Jai Jacob, managing director and fund manager in Lazard Asset Management’s multi-asset investment team, creates his own asset classes because traditional subdivisions no longer suffice. Most recently, he created sustainable agriculture. He also takes a different view of emerging markets because this universe has become predominantly China, just at a time when Chinese markets are reeling.
US-China relations
For Jacob, the biggest risk for the markets is the Sino-US trade relations and he said that they are not improving. “It does seem that the markets ignore any deterioration after a while, allowing another step down in those relations.” For him, the current steps that China is taking internally are not so strange. “For the Chinese government, there are three things that it describes as the three Big Burdens: education, healthcare and housing. And it believes that, given their social character, no billionaires should be created here, or worse, be allowed to take over.”
“A decade ago,” he continued, “China would never have dared take such steps for fear of scaring off foreign capital. Today, it doesn’t really need foreign capital any more because the domestic consumer market has become important enough.” And of course, according to him, the hard hand of the government is not a good evolution for an investor. “We have therefore significantly reduced our positioning in these three segments. And the risk around the big Chinese tech masterminds has to be looked at differently as a result.”
New asset classes
The Canadian, who works for Lazard in New York, also pointed out that the usual asset classes are no longer sufficient for a large investor. “If you look at the asset class of emerging markets today, it is mainly China. It has therefore become impossible to develop a vision of emerging markets that is not about China itself. And in order to get around this, we have recently started building our own asset classes. That is why you see thematic investing becoming more popular and traditional subdivisions such as large caps or certain geographical regions having less to offer.”
Jacob pointed out that if you expect something to manifest itself in the next 10 years, you have to give it a market interpretation yourself via a basket of shares or a fund. According to Jacob, this is how it works in practice. An investment must start with a certain observation. And this observation must be transformed into an investment opportunity. Then one must be able to categorise the concept and subdivide the problem into smaller segments.
He backed this up with an example. “Currently, there is so much focus on the climate change that is coming that many people lose sight of the fact that there is also such a thing as the climate change that we are experiencing today. And the technologies that are put into practice have to take into account the climate change of today, not just that of the future. And that is how we came to one of our new funds, Sustainable Agriculture. There is a global food shortage while at the same time the world population continues to grow. On top of that, agriculture is a major polluter. This can all be tackled by reducing the climate impact, optimising land use and water consumption, and so on.” He concluded that the addition of such funds gives you more options as an investor and you have to be less tactical. “After all, if you believe in the theme, you can include it in the portfolio for the next five years or more.”