liza, Author at CC&L Financial Group Ltd.

Considering the importance of structural liquidity in emerging market investing

We argue that a narrow focus on company fundamentals leaves investors increasingly exposed to powerful external forces like structural and cyclical liquidity shifts.

These forces influence capital availability, investor behaviour and asset pricing, often overriding fundamentals in the short to medium term.

Below, we run through two EM-specific examples of how we think about structural liquidity, along with a brief comment on market structure globally.

China’s National Team steps in as foreign investors hit eject

The “China is un-investable” doldrums from early 2021 to the beginning of 2024 saw the MSCI China Index drop from a peak to trough by over 50% in USD terms. Haphazard regulatory clampdowns on the technology and education sectors, a collapsing property market, and Sino-US tensions saw foreign investors run for the exits.

At the peak of the revulsion, we saw many liquid and high-quality companies being dumped, seemingly irrespective of fundamentals. For us, this was a painful experience with many of our favourite names caught up in the stampede. It was also a valuable lesson about the impact of what we call structural liquidity in markets and its power to create extended and sharp periods of disequilibrium where prices appear completely detached from fundamentals.

In our process, we define structural liquidity as the long-term, underlying availability of capital within a financial system or market. Unlike short-term liquidity (which can fluctuate daily), structural liquidity is shaped by:

The depth and breadth of financial institutions
The regulatory environment
The savings rate and capital formation
The presence of long-term investors (e.g., pension funds, sovereign wealth funds and other state-linked allocators)
Factors outside of a given country – i.e. pressures on foreign allocators to shift exposure

Our clients are very familiar with our work analysing monetary cycles, with the aim of anticipating economic and market environments over the next year or so. This is a powerful tool for understanding the prevailing investment backdrop and how we expect it to evolve.

Structural liquidity gets less coverage, but understanding this factor can be just as impactful for performance, especially at extremes. Analysing the evolving composition of a country’s financial markets can provide insights into how changes in liquidity flows may be felt across asset classes.

Through the China doldrums, structural liquidity was working against us. Foreign investors were more heavily weighted to higher-quality companies, aligned with our stock picking bias. As these investors yanked funds from the market, we saw favoured names get cut down regardless of the fact that many of these business were fundamentally well positioned to weather China’s weak economy and geopolitical turbulence.

At the same time, state allocators in China (the “National Team”) were instructed to support the market. The reflex for these institutions was to buy ETFs loaded up with state owned enterprises (SOEs). This created an odd dynamic where more economically sensitive, highly indebted and relatively poorly governed companies (including distressed banks and property companies) were dramatically outperforming quality companies in an economic slump.

Investor flows and their composition had a huge impact on returns through much of the 2022–2024 period. In hindsight, the optimal strategy to navigate the volatility would have been to reduce the risk budget for “foreign favourites” while increasing the weighting to select SOEs which fit our stock picking framework. Unfortunately, we were slow to pick up the trend and by the time we had a firm grasp of the situation, valuations of our favourite businesses were starting to look incredibly cheap while already robust fundamentals appeared to be strengthening.

We reviewed China exposure in depth and exited a few positions that were exposed to persistently weak consumer sentiment. We also travelled in China extensively to meet with dozens of companies as soon as the country reopened from the pandemic. This helped to accelerate idea generation and generate more competition for capital within our China exposure. The rest was behavioural, with our iterative process of testing and re-testing stock theses and country views underpinning our conviction to stick with a number of out-of-favour companies.

The slump in quality stocks came to an end as Chinese authorities announced monetary and fiscal loosening in September 2024 to stimulate the economy. This was followed by the Deepseek shock in January 2025, which shone a light on Chinese innovation in AI which was progressing rapidly and at a fraction of the cost in the United States. Suddenly, domestic allocators were rushing into Chinese consumer tech stocks leading China’s AI development. Improving liquidity supported a broadening out of the rally, boosting other innovative companies such as battery leader CATL, drug development company Wuxi Biologics and Hong Kong financials such as Futu Holdings.

Structural liquidity is playing an important role in providing fuel for the rally. With China’s weak housing markets and longer-term bond yields recently moving up from record lows, equities have been the default beneficiary of improving monetary trends which has fuelled a liquidity-driven bull market this year.

China nominal GDP* (% 2q) & money / social financing* (% 6m)
*Own seasonal adjustment

Source: NS Partners and LSEG.

So far it has been domestic money within China participating in the rally, with foreign investors yet to return. Global investors will likely want to see Sino-US tensions cool further following the October APEC summit between Trump and Xi where a temporary truce was announced.

China equities flows: domestic vs. foreign investors

Source: EPFR

While it is pleasing to see our investment style come back into favour, we aren’t falling in love with this rally. Any downturn in liquidity would be a signal to reduce exposure. In addition, while our companies have broadly reported well, much of the wider rally this year has come from re-rating.

Source: Jeffries, October 2025

We are wary of chasing momentum in the China AI thematic without support from fundamentals. This is a fragile trade and vulnerable to a stall in money growth in our view.

Beware relying on mean reversion tables in India

India offers a different perspective on the importance of structural liquidity. Indian equities outperformed for years leading into 2025, and yet most EM investors were underweight the market citing rich valuations.

GEMs active vs. passive country allocations

Source: EPFR

While we were certainly mindful of India’s valuation premium to wider EM, the rise of domestic mutual funds driving flows into equities as Indian workers contribute to their pension accounts is a major structural change. We have seen this before in places like Chile or Australia, and once this trend picks up steam it can be dangerous to rely too heavily on your mean reversion tables!

While we did shift to an underweight in India at the end of 2024, the move was modest and largely based on a view that a deluge of IPOs coming to market was soaking up too much liquidity. This factor, combined with high valuations, supported our view that the market looked to be due a period of consolidation after several years of strong gains.

Model GEM portfolio: India strategy macro ratings and weightings

India	Rating	Exposure	Share of risk	Relative weight
October 2025	3	13%	16.9%	-2.5%
June 2025	3	17%	22%	-1.1%
December 2024	4	19%	20%	-0.5%
June 2024	3	21%	30%	+1.9%
December 2023	2	19%	19.7%	+2.6%
June 2023	1	17%	14.4%	+2.2%

Source: NS Partners

More recently however, agressive central bank rate cuts have fuelled a pick-up in cyclical liquidity, and while it is a near-term headwind, the flurry of IPOs will deepen the market and produce a more vibrant opportunity set. At the company level, earnings growth is set to lead EM for the next few years. While we are happy to wait for the market to come back to us for now, we see no reason to dismantle our India exposure with such a strong structural backdrop and will be ready to add back when the opportunity arises.

Passive dominance and market fragility

Thinking more broadly, we have been reading some eye-opening analysis from market strategist and investor Michael Green on the impact of rising passive dominance in markets. I won’t rehash the whole thesis in detail, but in a nutshell, Green argues that passive investing has fundamentally reshaped market dynamics by inflating valuations of the largest stocks and undermining traditional price discovery.

As index funds allocate capital based on market cap rather than fundamentals, they create a self-reinforcing cycle where rising prices attract more flows, further distorting valuations. This mechanism favours size and trend over intrinsic value and ignores quality companies outside major indices.

