Diversified exposure to emerging markets, capturing value and growth

The Emerging Markets strategy invests primarily in common stocks of emerging markets companies. The strategy combines value and growth, and bottom-up and top-down factors. Our quantitative stock selection process is focused on attractively valued companies with superior earnings prospects and positive market sentiment; these companies should produce consistent returns across investment cycles. We use the same approach to select sectors and countries, comparing valuation against earnings growth and market sentiment. At the country level, we also consider the health of the macro-economy. Our quantitative process seeks to combine these factors while attempting to avoid undue sources of risk, which for this strategy we define as tracking error (a measurement of dispersion from a benchmark index).

Benchmark
MSCI Emerging Markets
Inception
March 29, 2007

Strategy overview

The portfolio managers discuss our Emerging Markets Equity strategy.

Portfolio managers

Head of Quantitative Research
Quantitative Portfolio Manager
Quantitative Portfolio Manager
Quantitative Portfolio Manager

Performance

QTD YTD 1 year3 years5 years10 years Since inception
Strategy (gross) -22.8%-22.8%-16.2%-2.2%-0.6%3.1%3.1%
Strategy (net) -22.9%-22.9%-17.0%-3.1%-1.5%2.1%2.1%
MSCI Emerging Markets -23.6%-23.6%-17.4%-1.3%0.0%1.0%1.7%
QTD YTD 1 year3 years5 years10 years Since inception
Strategy (gross) -22.8%-22.8%-16.2%-2.2%-0.6%3.1%3.1%
Strategy (net) -22.9%-22.9%-17.0%-3.1%-1.5%2.1%2.1%
MSCI Emerging Markets -23.6%-23.6%-17.4%-1.3%0.0%1.0%1.7%
QTD YTD 1 year3 years5 years10 years Since inception
Strategy (gross) -22.8%-22.8%-16.2%-2.2%-0.6%3.1%3.1%
Strategy (net) -22.9%-22.9%-17.0%-3.1%-1.5%2.1%2.1%
MSCI Emerging Markets -23.6%-23.6%-17.4%-1.3%0.0%1.0%1.7%
QTD YTD 1 year3 years5 years10 years Since inception
Strategy (gross) -22.8%-22.8%-16.2%-2.2%-0.6%3.1%3.1%
Strategy (net) -22.9%-22.9%-17.0%-3.1%-1.5%2.1%2.1%
MSCI Emerging Markets -23.6%-23.6%-17.4%-1.3%0.0%1.0%1.7%
Fund 201920182017201620152014201320122011201020092008
Strategy (gross) 18.1%-16.8%41.1%10.5%-15.1%3.4%-1.3%27.5%-17.0%28.0%90.5%-57.8%
Strategy (net) 17.1%-17.5%39.8%9.4%-16.0%2.4%-2.3%26.2%-17.9%26.7%88.7%-58.2%
MSCI Emerging Markets 18.9%-14.2%37.8%11.6%-14.6%-1.8%-2.3%18.6%-18.2%19.2%79.0%-53.2%
Strategy (gross)
Strategy (net)
MSCI Emerging Markets
201920182017201620152014201320122011201020092008
18.1%-16.8%41.1%10.5%-15.1%3.4%-1.3%27.5%-17.0%28.0%90.5%-57.8%
17.1%-17.5%39.8%9.4%-16.0%2.4%-2.3%26.2%-17.9%26.7%88.7%-58.2%
18.9%-14.2%37.8%11.6%-14.6%-1.8%-2.3%18.6%-18.2%19.2%79.0%-53.2%

Portfolio (as of February 29, 2020)

Benchmark: MSCI Emerging Markets
Asset Allocation
Strategy
Stocks 97.9%
Cash 2.1%
Strategy Characteristics
Strategy Benchmark
No. of holdings 122 1400
Weighted avg. market cap (US $MM) $97,192 $81,270
NTM price/earnings 9.5 11.7
Price/book value 1.4 1.6
Dividend yield (%) 3.3 2.7
NTM EPS revision (wtd. avg) -7.7 -7.8
TOP 10 ACTIVE HOLDINGS
Security Country Active weight*
China Construction Bank Corp. China 2.1%
Samsung Electronics Co., Ltd. South Korea 2.0%
Investimentos Itau Brazil 1.4%
Lukoil Russia 1.3%
Anhui Conch Cement Co., Ltd. China 1.3%
Tencent Holdings Ltd. China 1.3%
JBS SA Brazil 1.2%
Ping An Insurance Group Co Of China 1.1%
Sberbank Russia 0.9%
CNOOC Ltd. China 0.9%

