In the latter part of 2018, the emergence of the African swine fever epidemic in China began to take hold. Mainstream media coverage of this intricate situation was minimal, and there was limited analysis of its repercussions throughout the value chain. MGold Insights took the initiative to investigate the matter in October 2018, well ahead of media and analysts, aiming to gain deeper insights into the on-ground situation and assess the potential impact on supply chain companies.

Research Insight

MGold insights consumer teams in the United States and China conducted a thorough analysis of the situation, meticulously mapping out the complete supply chain of the largest global pork producers. Our research efforts involved approximately 10 interviews across three continents, engaging specialists from prominent global pork producers as well as local Chinese pork producers. Through these interviews, we uncovered crucial insights into the evolving situation, including the significant underreporting of the decline in pig numbers in China. This research proved instrumental in helping our clients comprehend the potential scale and subsequent consequences of the virus on pig producers and processors across Asia, the United States, and Europe. Furthermore, it shed light on the potential ramifications for both public and private companies, such as TSN, JBSS3, SEB, Simmons Foods, CWK, Muyuan Foods, Wen's Poultry, and Shuanghu.

1. Outcome

   MGold insights Forum's swift response to the situation involved mobilizing pan-regional specialists and conducting thorough interviews with insightful and contextual questions. This proactive approach allowed us to deliver timely, pertinent, and practical insights to investors. Importantly, we provided these valuable insights even before the epidemic received attention in mainstream media or sell-side research, giving our clients a competitive edge in their decision-making processes.

2. Client-Specific Research: bfinance conducted a comprehensive review of the portfolio and found it to be well-diversified, with a diversification ratio of 51.7%. This ratio effectively reduced undiversified volatility from 3.2% to 1.6% per annum. Identifying Potential Sources of Risk: The liquid alternatives portfolio focused on alternative risk premia (ARP) and equity market neutral strategies. The team observed a potential over-allocation to equity long-short strategies, which posed direct and indirect risks to the portfolio. Analyzing Portfolio Volatility Drivers: A significant risk overweight was identified in the volatility premium, which accounted for 23% of the portfolio and relied on short volatility exposure. The team also noted a bias towards systematic strategies (75%) compared to discretionary approaches (25%) and a preference for fundamentals-driven strategies over market stress-driven ones.

3. Portfolio Reconceptualization:

   Through quantitative and qualitative assessments, bfinance identified high-quality multi-strategy managers as core holdings that aligned with the client's objectives. They recommended sizing mandates of other single-strategy managers as high-alpha satellite allocations.

Accommodating Future Asset Growth: To accommodate future asset growth, bfinance proposed a core-satellite approach. This would allow the client's in-house team to focus on selecting and sizing satellite allocations, while the alternative risk premia/multi-strategy "core" would efficiently handle excess cash without impacting the satellite portfolio weights.