Markets become increasingly inelastic as passive share grows and the share of active and valuation-driven investment falls. The outcome is that liquidity no longer scales with market cap. This makes large stocks more vulnerable to outsized price impacts from passive flows.

Therefore, the largest beneficiaries of a constant inflows to passive vehicles could suffer sharp reversals should those flows reverse, exposing the market to volatility and mispricing.

Finally, Green highlights what he sees as an absurdity, being the construction of rigid rule-based investment strategies meant to operate in markets, which are complex adaptive systems. The dominance of this approach to investment is distorting markets and capital allocation which will have negative real-world impacts in magnifying the power of megacap firms and stifling innovation and creative destruction.

Having always considered the impact of structural liquidity in our markets as a part of our process, Green’s work resonates with our team. In our view, it will be crucial going forward for active investors to have an awareness of how rising passive dominance will create distortions in markets and identify the risks and opportunities that will flow from them.

It’s no secret that public finances in most of the markets Global Alpha covers are in a dire state, and one of the common culprits is usually pensions and other retirement benefits. Countries such as France and Italy spent roughly 15% of GDP over each of the last two years and are on average the second largest item after health care. Many countries are having to increase retirement age to alleviate the strain, and less than 30% of Gen Z expect to retire with similar retirement benefits than older generations.

In the 90s, Australia took its own unique approach to ensuring retirement-system sustainability through the development of the superannuation system. It is a mandatory savings scheme where employers are required to fund a minimum percentage of an employee’s salary into a superannuation fund on their behalf. Employees are then able to invest the amount on their own if they choose to and start withdrawing it at 65. This simple approach created one of the largest pension systems in the world with $4.1 trillion in assets, where employers contributed $147 billion in the last year. The Super Guarantee threshold, the percentage of salary employers must deposit, has once again increased this year to 12%.

Given the high expected retirement assets, it’s no surprise that Australian retirees have had a willingness to tolerate higher risk in their asset allocation while asset classes like annuities have seen a lower adoption rate compared to other developed economies. While the population is overall still young compared to the United States, there is a growing concern among experts that too much risk is being taken by individuals that cannot afford it. Regulators and policymakers in recent years have taken several steps to attempt to address the problem:

Implementation of Retirement Income Covenant in 2022 requiring superannuation trustees to put additional emphasis on diversification and flexibility and increase educational resources.
Friendlier mean-test treatment for lifetime income streams to improve middle-class retirees’ wealth and therefore reduce the need for risk-taking to reach retirement goals.
Consultation on potential changes to capital settings and requirements for annuity products, with the aim of reducing capital intensity of insurers and allowing for more competitive pricing and supply, therefore making the product more attractive as part of an asset allocation.

We recently initiated a name that gives us exposure to this dynamic: Challenger Limited (CGF AU). The company operates both an APRA‑regulated life division (annuities and related longevity solutions) and a multi‑manager funds management arm (Fidante and Challenger Investment Management). Challenger manages $130 billion in assets.

As mentioned, annuities as an investment product in Australia has some of the lowest adoption rates of all developed countries at 2% vs. 15% for Japan and 20% for the United States. While some of this difference can be explained by demographics, the reality is that regulatory capital intensity for annuity providers has been much higher than other countries (meaning their pricing ends up worst) and education on the product has been lacklustre. What piqued our interest in the Challenger story is that the Australian Prudential Regulation Authority (APRA) has announced steps to address these problems as it seeks to encourage workers to include an annuity allocation in their retirement savings account. Some of the steps proposed by APRA to reduce capital intensity are now clearer. In 2025, APRA confirmed a consultation to change the treatment of the illiquidity premium, with the stated intent to lower capital requirements for annuity products when risk controls and asset‑liability matching are robust. If implemented as outlined, this would make pricing more competitive and broaden supply without compromising solvency standards.

As the dominant player in the annuity market, with a market share estimated around 90-95%, Challenger has been one of the more influential and proactive companies in providing feedback to the regulators and there are reasons to believe that regulators are using Challenger’s data to evaluate the impact of potential changes.

Even without betting on regulatory changes, Challenger has plenty of things going for it. The core annuity business in Australia is growing nicely as they are consistently landing new mandates with super annuities (which are being urged to provide their members with more guaranteed income products), the annuity book duration is increasing (allowing for higher margin/investment return), their unique Japan exposure is showing strong momentum (and they are expected to land another distributor in the near future) and the firm is launching new products both on the annuity and investment side which appear to be showing initial success.

One of the advantages of taking a global view on investing is that it allows us to find differentiated stories in a space we typically would not be overly excited about. Life insurance companies in Europe or the United States tend to exhibit bond-like features, being highly defensive and providing decent cash-flow. Meanwhile, Australia built one of the most successful retirement savings engines globally and is set to benefit from a large demographic tailwind that should see life insurers like Challenger benefit over the next decade, in addition to having regulatory tailwinds and policymakers’ support.

The Spanish economy has been the star performer in Europe recently, and consequently its principal stock exchange has also produced the best returns. In this week’s commentary, we look at the underlying reasons behind the performance of both the economy and stock market, as well as some of Global Alpha’s holdings in the country.

The Spanish economy grew over 3% in 2024, and another 2.7% of growth is forecast for 2025 which is significantly more than other advanced economies in Europe. The European Central Bank is forecasting 1.2% growth for the euro zone this year. Spain has seen its credit rating upgraded in recent weeks, in stark contrast to other large, developed economies such as the United States and France, which have recently seen their credit ratings downgraded.

A significant factor of this star performance is how the demographic situation in Spain is different from its peers. While the general movement in Europe has been toward more restrictive policies on immigration, Spain’s border has remained more open. The majority of the 600,000 average annual net inflow of immigrants are of working age which has resulted in record levels of employment (yet still the EU’s highest unemployment rate) and means Spain is not experiencing the labour shortage found elsewhere in Europe. A secondary effect is the increase in domestic consumer spending. Given that most immigrants are coming from Latin America, a shared language and culture have been key in the integration and, more importantly, acceptance into society. Most of the jobs being filled by migrants are in hospitality and construction, so there is more to be done to attract workers in high-end service sectors.

Spain has been, and continues to be, a prime beneficiary of the EU’s Recovery and Resilience Fund (RRF); only Italy has received more. The RRF provides loans and grants to EU member states for reforms and investments to make economies greener, more digital and ultimately more resilient. Spain received over €20 billion as recently as August for investment in renewable energy, rail and cybersecurity. The push into renewable energy because of the funds received from the RRF has reduced energy cost pressure and increased industrial competitiveness.

A final reason why the Spanish economy has performed so well has been the resiliency of tourism. Tourism accounts for approximately 12% of Spain’s GDP. Spain had a record number of visitors in 2024, an increase of 10% compared to 2023, and that record is expected to be beaten once again in 2025.

Combining the strength of the economy, investments and improved credit rating leads to the Spanish stock market outperforming. The outperformance is also helped by the composition of the IBEX 35, which has a large exposure to banks and financial institutions. The banks have outperformed on the back of the strong macroeconomic backdrop and improved asset quality post structural reforms. Spanish banks have low US tariff exposure, as do other domestic focused industries such as utilities and telecommunication companies.