A "weighted average” measures a characteristic by the market capitalization of each stock. Price/book ratio is the weighted average of the price/book ratios of all the stocks in a portfolio. The P/B ratio of a company is calculated by dividing the market price of its stock by the company’s per-share book value. The price/earnings ratio is the weighted average of the price/earnings ratios of the stocks in a portfolio. “Earnings-per-share” is the portion of a company’s profit allocated to each outstanding share of common stock. “Earnings-per-share year-over-year estimate growth (next 12 months)” is the average next-twelve-month earnings-per-share estimate from one year ago for an individual company compared with that estimate today; note that this calculation is done on a company by company basis and is aggregated through a weighted average based on the individual company’s weight in the corresponding index. Also note that this characteristic is supplied directly by MSCI.

*Active defined as Portfolio weight minus MSCI EM Index weight. Holdings are subject to change.

SECTOR WEIGHTS
Sector Strategy Benchmark
Financials 21.9% 23.5%
Information Technology 20.3% 16.4%
Consumer Discretionary 13.2% 14.6%
Communication Services 12.7% 11.9%
Energy 7.9% 6.6%
Consumer Staples 5.5% 6.3%
Materials 5.4% 7.0%
Industrials 3.3% 5.2%
Equity Funds 2.4% 0.0%
Real Estate 2.3% 2.9%
Health Care 2.1% 3.1%
Utilities 0.8% 2.5%
TOP 10 COUNTRIES
Country Strategy Benchmark
China 39.4% 36.4%
South Korea 13.2% 11.4%
Taiwan 12.9% 12.1%
Brazil 8.8% 6.7%
India 8.6% 8.8%
Russia 7.0% 3.6%
Mexico 1.7% 2.3%
Thailand 1.6% 2.3%
South Africa 1.0% 4.2%
Turkey 0.8% 0.5%
Regional Allocation
  • Emerging Asia 76.8%
  • Emerging Latin America 11.0%
  • Emerging Europe, Middle East, Africa 10.1%

Commentary (As of February 29, 2020)

Highlights

  • In February, concerns regarding the spread of the novel coronavirus, COVID-19, weighed on global growth expectations and drove equity markets lower.
  • In addition to China, other EM countries have enacted stimulus to offset the slowdown resulting from COVID-19.
  • In the Portfolio, we continue to emphasize sectors with attractive valuation and earnings growth characteristics.

Portfolio attribution

The Portfolio outperformed the Index in February 2020. We use both bottom-up “stock-specific” and top-down factor categories to seek to forecast alpha for the stocks in the Portfolio's investable universe. Our bottom-upprice momentum and earnings growth factors were positive indicators in February. While trailing significantly over the prior one-year period, our value factor was a positive indicator during the month. Our four top-down factors – macroeconomic, country, sector, and currency – were all positive indicators in February.

Investment outlook

In the Portfolio, we continue to emphasize sectors with attractive valuation and earnings growth characteristics. EM earnings growth expectations relative to developed markets excluding the US have stabilized as the coronavirus spreads globally. Despite the disruptive impact of COVID-19 on the information technology (“IT”) supply chain, IT continues to be the only sector in EM that experienced net analysts' projected earnings positive upgrades over the last three months. We maintain our largest sector overweight to IT given this attractive earnings growth. The energy sector experienced the largest net earnings growth downgrades over the last three months as oil prices have cratered. We are overweight the energy sector in the Portfolio due to attractive valuations.

We maintain a value emphasis in our multi-factor quantitative process. The MSCI EM Value Index is trading at a wide discount to the MSCI EM Growth Index, particularly after weak performance in calendar year 2019 and over the 2020-to-date period. Using these indices’ valuations, investors are paying over twice as much for each dollar of next year’s earnings from growth stocks than they pay for earnings from value stocks, while the dividend yield for growth stocks is less than half that of value stocks. Value tends to underperform in times of uncertainty, but given these wide disparities between growth and value, as more clarity emerges on the coronavirus situation globally, we believe value factor performance will recover.

The market commentary expresses the portfolio managers’ views as of the date of this report and should not be relied on as research or investment advice regarding any stock. These views and the portfolio holdings and characteristics are subject to change. There is no guarantee that any forecasts made will come to pass. The securities identified and described above do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in the securities identified was or will be profitable. Past performance does not guarantee future results. For a description of our performance attribution methodology, or to obtain a list showing every holding's contribution to the overall account's performance during the quarter, please contact our product manager, Kevin Moutes, at 310-231-6116 or [email protected].