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

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) 3.8%3.8%30.1%3.6%15.0%5.7%6.4%
Strategy (net) 3.8%3.8%29.0%2.7%13.9%4.7%5.4%
MSCI Emerging Markets 3.1%3.1%28.3%4.8%15.4%4.6%5.1%
QTD YTD 1 year3 years5 years10 years Since inception
Strategy (gross) 3.8%3.8%30.1%3.6%15.0%5.7%6.4%
Strategy (net) 3.8%3.8%29.0%2.7%13.9%4.7%5.4%
MSCI Emerging Markets 3.1%3.1%28.3%4.8%15.4%4.6%5.1%
QTD YTD 1 year3 years5 years10 years Since inception
Strategy (gross) 19.8%18.1%18.1%5.1%12.6%5.2%6.2%
Strategy (net) 19.6%17.1%17.1%4.2%11.6%4.2%5.2%
MSCI Emerging Markets 19.8%18.7%18.7%6.6%13.2%4.0%4.9%
QTD YTD 1 year3 years5 years10 years Since inception
Strategy (gross) 19.8%18.1%18.1%5.1%12.6%5.2%6.2%
Strategy (net) 19.6%17.1%17.1%4.2%11.6%4.2%5.2%
MSCI Emerging Markets 19.8%18.7%18.7%6.6%13.2%4.0%4.9%
Fund 2020201920182017201620152014201320122011201020092008
Strategy (gross) 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) 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 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
2020201920182017201620152014201320122011201020092008
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%
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%
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 January 31, 2021)

Benchmark: MSCI Emerging Markets
Asset Allocation
Strategy
Stocks 99.1%
Cash 0.9%
Strategy Characteristics
Strategy Benchmark
No. of holdings 117 1379
Weighted avg. market cap (US $MM) $174,125 $145,130
NTM price/earnings 11.9 15.0
Price/book value 1.7 2.1
Dividend yield (%) 2.0 1.8
NTM EPS revision (wtd. avg) 22.9 14.2
TOP 10 ACTIVE HOLDINGS
Security Country Active weight*
China Construction Bank China 2.0%
Tencent Holdings China 2.0%
TSMC Taiwan 1.3%
KIA Motors South Korea 1.2%
Jd.com China 1.0%
Baidu China 1.0%
HON Hai Precision Industry Co Taiwan 0.9%
Mediatek Taiwan 0.9%
CIA Vale Do Rio Doce Brazil 0.8%
Hindalco Industries India 0.8%

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 24.6% 20.9%
Consumer Discretionary 16.7% 19.3%
Financials 15.5% 17.1%
Communication Services 13.3% 12.3%
Materials 8.3% 7.4%
Equity Funds 5.5% 0.0%
Energy 4.1% 4.6%
Consumer Staples 3.9% 5.7%
Health Care 3.2% 4.7%
Industrials 2.7% 4.2%
Real Estate 1.3% 1.9%
Utilities 0.2% 1.9%
TOP 10 COUNTRIES
Country Strategy Benchmark
China 37.8% 40.1%
South Korea 17.6% 13.3%
Taiwan 16.7% 13.3%
India 9.0% 8.9%
Brazil 5.6% 4.6%
Russia 3.7% 2.8%
South Africa 2.3% 3.5%
Mexico 1.9% 1.6%
Saudi Arabia 1.1% 2.4%
Malaysia 1.0% 1.4%
Regional Allocation
  • Emerging Asia 83.7%
  • Emerging Latin America 7.9%
  • Emerging Europe, Middle East, Africa 7.5%
  • Multi Region Emerging (ETF) 0.0%

Commentary (As of January 31, 2021)

Highlights

  • Propelled by Chinese stocks, emerging market (“EM”) equities delivered positive returns in January.
  • Given the Democrats control both branches of US Congress, albeit with a slim majority, we believe the prospects for sizable fiscal stimulus have improved. The potential impact on EM assets is multi-faceted. Fiscal stimulus should bolster global growth, which would be a positive for EM. However, it would also decrease the need for monetary stimulus, which would likely be a negative for EM assets.
  • In addition to our growth, valuation, and price momentum factors, we recently added a bottom-up competitive strength factor to our model. The new alpha factor examines current levels and longer-term trends in a broad range of metrics relevant to competitive strength: margins, returns, competition, industry structure, market share, and balance sheet strength. Based on our research, the competitive strength factor is a good complement to our value factor, which continues to be the dominant indicator in our model.

Portfolio attribution

The Portfolio outperformed the Index in January 2021. 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 new competitive strength factor was the best performing bottom-up indicator in January. Our bottom-up growth and valuation factors were also positive indicators during the month. Our bottom-up price momentum factor was a negative indicator. Of our top-down factors, currency and macroeconomic were positive indicators while sector and country were negative.

Investment outlook

Earnings growth prospects have continued to rebound for many EM companies. Earnings growth upgrades exceeded downgrades in all but three sectors – real estate, consumer discretionary, and consumer staples. We are underweight each of these sectors in the Portfolio due in part to low earnings growth expectations. The materials, information technology, and financials sectors have exhibited the strongest net upgrades. From a country perspective, net earnings growth upgrades have been the most compelling in Taiwan, Russia, and India. In addition to our growth, valuation, and price momentum factors, we recently added a bottom-up competitive strength factor to our model. The new alpha factor examines current levels and longer-term trends in a broad range of metrics relevant to competitive strength: margins, returns, competition, industry structure, market share, and balance sheet strength. The factor has quality aspects as it highlights companies with increasing profit margins and returns on equity. This indicator also seeks to identify companies that operate in environments with few competitors and enjoy significant market share. Given these favorable competitive dynamics, these companies should be better positioned to sustain their strong performance. The factor also includes a balance sheet strength component that considers financial leverage and default risk. Based on our research, the competitive strength factor is a good complement to our value factor, which continues to be the dominant indicator in our model.

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].