Global Alpha counts three Spanish companies in its portfolios that give exposure to Spanish tourism, the resilient labour environment and domestic spending. Meliá Hotels International S.A. (MEL ES) owns and manages hotels and resorts. Meliá operates luxury, upscale and mid-scale hotels and resorts. Meliá operates hotels in Europe, Asia and the Americas. With fiscal spending increasing in Europe, consumer sentiment should improve, and leisure spending continues to show resilience. The demand in Spain means rates should remain strong and Meliá is well placed to benefit. Meliá has a much-improved balance sheet that trades at an attractive valuation.

Fluidra S.A. (FDR SM) is a global leader in the pool and wellness industry. They design and manufacture a range of products for residential and commercial swimming pools. The products include pumps, valves, heaters, filters, pool-cleaner robots, chemicals, and devices for pool IoT devices. Around 70% of Fluidra’s sales are to the residential end-market, and aftermarket accounts for the majority of Fluidra’s sales over the cycle, providing resilience while the industry waits for new-build activity to recover. Fluidra continues to trade at a discount to its US peers.

Merlin Properties Socimi S.A. (MRL SM) is the largest Spanish commercial REIT. It operates a 100% Iberian portfolio centred around offices, shopping centres, logistics, and most recently, data centres. Most of its assets are in the prime cities of Madrid, Barcelona, and Lisbon. The recent investment in data centres will start to contribute meaningfully to rental income by 2028 and represents the next leg of growth.

A headwind for Spain’s continued prosperity is that the minority government has been unable to pass much legislation. It has, however, avoided much of the turmoil seen in France. The challenge now is to capitalize on the domestic demand, robust tourism and EU recovery funds to continue to outperform its European peers.

Strategy overview

The strategy invests in frontier and emerging market companies that we believe will benefit from demographic trends, changing consumer behaviour, policy and regulatory reform and technological advancement.

Egypt, Vietnam and Poland were the top three country contributors to strategy P&L in the quarter, whereas Indonesia, Lithuania and the Philippines were the worst three country contributors. On a sector basis, banks, non-bank financials and health care were the top three sector contributors to strategy P&L, whereas consumer staples, media and entertainment and consumer services were the worst three sector contributors. Below, we highlight the three best and worst stock performers during the quarter (by USD returns generated to the strategy) and share our latest observations on the portfolio and the broader investment environment.

Top Performers

Integrated Diagnostics Holdings PLC (IDHC LN)

IDHC is a leading laboratory and diagnostics provider in Egypt and Jordan with smaller operations in Nigeria and Saudi. IDHC shares returned 62.8% in during the quarter as investor sentiment turned more constructive toward Egypt and as the market responded positively to the resumption of dividends by the company that was announced with strong second quarter results. The resumption of dividends is a reflection of management’s more assured view on Egypt and signals confidence in the outlook for earnings going forward. We see further upside in the shares as we expect the company can generate nearly half of its market capitalisation in aggregate free cash in 2026 and 2027 and expect discount rates on Egyptian assets to decline as inflationary pressures subside. On the business model side, management continues to execute well by scaling the testing-at-home business (now approximately 20% of revenue), closing a ~$9 million transaction in a leading Cairo-based diagnostic imaging centre and expanding its capex-light lab roll-out via hospital and medical centre partnerships.

Kelington Group BHD (KGRB MK)

KGRB is a Malaysian engineer solutions provider with a core competency in Ultra-High Purity (UHP) gas and chemical delivery systems in the semiconductor, flat-panel display, solar and LED industries. KGRB shares returned 48.3% in the quarter as the market reacted positively to a string of contract awards announced in July and August. The most notable announcement by the company was the signing of a framework agreement with a multinational semiconductor company in Dresden, Germany with a minimum value of $35 million. KGRB is bidding on more than $1.3 billion worth of work, of which 44% is in Europe, so this contract win gives us more confidence in the company’s right-to-win in that market. KGRB’s market capitalisation crossed the $1billion mark in the quarter and its average daily value has quintupled to $5 million compared to its one-year average. While the shares have done very well year to date, the company would have only recently entered the radar screen of a large subset of emerging and global market investors who we believe will appreciate the positioning of the company in the semiconductor value chain. As a result, we see a nice combination of fundamental and technical catalysts for the shares going forward.

Ho Chi Minh City Development JS Commercial Bank (HDB VN)

HDB is a mid-sized private sector Vietnamese bank serving 23 million customers with a strong competitive advantage in the SME and consumer segments of the market. HDB shares returned 39.6% in the quarter as they benefitted from a sector-wide rally in Vietnamese bank stocks in the quarter on account of strong system lending growth, a pro-growth economic policy that appears to have been spurred on by tariff anxiety and a euphoric domestic retail investor base. We like HDB for its sector leading returns (ROE of ~27%) and proactive management which has allowed it to grow its loan book at twice the sector average. However, with the strong share price performance, we deemed the risk-reward setup no longer conducive for continued ownership and decided to exit the stock at the end of the quarter.

Worst performers

Sumber Alfaria Trijaya Tbk (AMRT IJ)
AMRT is the leading mini-market retailer in Indonesia with a network of over 20,000 stores. The company operates in an effective duopoly along with competitor Indomart, which operates around the same number of stores in Indonesia. AMRT shares lost 21.7% in the quarter as sentiment toward Indonesia soured on increased policy uncertainty and weak consumer confidence, culminating in a short period of violent protests in the last week of August. While we reduced the strategy’s exposure to Indonesia in the quarter (including in AMRT), we remain confident in the company’s ability to manage through this period of uncertainty aided by a net cash balance sheet and a defensive business model. We find the valuation appealing here at ~20x 2026 earnings and believe the business can underwrite mid-teens local currency bottom line and free cash flow CAGR for the next three years.

Hikma Pharmaceuticals PLC (HIK LN)
HIK is a Jordan-headquartered, global generic pharmaceutical company listed on the London Stock Exchange. HIK shares lost 19.4% in the quarter as policy uncertainty in the US market (~50% of group sales) and unfavourable currency movements weighed on the stock, despite the company affirming guidance in their latest results. While we see a lot of value in the shares at less than 10x 2026 earnings and think the group’s diverse revenue mix and manufacturing presence in the United States are appealing attributes, we decided to exit the shares for the time being as policy risk continues to supress the multiple and can present a risk to earnings.

Baltic Classifieds Group PLC (BCG LN)
BCG is the dominant online classifieds platform in the Baltic region operating across Lithuania, Latvia and Estonia. BCG shares lost 21.1% in the quarter following a revenue and profit downgrade issued by the company (by only 3–4%) which management attributed entirely to the new vehicle transaction and ownership tax in Estonia. Uncertainty on whether this tax will stay or go is impacting transaction activity on the company’s Auto 24 platform. Estonia has one of the highest motorisation rates in Europe and the Baltics and we believe the profit hit resulting from the tax uncertainty will likely be transitory in nature. We continue to like the pricing power of BCG across several verticals in the three countries it operates, and we see continued support for the share price from the company’s buyback program.

