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) 8.7%-16.1%-10.3%0.1%-0.5%3.8%3.8%
Strategy (net) 8.6%-16.3%-11.1%-0.8%-1.4%2.8%2.7%
MSCI Emerging Markets 9.2%-16.6%-11.7%0.9%0.3%1.8%2.4%
QTD YTD 1 year3 years5 years10 years Since inception
Strategy (gross) 8.7%-16.1%-10.3%0.1%-0.5%3.8%3.8%
Strategy (net) 8.6%-16.3%-11.1%-0.8%-1.4%2.8%2.7%
MSCI Emerging Markets 9.2%-16.6%-11.7%0.9%0.3%1.8%2.4%
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 April 30, 2020)

Benchmark: MSCI Emerging Markets
Asset Allocation
Strategy
Stocks 97.7%
Cash 2.3%
Strategy Characteristics
Strategy Benchmark
No. of holdings 116 1403
Weighted avg. market cap (US $MM) $104,020 $86,649
NTM price/earnings 10.2 12.5
Price/book value 1.3 1.5
Dividend yield (%) 3.3 2.8
NTM EPS revision (wtd. avg) -26.3 -29.1
TOP 10 ACTIVE HOLDINGS
Security Country Active weight*
Samsung Electronics Co., Ltd. South Korea 1.9%
China Construction Bank Corp. China 1.8%
Anhui Conch Cement Co., Ltd. China 1.5%
JBS SA Brazil 1.1%
Taiwan Semiconductor Manufacturing Co., Ltd. Taiwan 1.1%
Lukoil Russia 1.0%
Tencent Holdings Ltd. China 1.0%
Ping An Insurance Group Co Of China 0.9%
NEW Oriental Education & Techn China 0.8%
CNOOC Ltd. China 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 21.7% 17.0%
Financials 17.9% 20.9%
Communication Services 14.1% 13.0%
Consumer Discretionary 13.9% 15.3%
Energy 6.9% 6.2%
Materials 5.9% 7.0%
Consumer Staples 4.8% 6.6%
Equity Funds 3.9% 0.0%
Industrials 3.3% 5.0%
Health Care 2.5% 3.7%
Real Estate 2.2% 2.8%
Utilities 0.6% 2.6%
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 79.9%
  • Emerging Europe, Middle East, Africa 9.9%
  • Emerging Latin America 7.9%
  • Multi Region Emerging (ETF) 0.1%

Commentary (As of April 30, 2020)

Highlights

  • Buoyed by the emergency monetary and fiscal relief measures enacted globally, equity markets rebounded in April.
  • 2020 economic growth estimates for emerging market (“EM”) countries have significantly declined due to the COVID-19 pandemic. However, consensus analysts expect overall EM growth to be 5% in 2021, a rebound from the depressed levels of 2020. Among the major EM countries, China is forecast to experience one of the strongest growth rebounds in 2021.
  • Compared to developed markets, earnings growth prospects for EM companies have been relatively resilient over the past three months. However, there is uncertainty around these analyst forecasts as earnings dispersion globally is at its highest level since the Global Financial Crisis.

Portfolio attribution

The Portfolio underperformed the Index in April 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. The earnings growth factor was our weakest bottom-up indicator in April, which could signal that uncertainty surrounding earnings estimates in this environment dampened investors’ willingness to pay a premium for stocks that have experienced earnings upgrades. Our bottom-upvalue factor was also a negative indicator during the month. Dividend yield was the weakest component of our value factor, presumably because investors foresaw future dividend cuts. Our bottom-up price momentum factor was modestly positive in April and has been the strongest bottom-up indicator over the year-to-date (“YTD”) period. Of our four top-down factors, macroeconomic and country were negative indicators in April. Sector and currency were positive indicators during the month.

Investment outlook

Compared to developed markets, earnings growth prospects for EM companies have been relatively resilient over the past three months. However, there is uncertainty around these analyst forecasts as earnings dispersion globally is at its highest level since the Global Financial Crisis. Within EM, all sectors are experiencing net downgrades. Cyclical sectors including energy, financials, real estate, and industrials have been the most challenged. Downgrades have been less pronounced in the more defensive sectors, including communication services, health care, and consumer staples. The materials sector has also been resilient due to the relative strength of non-oil commodity prices and the fact that mining companies typically generate revenues in US dollars and therefore benefit from dollar strength. Information Technology, currently the Portfolio's largest sector overweight due in part to favorable price momentum characteristics, is in the middle of the earnings estimates distribution. From a country perspective, analysts’ earnings estimates have favored countries which have progressed furthest in the pandemic response. Taiwan and China, both countries in which the Portfolio is overweight, have experienced the fewest net earnings estimates downgrades over the last three months.


The MSCI Emerging Markets Value Index continued to underperform the MSCI Emerging Markets Growth Index in April. Following a poor 2019, the MSCI Emerging Markets Value Index has underperformed the MSCI Emerging Markets Growth Index by 10.8% YTD in local currency terms. Value stocks historically have tended to outperform in market recoveries, but that was not the case in April. This could indicate that much of the recent rally is attributable to markets being oversold coming into the month as opposed to a meaningful reduction in uncertainty. The MSCI Emerging Markets Value Index is trading at a sizable discount to the MSCI Emerging Markets Growth Index based on both price-to-earnings and price-to-book value ratios. We continue to emphasize value factors in our investment process and we believe that value’s relative performance should improve once COVID-19 uncertainty abates, especially given the discount offered by value stocks currently.

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].