportunity to get more global in his perspective, which he appreciated.

Managing Emerging Market Portfolios Is Like Being a Wine Enthusiast

Reynolds started the conversation with a great analogy on how managing investments, particularly for emerging markets, is like being a wine enthusiast. He suggested that people who are very informed on wines can almost never be “true” experts. With different microclimates every year, different vintages and different types of grapes, you can be informed and knowledgeable, but things are always changing. This is how Reynolds thinks you can add value as an investment manager as things are always changing.

ERS Generally and Return Expectations

ERS is a $25 billion trust—a fairly mature plan. It used to be a plain-vanilla stock and bond plan, but in the last 10 years ERS has developed a greater set of portfolio sleeves to include alternatives, private equity, private direct real estate investing and hedge funds. Emerging markets is 4% of total trust assets, and much of that management is done in-house. ERS employs a mix of external investors and in-house managers.

The internal portfolio tends to be run as very inexpensive in-house beta tracking close to MSCI benchmarks, but it also looks to overlay very inexpensive in-house alpha on top of that. ERS looks to external managers when it thinks alpha potential is higher with strategies it cannot implement on its own.

Motivations to Look at Ex-State-Owned Universes

Reynolds started thinking about ex-state-owned investing with the company Petrobras, a giant energy company that transformed itself into a poorly run company that was the most indebted in the world. That caused Reynolds to wonder if governments were equipped to run publicly traded companies in the right way. Then he looked at comparing oil companies and saw a chart comparing ExxonMobil to PetroChina. They both had similar levels of revenue—$400 billion—and similar levels of profit—$30 billion. PetroChina had more than 500,000 employees, while Exxon had 75,000 employees. That knowledge led him to think about state-owned companies differently.