Outlook

Amidst volatile geopolitics and frothy asset markets, we continue to find attractive opportunities to deploy capital in our core markets. While some risks have emerged in the ASEAN region (namely in Indonesia, Philippines and Thailand) from messy politics, we find that valuations of our portfolio companies in those three countries have largely absorbed those risks. In other regions, we believe the Middle East offers good opportunities post the recent correction in Saudi and UAE equities. In Africa, we see green shoots emerge from subsiding inflationary pressure in Egypt, while Morocco’s “Gen-Z” protests offered an opportunity for us to reshuffle and add to favoured stocks on weakness. In Central Eastern Europe, we continue to see a rich opportunity set with our portfolio indexing to small and midcap high growth companies.

Broadly, the portfolio is appropriately diverse from a regional and sectoral perspective with 20 countries across 16 GICS industry groups. Within those areas, the portfolio owns a unique combination of companies that exhibit growth, re-rating potential and idiosyncratic catalysts.

We look forward to updating you on the strategy in the next quarter.

MENA equity markets ended the third quarter of 2025 with returns of 4.6% for the S&P Pan Arab Composite (TR) Index Net versus the MSCI Emerging Markets Index which was up 10.6% in the same period. For the year-to-date end of September 30, MENA markets are up 8.8% compared to 27.5% for emerging markets (EM).

The factors driving the underperformance in MENA that we called out in our second quarter letter remain relevant today:

Relative under-indexation to the AI theme, which explains the majority of returns in global equity markets this year;
Weak USD, reducing the desire for owning USD-pegged risk assets; and,
A low oil price, creating a visible fiscal overhang on most countries in the region.

So long as those factors remain simultaneously in play, it is difficult to imagine a scenario where MENA equities outperform. As a result of the year-to-date underperformance, MENA equities (as measured by the aforementioned S&P index) have lost their four-year premium valuation versus MSCI EM and now trade at a 15% discount on a forward P/E basis (as per Bloomberg data). As discussed before, return dispersion in the region is high and it is important that we single out the Saudi equity market as the main culprit for the regional underperformance; the Tadawul All Share Index is down 4.3% in the year to date ending September 30, 2025 while the S&P regional index is up 9.8% in the same period (we acknowledge the TASI is a price only index so the degree of underperformance is slightly overstated).

In our last letter we argued that Saudi valuations were attractive despite lower growth visibility. This is always an interesting backdrop for equities as diminished growth visibility justifiably lowers investor expectations. This usually results in lighter positioning/ownership as capital seeks out more interesting opportunities elsewhere (e.g., data from Argaam.com showed Saudi investors’ transaction value in US equities increased by 3x year-over-year in H1 2025). For myriad reasons (which we will not get into here), that setup appeared conducive for the Saudi Capital Markets Authority (CMA) to announce (initially via an interview on Bloomberg with a board member) a possible upward revision of foreign ownership limits (FOLs) on Saudi equities from the current 49% levels. While the details are still limited, the expectation is that the limit will be revised to 100% (as is common with most Qatari companies and with companies that are not classified as strategic in the UAE) in the coming few months. The flow implications are straightforward with various estimates putting expected passive and active inflows at $10 billion and $15 billion respectively from investors adjusting to an increase in Saudi’s weight (in a 100% foreign ownership scenario) in the MSCI EM from 3.1% to 3.9%, and FTSE EM from 3.6% to 4.5%. While inflows will be limited to a small group of large cap stocks (mainly in the banking sector) with high free floats (i.e., which have room to absorb foreign ownership), the magnitude of the inflows is substantial relative to the current share liquidity of those stocks. With light positioning and relatively low expectations, the market reacted as one would expect, rising 5.1% on September 24, the strongest one-day gain since March 2020.

While underlying fundamentals will not change with FOLs revised upward, this is yet another signal that regional governments consider their stock markets to be at the centre of their economic agenda and a live barometer of its success. While there are obvious moral hazards associated with regulatory intervention in the stock market, opening the market to foreigners is not one of them. In fact, we see it as a welcome step that should increase the relevance of the Saudi market in global equity allocations and improve transparency and corporate governance standards (which can be superior to other emerging markets we invest in). This episode is also another reminder that expectations embedded in stock prices (i.e., valuations) remain a critical part of the total return formula in stock investing and something we place great emphasis on in our investment process.

We see a more favourable set up for the region as we enter the last quarter of the year. This view is driven by an underlying bid associated with the FOL removal in Saudi (i.e., dips will be bought), a more stable DXY and hopes of a more stable geopolitical environment following the signing of the Trump peace plan in Egypt in October.

The portfolio continues to favour the Saudi and Qatari markets whilst being somewhat neutral on Kuwait and cautious on the UAE. For the latter, we are entering a period of heavy public and secondary issuances (perhaps a signal that insiders find these valuations too good to pass on) and that is likely to put pressure on that market. In addition, 2025 will be a high base for corporate earnings which will make earnings growth in 2026 mathematically lower than the previous three years. That being said, we are finding pockets of interesting opportunities in UAE energy services and infrastructure that we find attractive after a strong correction in valuations in the last month. In the smaller markets, we continue to increase our exposure to Egypt as we see green shoots emerge from subsiding inflationary pressure and the prospect of a lower rate regime in the next six to twelve months. In Morocco, the “Gen-Z” protests highlighted fragilities in the case for Morocco and gave the market reason to undergo a much-needed correction. We continue to like the long-term case for the country and have opportunistically reshuffled the portfolio and net added to our exposure during the recent correction.

We look forward to updating you on the strategy going forward.

Toronto, ON – October 23, 2025 – Connor, Clark & Lunn Funds Inc. (the “Manager”) today announced its intention to terminate CC&L Market Neutral Fund (the “Fund”). The termination is scheduled to take effect on or about December 10, 2025.

The decision to terminate the Fund was made after careful consideration of various factors and is part of the Manager’s ongoing effort to ensure its product lineup remains aligned with investor preferences and needs and meets long-term goals.

Effective October 23, 2025, units of the Fund will no longer be available for purchase. Existing unitholders may redeem or switch their units of the Fund for settlement on or prior to the close of business on December 9, 2025. After that time, any remaining unitholders will have their units automatically redeemed at the net asset value per unit as of the termination date.

A notice with further information regarding the termination of the Fund will be sent to unitholders of the Fund. Unitholders are encouraged to speak with their Financial Advisors to discuss the termination and their investment options.

About Connor, Clark & Lunn Funds Inc.

Connor, Clark & Lunn Funds Inc. partners with leading Canadian financial institutions and their investment advisors to deliver unique institutional investment strategies to individual investors through a select offering of funds, alternative investments and separately managed accounts.

By limiting the offering to a focused group of investment solutions, Connor, Clark & Lunn Funds Inc. is able to deliver unique and differentiated strategies designed to enhance traditional investor portfolios. For more information, please visit www.cclfundsinc.com.

