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
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Strategy overview

The portfolio managers discuss our Emerging Markets Equity strategy.

Portfolio managers

Quantitative Portfolio Manager
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) 1.7%-17.9%-21.5%3.6%0.4%4.1%4.1%
Strategy (net) 1.5%-18.4%-22.3%2.7%-0.6%3.2%3.1%
MSCI Emerging Markets 0.3%-17.2%-21.5%3.1%1.0%3.3%2.9%
QTD YTD 1 year3 years5 years10 years Since inception
Strategy (gross) 1.7%-17.9%-21.5%3.6%0.4%4.1%4.1%
Strategy (net) 1.5%-18.4%-22.3%2.7%-0.6%3.2%3.1%
MSCI Emerging Markets 0.3%-17.2%-21.5%3.1%1.0%3.3%2.9%
QTD YTD 1 year3 years5 years10 years Since inception
Strategy (gross) -12.9%-19.3%-26.3%0.8%1.9%4.1%4.1%
Strategy (net) -13.1%-19.6%-27.0%-0.1%1.0%3.2%3.1%
MSCI Emerging Markets -11.3%-17.5%-25.0%0.9%2.5%3.4%3.0%
QTD YTD 1 year3 years5 years10 years Since inception
Strategy (gross) -12.9%-19.3%-26.3%0.8%1.9%4.1%4.1%
Strategy (net) -13.1%-19.6%-27.0%-0.1%1.0%3.2%3.1%
MSCI Emerging Markets -11.3%-17.5%-25.0%0.9%2.5%3.4%3.0%
Fund 20212020201920182017201620152014201320122011201020092008
Strategy (gross) -0.3%18.1%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) -1.2%17.1%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 -2.2%18.7%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
20212020201920182017201620152014201320122011201020092008
-0.3%18.1%18.1%-16.8%41.1%10.5%-15.1%3.4%-1.3%27.5%-17.0%28.0%90.5%-57.8%
-1.2%17.1%17.1%-17.5%39.8%9.4%-16.0%2.4%-2.3%26.2%-17.9%26.7%88.7%-58.2%
-2.2%18.7%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 August 31, 2022)

Benchmark: MSCI Emerging Markets
Asset Allocation
Strategy
Stocks 96.3%
Cash 3.7%
Strategy Characteristics
Strategy Benchmark
No. of holdings 182 1382
Weighted avg. market cap (US $MM) $64,605 $66,197
NTM price/earnings 6.4 11.1
Price/book value 1.1 1.7
Dividend yield (%) 5.1 3.3
NTM EPS revision (wtd. avg) 11.9 1.0
TOP 10 ACTIVE HOLDINGS
Security Country Active weight*
China Construction Bank Corp. China 1.9%
Banco do Brasil SA Brazil 1.4%
Kia Corp. South Korea 1.3%
PetroChina Co., Ltd. China 1.1%
PICC Property & Casualty Co., Ltd. China 1.1%
Hon Hai Precision Industry Co., Ltd. Taiwan 1.0%
Cosco Shipping Holdings Co China 0.9%
Daqo New Energy China 0.9%
Sun Pharmaceutical Industries Ltd. India 0.9%
JBS SA Brazil 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
Information Technology 20.0% 19.4%
Financials 19.4% 21.6%
Materials 9.4% 8.4%
Energy 9.3% 5.3%
Industrials 8.7% 5.8%
Consumer Discretionary 8.4% 14.2%
Consumer Staples 5.6% 6.2%
Communication Services 5.4% 10.1%
Equity Funds 4.2% 0.0%
Health Care 3.6% 3.9%
Utilities 1.9% 3.1%
Real Estate 0.4% 1.9%
TOP 10 COUNTRIES
Country Strategy Benchmark
China 31.7% 32.1%
Taiwan 13.6% 14.6%
India 13.6% 14.5%
South Korea 13.3% 11.6%
Brazil 6.6% 5.3%
Saudi Arabia 5.1% 4.6%
Thailand 3.1% 2.0%
Indonesia 2.5% 2.0%
United Arab Emirates 2.3% 1.3%
South Africa 2.0% 3.4%
Regional Allocation
  • Emerging Asia 78.1%
  • Emerging Europe, Middle East, Africa 10.7%
  • Emerging Latin America 7.6%

Commentary (As of August 31, 2022)

Highlights

  • In August, emerging market equity prices continued their third quarter rebound as the MSCI Emerging Markets (“Index”) returned 1.25% in local currency terms during the month.
  • In the current environment, the Fed is increasing interest rates at the front end of the yield curve, which is dampening global growth and reducing global liquidity. EM currencies have fared relatively well despite these headwinds due in part to the efforts of most EM central banks to increase their benchmark interest rates in anticipation of a Fed rate hiking cycle.
  • China remains a noteworthy outlier compared to other EM countries. The People’s Bank of China has been easing monetary policy as Covid-19 lockdowns have lowered growth and inflation expectations. Buoyed in part by accommodative monetary and fiscal policies, earnings growth estimates for Chinese companies have been improving.

Portfolio attribution

The Portfolio outperformed the Index in August 2022. 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-up growth and technical factors were positive indicators during the month. Our valuation and competitive strength factors were negative indicators. Of our top-down factors, our country and sector factors were positive indicators while our macroeconomic and currency factors were negative indicators in August.

Investment outlook

Earnings growth upgrades for EM equities continue to lag those in developed markets. From a country perspective, South Korea, South Africa, and Brazil had the weakest net upgrades. South Korea reflects slowing global growth via the country’s exposure to the information technology sector. South Africa and Brazil are commodity-oriented economies that have been impacted by falling commodity prices. We are overweight South Korean and Brazilian stocks in the Portfolio due to a combination of valuation, price momentum, and macroeconomic considerations. The countries with the strongest net upgrades were Indonesia, Saudi Arabia, and United Arab Emirates, in part reflecting relatively strong oil and coal prices. The EM sectors with the weakest upgrades were real estate, materials, and information technology. Real estate is primarily driven by slowing growth in the Chinese real estate sector, which is less impactful for China overall as the relative size of the sector has declined. Materials and information technology reflect the falling commodity prices resulting from a slowing global economy. The sectors with the strongest earnings growth upgrades were energy, consumer discretionary, and consumer staples. Energy companies continue to benefit from relatively high oil prices. The positive outlook for consumer discretionary companies reflects the encouraging results of Chinese online consumer companies. Consumer staples, a defensively-oriented sector, reflects the growing concern over an economic slowdown. While we incorporate growth expectations into our multi-factor investment process, we continue to emphasize valuation in our approach. With a balance of favorable valuation, growth, and price momentum characteristics relative to the Index, we believe the portfolio provides outperformance potential looking forward.

 

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].