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) -5.7%-5.7%2.2%7.0%4.0%6.1%4.8%
Strategy (net) -5.8%-5.8%1.3%6.0%3.0%5.1%3.8%
MSCI Emerging Markets -4.7%-4.7%4.2%8.3%4.9%4.1%3.5%
QTD YTD 1 year3 years5 years10 years Since inception
Strategy (gross) -5.7%-5.7%2.2%7.0%4.0%6.1%4.8%
Strategy (net) -5.8%-5.8%1.3%6.0%3.0%5.1%3.8%
MSCI Emerging Markets -4.7%-4.7%4.2%8.3%4.9%4.1%3.5%
QTD YTD 1 year3 years5 years10 years Since inception
Strategy (gross) 12.4%18.1%18.1%11.5%5.4%6.0%5.3%
Strategy (net) 12.1%17.1%17.1%10.5%4.4%5.0%4.3%
MSCI Emerging Markets 11.9%18.9%18.9%12.0%6.0%4.0%3.9%
QTD YTD 1 year3 years5 years10 years Since inception
Strategy (gross) 12.4%18.1%18.1%11.5%5.4%6.0%5.3%
Strategy (net) 12.1%17.1%17.1%10.5%4.4%5.0%4.3%
MSCI Emerging Markets 11.9%18.9%18.9%12.0%6.0%4.0%3.9%
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 January 31, 2020)

Benchmark: MSCI Emerging Markets
Asset Allocation
Strategy
Stocks 98.1%
Cash 1.9%
Strategy Characteristics
Strategy Benchmark
No. of holdings 127 1401
Weighted avg. market cap (US $MM) $93,178 $78,987
NTM price/earnings 9.7 12.1
Price/book value 1.4 1.6
Dividend yield (%) 3.3 2.7
NTM EPS revision (wtd. avg) 5.3 0.7
TOP 10 ACTIVE HOLDINGS
Security Country Active weight*
China Construction Bank Corp. China 1.9%
Samsung Electronics Co., Ltd. South Korea 1.9%
Lukoil Russia 1.5%
Investimentos Itau Brazil 1.5%
JBS SA Brazil 1.3%
Tencent Holdings Ltd. China 1.1%
Ping An Insurance Group Co Of China 1.1%
Anhui Conch Cement Co., Ltd. China 1.1%
Sberbank Russia 1.1%
Gazprom PJSC Russia 1.0%

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 22.2% 23.8%
Information Technology 20.2% 16.1%
Consumer Discretionary 12.8% 14.3%
Communication Services 11.7% 11.4%
Energy 8.7% 7.1%
Consumer Staples 5.7% 6.5%
Materials 5.5% 7.3%
Industrials 3.7% 5.2%
Equity Funds 2.3% 0.0%
Real Estate 2.3% 2.8%
Health Care 2.2% 3.0%
Utilities 0.9% 2.7%
TOP 10 COUNTRIES
Country Strategy Benchmark
China 37.1% 34.2%
South Korea 13.6% 11.6%
Taiwan 13.0% 11.7%
Brazil 9.5% 7.3%
India 8.3% 9.0%
Russia 7.7% 4.0%
Thailand 1.9% 2.5%
Mexico 1.8% 2.4%
South Africa 1.2% 4.5%
Turkey 1.0% 0.5%
Regional Allocation
  • Emerging Asia 74.9%
  • Emerging Latin America 12.0%
  • Emerging Europe, Middle East, Africa 11.2%

Commentary (As of January 31, 2020)

Highlights

  • Concerns regarding the coronavirus outbreak in China weighed on emerging markets (“EM”) equities in January.
  • Given the severe market reaction to the coronavirus outbreak, investors are implying that the negative impact from the virus will more than offset the positives from the January 15th signing of the Phase 1 US-China trade deal.
  • Value stocks tend to underperform in “risk-off” environments so we would not expect a rebound in value stock performance until there is more clarity on the coronavirus situation. However, given EM growth stocks are trading at a historically large premium to value stocks, we believe that value stocks could rally when there is more clarity around the outbreak.

Portfolio attribution

The Portfolio underperformed the Index in January 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 value factor was our weakest performing bottom-up indicator in January. Our bottom-up price momentum and earnings growth factors were both positive indicators during the month. Of our top-down factors, country and sector were negative indicators. Our macroeconomic and currency factors were positive indicators during the period.

Investment outlook

Earnings growth expectations for EM companies declined relative to other regions in recent weeks as analysts incorporated the potential effects of the coronavirus outbreak. In China, companies are beginning to experience net earnings growth downgrades for the first time in a number of months. From a sector perspective, information technology companies have been particularly impacted as China is a large consumer of technology goods and services and the country is a key constituent in supply chains. We are overweight the information technology sector within the Portfolio as earnings growth and momentum characteristics remain attractive.

The external shock caused by the coronavirus outbreak also impacted value stocks. In January, the MSCI Emerging Markets Value Index underperformed the MSCI Emerging Markets Growth Index by 4.1%. Our value factor also underperformed during the month. Value stocks tend to underperform in “risk-off” environments so we would not expect a rebound in value stock performance until there is more clarity on the coronavirus situation. However, given EM growth stocks are trading at a historically large premium to value stocks, we believe that value stocks could rally when there is more clarity around the outbreak.

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].