For further information, please contact:
Lisa Wilson
Manager, Product & Client Service
Connor, Clark & Lunn Funds Inc.
416-864-3120
[email protected]

Caution concerning forward-looking information

Certain statements in this press release may contain forward-looking statements or forward-looking information that are predictive in nature and may include words such as “expects,” “anticipates,” “intends,” “plans,” believes,” “estimates” and similar forward-looking expressions or negative versions thereof. All information other than statements of historical fact may be forward-looking information. All forward-looking information in this press release is qualified by these cautionary statements. Forward-looking information in this press release includes, but is not limited to, statements with respect to management’s beliefs, plans, estimates, and intentions, and similar statements concerning anticipated future events, results, circumstances, or expectations, including, but not limited to, the proposed termination of the Fund and the anticipated process for such termination. Such forward-looking information reflects management’s beliefs and is based on information currently available. Such forward-looking statements are based on current expectations and projections about future general economic, political, and other relevant market factors, and assumes there will be no changes to applicable tax or other laws or regulations. Although the Manager believes that the expectations reflected in such forward-looking information are reasonable, expectations and projections about future events are inherently subject to, among other things, risks and uncertainties, some of which may be unforeseeable and, accordingly, may prove to be incorrect at a future date. Forward-looking statements are not guarantees of future performance, and actual events could differ materially from those expressed or implied in any forward-looking statements. A number of important factors can contribute to these differences, including, but not limited to, general economic, political, and market factors in Canada and internationally, global equity and capital markets, business competition, and catastrophic events. You should avoid placing any undue reliance on forward-looking statements. The forward-looking information contained in this press release is presented as of the preparation date of this press release and should not be relied upon as representing the Manager’s views as of any date subsequent to the date of this press release. The Manager disclaims any and all responsibility to update any forward-looking statements, whether as a result of new information, future events, or otherwise, except as specifically required by law.

This communication is intended for informational purposes only and does not constitute an offer to sell or the solicitation of an offer to purchase any funds and/or investment products managed or advised by the Manager or any of its affiliates, and is not, and should not be construed as, investment, tax, legal, or accounting advice, and should not be relied upon in that regard. Commissions, fees, and expenses all may be associated with investments in funds and/or other investment products managed or advised by the Manager or any of its affiliates. Please read a fund’s offering memorandum or prospectus, as applicable, which contains detailed information, and speak to an advisor before investing. Funds are not guaranteed, their values change frequently, and investors may experience a gain or loss. Past performance may not be repeated.

In a world increasingly focused on wellness and sustainability, fish sits at the intersection of health and investment opportunity. From the cardiologist’s clinic to the equity analyst’s desk, the case for seafood has never been stronger. Whether you’re measuring omega-3 levels or return on equity, the numbers tell a similar story: balance, resilience and long-term growth.

In recent years, a quiet revolution has taken hold in nutrition circles: protein is back in the spotlight. Supermarkets and social media alike now highlight “high-protein” products, from snack bars and shakes to reformulated staples. What was once the domain of bodybuilders is fast becoming mainstream wellness. Major food industry reports confirm that the appetite for protein is real and broadening with 61% of US consumers increasing their protein intake in 2024, up from 48% in 2019. We all know the reasons: protein builds muscle, keeps you satisfied and supports overall health. What’s new is how it’s gone mainstream; it’s not just for athletes anymore.

This trend ties in perfectly with the growing focus on fish as a cornerstone of a healthy diet. As consumers shift toward protein-forward diets, seafood – long praised for its rich omega-3s – now gains even more appeal for its dual role: premium protein plus cardiovascular benefit.

Salmon isn’t just known for its omega-3s; it is a robust, high-quality protein source, and that amplifies its value in a protein-conscious world.

Rich protein density: An 85 g portion of raw wild salmon contains about 17 g of protein, nearly all essential amino acids, making it a “complete” protein.
Lean, but nutrient-dense: Compared to many red meats or processed protein sources, salmon provides its protein alongside healthy fats (primarily EPA/DHA), vitamin D, selenium and minimal saturated fat.
High bioavailability and recovery support: The amino acid profile (especially leucine) in fish proteins supports muscle protein synthesis and recovery which is a benefit that complements the anti-inflammatory effects of omega-3s.
Lower contaminant risk (relative to larger predators): While mercury and PCBs remain valid concerns for some species, salmon – particularly well-managed farmed or wild-caught types – tends to lie at the safer end of the spectrum, making it a smart choice within a diversified seafood diet.

This health-driven demand story is not only reshaping dietary habits, it’s also powering an investment opportunity. As one of the world’s largest salmon farmers, SalMar ASA (SALM NO) sits at the forefront of this global protein transition. The company’s scale, cost control and sustainability credentials make it a standout in the seafood sector.

SalMar is one of Norway’s leading salmon producers, and one of the highest-quality names in the global aquaculture industry. Based along Norway’s pristine coastline, SalMar combines decades of experience with innovative farming technology to produce salmon that’s both sustainable and consistently high in quality. The company’s strengths lie in its efficient operations, prime farming locations and focus on biological control, which keep production costs low while maintaining excellent fish health and environmental standards. With operations stretching from central to northern Norway and growing exposure in Iceland and Asia, SalMar is well-positioned to meet rising global demand for healthy protein.

Norwegian farmed salmon, more broadly, has become a gold standard for sustainable seafood. The cold, clean waters of Norway provide the perfect environment for salmon to grow naturally, while strict national regulations ensure traceability, low antibiotic use and responsible feed sourcing. Compared to other animal proteins, salmon has a smaller carbon footprint, delivers high-quality omega-3 fats and provides a complete source of lean protein making it a smart choice for both consumers and investors focused on health, sustainability and long-term value.

If consumers continue reprioritizing protein, salmon producers like SalMar, that manage costs, traceability and scale will enjoy structural growth beyond the broader seafood category. For our portfolio, the protein trend adds an extra degree of optionality of not just health credibility, but a narrative anchored in a “protein-first” consumer future.

We called for a brighter outlook for EM equities over a year ago on the prospect of a USD bear market. This is now starting to play out, led by a liquidity-driven bull market in China.

Over the last three years to the end of the quarter, EM equities have compounded at an annualised rate of 19%.

Our markets remain under-owned and boast cheap valuations relative to US stocks. Easing financial conditions should support a recovery in earnings growth.

We are also believers that you can have too much of a good thing, and that emerging markets are a host to a number of attractive structural thematics outside of the AI fervour that are unique to our investment universe.

The rally this year has been focused on the large cap names. To illustrate, the MSCI EM Small Cap Index has returned 16.67% against 28.16% for the large cap index for the year to date.

This is also reflected in the underperformance of smaller and less liquid markets such as ASEAN. As the bull market matures, we expect liquidity to creep out to markets such as Malaysia, which have been abandoned by foreign investors despite having exciting structural investment opportunities. We know from past experience that when investor flows do return, the upside can be dramatic.

Returns across emerging markets have so far been driven by local allocators, with foreign investors largely sitting on the sidelines – although interactions with attendees on our usual conference circuit suggest that this could be about to change.

Korea Value-Up deep dive: SK Square

Corporate Value-Up catalyst alongside tailwind from SK Hynix’s dominance in high bandwidth memory

South Korean equities have surged by over 57% this year to the end of September. The fuel is a combination of exposure to AI infrastructure mania through the country’s tech giants such as SK Hynix and Samsung rallying, ultra cheap valuations and the prospect of a broader market re-rating courtesy of the Value-Up corporate reform drive that is now underway.

Below we provide a deep dive into recent portfolio addition SK Square, which we think is emblematic of the broader upside potential in Korean equities if the government sticks to its reform ambitions.

Overview

South Korea is home to some of the world’s most innovative companies, and yet it is also arguably one of the cheapest equity markets. The dichotomy is down to a poor history of corporate governance in the country, with the economy dominated by vast family-controlled chaebol conglomerates.

These families have historically been more focused on preserving their business empires than looking out for the interests of minority shareholders. However, following in the footsteps of Japan’s stock exchange reforms, South Korea has launched Value-Up to narrow the “Korea discount” and attract foreign capital.

We think SK Square epitomises the sort of opportunity where Value-Up could be a significant catalyst for re-rating. Spun off from SK Telecom in 2021, the holding company’s investment portfolio includes business across semiconductors (SK Hynix), ICT ventures and digital platforms.

Source: SK Square 2025

Focus on the discount to NAV for this holding company – the discount has widened to 55% following a recent correction. This was an opportunity to buy. Management has levers to pull to narrow the NAV discount via more share buybacks, NAV enhancement and dividend payouts.

SK Square is the best in class among the holding companies and is leading peers in efforts to enhance shareholder value. Management quality is high and the board has a majority of independent directors. They were the first holdco to unveil their Value-Up program and appear to be executing the plan well.

The company is already practising cumulative voting rights – this favours minority shareholders who can pool votes to secure board seats (only 6% of companies in South Korea practice cumulative voting).

The disposal of non-core assets will enable SK Square to focus its energy on its best assets in the IT and Communications sectors.

A brief history of the chaebols

Born out of the interplay of historical, economic and governmental forces following WWI and the Korean War, these family-owned conglomerates filled a significant institutional void post Korea’s liberation from Japanese occupation in 1945.

Chaebols were formed out of the sale of assets previously owned by Japan’s government and firms, which accounted for 30% of the Korean economy. These assets were often sold to families and high-ranking officials at a deep discount, with prices based on outdated book values amidst high inflation. Early chaebols like Hanwha, Doosan, Samsung, SK and Hyundai used these assets as the foundation for growth.

The Korean government played a decisive role in shaping the economy since 1961. Under President Chung Hee Park, economic development became a top priority for legitimacy. The government launched a series of five-year development plans which were based on nationalising banks and channelling foreign loans in capital-intensive heavy industries and chemical industries. It allowed chaebols to acquire or establish non-bank financials to provide capital to their affiliates.

Korea experienced chronic capital shortages throughout its development period, particularly after the Korean war. The chaebols could create value by internalizing resource allocation and replacing poorly performing institutions. The absence of supporting industries meant that chaebols often had to vertically integrate to secure necessary parts and raw materials.

While the chaebols were effective vehicles for kickstarting growth, a host of structural issues emerged.

Vertically integrated suppliers, with captive customers, meant the chaebols lacked incentives to be efficient.

Cross-subsidisation across affiliate businesses led to yet more inefficiencies and wasteful allocation of capital.

Internal subsidies via nonbank financial subsidiaries funded unprofitable ventures bypassing traditional banks. This was identified as one of the causes for the Asian Financial Crisis.

Centralised family control over numerous group affiliates even though their direct equity ownership is often a small percentage. This control allows for decisions that serve personal interests at the expense of minority shareholders.

Cross-shareholding – affiliates within a chaebol group own shares in each other, which inflates the apparent ownership stakes and provides a mechanism for the founding family to control the entire group with minimal actual capital investment.

High debt-equity ratios. Chaebols have historically preferred debt over equity financing to avoid diluting the controlling stakes of their founding families.

Unchecked power of chairmen. Chairmen held absolute power over strategic decisions, leading missteps such as ill-conceived diversification strategies e.g., Samsung’s entry into the auto industry.

Ineffective boards. Typically dominated by executive officers and outside directors with close ties to dominant shareholders. They often serve to provide ex-post factor approval rather than independent oversight.

Value-Up aims to tackle these issues, and it is more than just political rhetoric.

The program is supported by both of South Korea’s major political parties in the DPK and PPP. Real reform is underway, including revisions to the Commercial Act mandating director loyalty to shareholders (instead of to “the company”), electronic shareholder meetings for large firms and cumulative voting rights to empower minority investors.

Corporate governance reform – Japan vs. Korea

	South Korea	Japan
Mandatory vs. voluntary	Voluntary	Mandatory
Incentives	Carrots and sticks	Named and shamed
Targeting companies with price to book ratio <1	Financial Services Commission believes PBR helps assess whether or not the issue arises from a low ROE due to a high cost production structure and decrease in market demand.	The company has not achieved profitability that exceeds its cost of capital, or investors are not seeing its growth potential.
Framework	A Value-Up ETF Index has been created. Value-Up adherents to be rewarded with inclusion. Potentially, a special tax regime will be set up for companies increasing dividends.	Companies complying with the new corporate governance rules were publicly named by TSE in early 2024.

History of SK Square

Founded in November 2021 via a spin-off of SK Telecom, SK Square intended to focus on ICT investments and become a more growth-and-tech-focussed holding company.

The downturn in portfolio company and DRAM giant SK Hynix in 2023 forced SK Square management to sharpen its focus on the underlying portfolio, much of which was loss making.

SK Group chairman Chey does not have a direct stake in SK Square and the independent board of directors makes it more exposed to shareholder activism. It was the subject of shareholder activism in 2023–2024, led by a London hedge fund (1% shareholding), pushing for the business to release an industry-leading value-up plan which was eventually announced in November 2024.

Company overview

Operating income (Q2 2025) of 1.4tn won, of which SK Hynix contributed to 1.84tn (20% stake). The ICT portfolio is generating negative operating income of 28.9tn won.

Source: SK Square company presentation Q2 2025

SK Hynix is 88% of SK Square NAV.

Other than SK Hynix, SK Shieldus (2% NAV) and TMAP Mobility (1%) are the only ventures making meaningful profits.
Management said that they will divest 20 or more ventures this year, and the rest in the next couple of years.

Source: SK Square company presentation Q2 2025

SK Square’s NAV discount is beginning to narrow. A recent market correction has given us an opportunity to buy the stock.

NAV to market cap discount has narrowed significantly from 74% in 2022 to 66% at Q3 2024 since the announcement of its value-up program.
The discount narrowed to a low of 47% in June, before the KOSPI and SK Square correction.
While SK Hynix corrected by c.15% from its July peak, SK Square’s share price fell by c.37% from its June peak, with the NAV discount widening to c.55% at the time we initiated our position.

NAV Discount	28/08/25
NAV	44,198
Market cap	19,828
-55%

Catalysts

There are strong KPI incentives in place for management if the NAV discount gets to 50%, ROE> Cost of equity at 13-14% and over 1x PB by 2027.

Source: SK Square company presentation Q2 2025

The NAV discount has been narrowed by:

1) Aggressive share buybacks (c.9% of total outstanding). Critically, all shares bought back are to be cancelled. At the March AGM, another batch of buyback of 100bn won was announced on top of the 300bn and 200bn buybacks in 2023 and 2024.

Source: SK Square company presentation Q2 2025

2) Non-core divestments by reducing the number of entities from 43 to 20 this year. They are hoping to de-risk the portfolio, boost cash flows and shareholder returns.

Source: SK Square company presentation Q2 2025

3) Payout of at least 50% of recurring portfolio dividend income to investors.

Source: SK Square company presentation Q2 2025

Our base case is for NAV discount to narrow to 40% over medium term, the historic average of holdco discounts in South Korea.

Source: CLSA, DART

Narrowing the discount to this level implies significant upside in the stock.

In addition, dividends from SK Hynix will amount to 3tn won by 2027, which can be deployed.

They have sold an SK Shieldus (Cybersecurity) stake to a PE fund and the cash received in Q3 2025 (510bn won) could be deployed to further boost shareholder returns.

For the remaining unlisted companies, management is yet to outline plans for further asset sales. More clarity here would boost the stock.

Additional tailwinds may come from the next batch of share buybacks to be announced in Q4. The pace and magnitude will be key. SK Hynix coming back in focus as an AI play is an added tailwind.

Risks

The board of directors may not go as far as investors expect to sustainably narrow the NAV discount from 75% in 2022 to 50%.
Disappointment over the cadence and magnitude of share buybacks.
Chairman Myung is trying to turn some portfolio companies around to be EBITDA positive, but the labour union is in the way. (We are still seeing some progress i.e., portfolio company TMAP turned an operating profit in Q2 2025).
The pace of divestments could be slower than anticipated, as assets require proper packaging to sell them at a good valuation.
Volatility in the stock adding to beta to the portfolio.
An SK Hynix downcycle and share price downturn will trigger a bigger correction in SK Square.

Summary

Overall, SK Square is just one example of how South Korea’s Value-Up program can act as a catalyst for managers to sharpen up capital allocation and sweat their assets harder. Much will depend on the government’s willingness to pressure corporates to continue value-enhancing efforts through further legislative and regulatory reform. The momentum is positive, and if sustained could lead to a full market re-rating.

The foundation of traditional Chinese medicine is Qi – the life force or energy that flows through a body. If, for any reason, the Qi in your body was to go out of balance or get blocked, one would end up falling ill. A wide range of plant- and animal-based medicines would then be used to unblock those pathways and to restore the balance of Yin and Yang in the body.

While traditional Chinese medicine techniques like cupping and acupuncture gain popularity both at home and abroad, China has been quietly making giant strides in the traditional pharmaceutical and biotechnology sectors. In the past, it applied the principles of scale and an integrated supply chain to manufacture inexpensive generics faster and cheaper than its competitors.

Cut to present day, China’s pharmaceutical industry is on the cusp of becoming a global leader in both drug discovery and development. According to Morgan Stanley, annual revenues from drugs originating in China could reach USD$34 billion by 2030 and USD$220 billion by 2040. Currently, drugs from China account for only 5% of all USFDA approvals, but that is estimated to rise to 35% by 2040. So how did China go from a middling pharma player to the hot house of innovation and manufacturing that we see today?

Broadly, we can trace three key factors that are fueling this boom:

Reforms – The comprehensive series of reforms needed to move the needle in this space did not happen overnight. Over the last decade, China has made a deliberate push to move from a large-scale generics manufacturer to an innovation powerhouse by pushing through the following reforms.

- Increasing innovative drug approvals – In 2017, measures were introduced to reduce the review timeline of innovative drugs to 60 days, increasing the efficiency of the drug development process. The result has been a record 93 drugs receiving first approval from the National Medical Products Administration (NMPA) in China in 2024 with China surpassing Europe and Japan as the second largest country to receive first approvals.
- Investment inflows – Funding is crucial for innovation and reforms such as 18A listing rules in Hong Kong and the launch of STAR Market (touted as Shanghai’s equivalent to NASDAQ) allowed pre-revenue biotech companies to list and raise money.
- Globalization – In response to intense competition at home, Chinese pharmaceutical companies have started to spread their wings abroad through strategic partnerships. This is being executed by applying for global approvals for drugs developed in China and through so called out-licensing agreements, where Chinese companies further the development of their unique IP by leveraging the R&D and commercialization network of western pharma giants.

Speed – To accelerate development of novel drugs, China’s regulator is proposing to further cut the clinical trial review period from 60 to 30 working days, matching the time line of USFDA. The presence of large pools of patients in Chinese cities further expedites the go-to-market process.
Talent – China graduates around five million science, technology, engineering and mathematics (STEM) graduates every year. The recent crackdown in immigration in the United States has led many talented Chinese scientists and professionals (nicknamed “sea turtles”) to return home. The recent announcement by the Chinese government of the K visa program could further accelerate this trend.

This combination of speed, abundance of talent and structural reforms could throw up multiple opportunities in the Chinese pharma space. It is next to impossible to predict which company could win the next out-licensing deal. Similarly, picking the next big biopharma product requires a high degree of technical expertise. Hence our investment in Sunresin New Materials Co. Ltd. (300487 CH) takes a picks and shovel approach to this space.

Sunresin is a specialty resin manufacturer, making more than 200 different types of resin for a variety of applications from purifying water, extracting lithium to serving as an enzyme carrier for drug development including GLP-1 drugs. While its life sciences business makes up about a fourth of its revenue, given the trends discussed above, the growth opportunities and potential runway could be enormous.

The consumables that Sunresin manufactures have high barriers to entry, more stable risk profiles vs. betting on winning drugs and underlying high growth in total addressable market. Its products are used both for upstream synthesis of various active pharmaceutical ingredients (APIs) and for downstream separation and purification that determines the final quality of the drug.

Key trends that underpin Sunresin’s growth include:

Growth of the biologics (large molecules) market that is growing faster than the chemical drug (small molecules) market. Biologics production has an upstream API synthesis phase that requires carriers and a downstream purification phase that requires chromatographic media (CM) to capture target molecules.
Sunresin produces both upstream carriers (for both large and small molecules) and downstream chromatographic media. Entry barriers are high as both products can make up 15–40% of production cost and are crucial to the final quality of the drug. Switching suppliers by commercial drug makers can be costly and time consuming.
Rise of import substitution in China and rise of overseas opportunities from out-licensing deals could further underpin growth.
Build out of new high-end life sciences capacity that could support 10x of current sales.

Between its proven products, new capacities and tailwinds from the growth of biologics and the larger China bio pharma sector, we see Sunresin as a key winner in the race to find the new blockbuster drugs on the back of China’s booming pharmaceutical sector.

For decades, the strategic asset allocation (SAA) process has provided institutional investors with a structured, benchmark-driven framework for managing portfolios. This approach, grounded in academic research and modern portfolio theory, has helped countless boards and investment committees move beyond the classic 60/40 equity/fixed income allocation to embrace a more diversified mix.

As the investment landscape evolves, some of the world’s largest investors are transforming their processes, adopting an innovative total portfolio approach (TPA) that treats the portfolio as a single, dynamic entity rather than a collection of separate asset classes. This article explores the evolution of asset mix strategies, the merits and limitations of SAA and the promise and challenges of a TPA.

The evolution of asset mix strategies

Institutional investors have experienced significant changes in their asset mix over the years. The classic 60/40 model dominated for decades, until Yale’s David Swensen and Dean Takahashi pioneered a shift toward alternative investments in the late 1980s and early 1990s. By introducing private equity, hedge funds, real estate and natural resources, they revolutionized asset allocation and diversified portfolios beyond traditional boundaries.

As other institutions moved beyond the 60/40 allocation, the SAA framework became a critical tool for guiding long-term asset mix targets, based on investment objectives, risk tolerance, liquidity needs and time horizon.

Advancements in technology and greater access to data are transforming how financial markets operate and how portfolios are managed. Investors can now better understand the impact of their decisions, enabling more dynamic and informed portfolio management, which has led to the TPA becoming the latest evolution. It offers valuable concepts for all investors, even though it remains the domain of the largest global institutions.

The enduring appeal of SAA

The SAA process is intuitive and provides a quantitative discipline for establishing asset mix. Its enduring appeal lies in its accessibility, where any investor, regardless of size, can use it. At its heart, the SAA process is about enhancing diversification – which can reduce risk without sacrificing target returns – or enabling higher returns while keeping risk consistent.

The process begins with defining investment objectives, time horizon, risk comfort, and liquidity needs. Based on these metrics, investors analyze expected performance and volatility to determine potential mixes, but with a general prioritization on relative returns. The final asset mix decision often hinges on which asset classes a board or investment committee is most comfortable with.

Once selected, the mix is refined, which can imply adding new asset classes or investment managers to the mix, or simply tweaking the allocations among the existing asset classes and managers. The portfolio is monitored against objectives and benchmarks, ensuring ongoing vigilance and adaptability as market conditions evolve.

Limitations and disconnects in SAA

While the SAA framework has stood the test of time, it is not without flaws. A common critique is the disconnect between asset allocation design and manager selection. When these steps are managed separately, inefficiencies can arise, reducing diversification benefits. This separation can also result in the portfolio’s risk-return experience deviating from the intended profile, especially when too much focus is placed on past performance during manager selection, overlooking risk.

Adding new asset classes and investment managers typically requires a formal review, slowing down the ability to respond to evolving market conditions. Long-term capital market assumptions guide SAA decisions, but their reliability is questionable. Studies show that while return forecasts often miss the mark, risk forecasts tend to be more consistent with actual outcomes. This suggests that focusing on managing risk may be wiser than chasing returns.

What is a total portfolio approach?

Unlike the traditional SAA model, where asset classes are managed in silos, the TPA treats the portfolio as one unified whole. Every investment decision is evaluated for its impact on the overall risk and return of the portfolio, with a particular focus on risk. This holistic, agile approach leverages cross-asset expertise and enables teams to respond quickly to changing market dynamics.

However, adopting a TPA is not simply an investment process shift; it is a cultural transformation. Organizations must move beyond managing asset-class silos to embrace a unified portfolio model, requiring bold changes in culture and governance. Boards and investment committees need to delegate more decision-making authority and empower CIOs and internal investment teams. Under the TPA, collaboration across specialist disciplines and alignment of incentives are essential for total portfolio success.

Who is leading the way?

The TPA was initially adopted by the world’s largest investors, such as the Australian Future Fund, Canada’s CPP Investments, the New Zealand Superannuation Fund, and GIC, Singapore’s Sovereign Wealth Fund. These institutions have the scale to integrate investment teams and create collaborative environments necessary for a TPA to work. The TPA philosophy began to take formal shape around 2006, but its roots go back further, notably to TRW in the early 1990s, where Chief Investment Officer Bob Hamje shifted the focus from individual mandates to total portfolio performance, rewarding managers for collaboration and overall success.

SAA versus TPA: Comparative perspective

The table highlights key differences between SAA and TPA.

Characteristic	Strategic asset allocation (SAA)	Total portfolio approach (TPA)
Performance assessed versus:	Asset class benchmarks	Fund-level goals and reference portfolio
Success measured by:	Relative value added	Total fund return
Opportunities for investment defined by:	Asset classes	Contribution to total portfolio outcome
Diversification achieved through:	Asset classes	Risk factors
Asset allocation determined by:	Board-centric process	CIO-centric process
Portfolio implemented by:	Multiple teams competing for capital	One team collaborating across strategies

Source: Thinking Ahead Institute

The move from SAA to TPA represents a significant transformation. With SAA, success is defined by performance relative to a total fund benchmark, which is calculated as a weighted average of the benchmarks for each asset class. The TPA, on the other hand, measures success against fund-level goals, typically guided by a reference portfolio.

Under SAA, each asset class is selected for its role in meeting return, risk, diversification, and liquidity objectives. The TPA shifts emphasis to understanding how each investment opportunity contributes to the overall portfolio outcome, with risk factors and risk premia shaping both strategy and results. This approach allows for more robust stress testing under different macroeconomic regimes, providing a clearer understanding of a portfolio’s resilience.

Perhaps the most profound change under the TPA is the shift in culture and governance. Decision making moves from being board-centric to being centered on the CIO and investment team, fostering collaboration and accountability for total portfolio outcomes.

Challenges of TPA

While the appeal of TPA is clear, it can be challenging to implement. The challenges are not just technical but also cultural and governance related. TPA empowers the CIO with greater investment discretion, opening the door to more dynamic portfolio management. Many funds adopting TPA use a reference portfolio, typically comprised of equities and fixed income, as an additional benchmark, but this can lead to counterfactual thinking and misplaced concerns if the more diversified TPA portfolio underperforms the reference portfolio over shorter-term periods.

The TPA also demands significant investment in data and infrastructure for risk analysis, making it challenging for smaller funds to contemplate. In addition, assessing individual manager contributions becomes more nuanced. Under the TPA success is measured by the impact on overall portfolio outcomes rather than asset-class benchmarks, which makes it more challenging to appreciate individuals’ or specific teams’ contributions.

Practical lessons for all investors

While a full TPA may be beyond the reach of most investors, elements of the approach can strengthen decision-making and improve outcomes, including:

Reframing objectives to focus on total portfolio outcomes and have less emphasis on relative returns.
Enabling greater investment flexibility through governance education that engages the board early in the review process with the goal of obtaining comfort with a broader set of investments.
Shifting emphasis from return forecasts to risk expectations, since the evidence suggests risk forecast tend to be more dependable than return forecasts.
Enhancing implementation through completion portfolios to maintain the total portfolio’s alignment with long-term objectives.

Conclusion

Although the total portfolio approach has so far been adopted by the largest funds, its lessons are relevant to all investors. The emphasis on risk, alignment with long-term goals, and more flexible governance point to a more resilient and responsive way of managing portfolios.

Even if a full TPA is not practical today for smaller investors, there is real value in adopting elements of the approach and weaving its philosophy into board discussions and asset allocation processes over time.