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) 9.5%-1.4%10.8%1.4%8.1%4.5%4.9%
Strategy (net) 9.3%-2.1%9.8%0.5%7.1%3.5%3.9%
MSCI Emerging Markets 9.7%-0.9%10.9%2.8%9.4%2.9%3.6%
QTD YTD 1 year3 years5 years10 years Since inception
Strategy (gross) 9.5%-1.4%10.8%1.4%8.1%4.5%4.9%
Strategy (net) 9.3%-2.1%9.8%0.5%7.1%3.5%3.9%
MSCI Emerging Markets 9.7%-0.9%10.9%2.8%9.4%2.9%3.6%
QTD YTD 1 year3 years5 years10 years Since inception
Strategy (gross) 9.5%-1.4%10.8%1.4%8.1%4.5%4.9%
Strategy (net) 9.3%-2.1%9.8%0.5%7.1%3.5%3.9%
MSCI Emerging Markets 9.7%-0.9%10.9%2.8%9.4%2.9%3.6%
QTD YTD 1 year3 years5 years10 years Since inception
Strategy (gross) 9.5%-1.4%10.8%1.4%8.1%4.5%4.9%
Strategy (net) 9.3%-2.1%9.8%0.5%7.1%3.5%3.9%
MSCI Emerging Markets 9.7%-0.9%10.9%2.8%9.4%2.9%3.6%
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 September 30, 2020)

Benchmark: MSCI Emerging Markets
Asset Allocation
Strategy
Stocks 97.8%
Cash 2.2%
Strategy Characteristics
Strategy Benchmark
No. of holdings 121 1386
Weighted avg. market cap (US $MM) $163,771 $135,823
NTM price/earnings 11.1 14.0
Price/book value 1.4 1.7
Dividend yield (%) 2.7 2.3
NTM EPS revision (wtd. avg) 16.5 10.7
TOP 10 ACTIVE HOLDINGS
Security Country Active weight*
Samsung Electronics Co., Ltd. South Korea 1.7%
Tencent Holdings Ltd. China 1.7%
China Construction Bank Corp. China 1.5%
Jd.com China 1.1%
Anhui Conch Cement Co., Ltd. China 1.0%
Taiwan Semiconductor Manufacturing Co., Ltd. Taiwan 0.9%
Kia Motors Corp. South Korea 0.9%
Baidu China 0.8%
Hindalco Industries India 0.7%
Dr. Reddy's Laboratories Ltd. India 0.7%

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 21.8% 18.5%
Consumer Discretionary 17.5% 20.2%
Financials 15.3% 17.1%
Communication Services 14.2% 12.7%
Materials 6.6% 6.9%
Energy 5.4% 5.4%
Equity Funds 4.6% 0.0%
Consumer Staples 4.4% 6.1%
Health Care 3.2% 4.3%
Industrials 2.8% 4.4%
Real Estate 1.8% 2.4%
Utilities 0.3% 2.0%
TOP 10 COUNTRIES
Country Strategy Benchmark
China 41.0% 41.9%
South Korea 15.3% 12.1%
Taiwan 13.8% 12.8%
India 9.5% 8.2%
Brazil 5.3% 4.6%
Russia 4.8% 3.0%
South Africa 1.9% 3.5%
Mexico 1.7% 1.6%
Malaysia 1.2% 1.7%
Thailand 1.0% 1.8%
Regional Allocation
  • Emerging Asia 82.5%
  • Emerging Europe, Middle East, Africa 8.3%
  • Emerging Latin America 7.1%
  • Multi Region Emerging (ETF) 0.0%

Commentary (As of September 30, 2020)

Highlights

  • During a volatile month in global equity markets, emerging markets (“EM”) equities posted negative returns and value indices lagged their growth counterparts.
  • Earnings growth prospects have been improving for many EM companies. The sectors experiencing net upgrades include consumer discretionary, communication services, information technology, and materials.
  • We continue to emphasize value factors in our multi-factor investment process and we believe value stocks are poised to rebound. A catalyst for value’s resurgence could be the dissemination of one or more COVID-19 vaccines, many of which are in Phase III trials. We believe that a reduction in other sources of uncertainty, including the US election, should also support value stocks.

Portfolio attribution

The Portfolio outperformed the Index in September 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-up earnings growth and price momentum factors were positive indicators during the month. Our bottom-up value factor was a negative indicator in September and it has lagged over most recent periods. Of our top-down factors, our currency and country factors were positive indicators during the month. Our macroeconomic and sector factors were negative indicators.

Investment outlook

Earnings growth prospects have been improving for many EM companies. Earnings growth upgrades exceed downgrades in more than half of the EM sectors according to analyst forecasts. The sectors experiencing net upgrades include consumer discretionary, communication services, information technology, and materials. Information technology companies have experienced the strongest net upgrades as increased reliance on technology during the pandemic and strong 5G demand have buoyed earnings. Information technology is the Portfolio's largest sector overweight due to favorable earnings growth and price momentum characteristics. From a country perspective, companies in the technology-oriented economies of South Korea and Taiwan experienced the strongest net upgrades. Russian companies also experienced strong net upgrades despite declining oil prices. This was primarily attributable to improvement relative to a low baseline as downgrades for many Russian companies were quite pronounced earlier this year. On the negative side, companies in Thailand experienced substantial net downgrades as tourism has been halted.

Uncertainty surrounding the COVID-19 pandemic has continued to weigh on EM value stocks. Following a poor 2019, the MSCI Emerging Markets Value Index trails the MSCI Emerging Markets Growth Index by 28 percentage points on a local currency basis over the year-to-date period. The MSCI Emerging Markets Value Index is trading near record low valuations based on both price-to-earnings and price-to-book value ratios. We continue to emphasize value factors in our multi-factor investment process and we believe that EM value stocks are poised to rebound once there is a reduction in COVID-19 uncertainty given the discount relative to EM growth stocks. A catalyst for value’s resurgence could be the dissemination of one or more COVID-19 vaccines, many of which are in Phase III trials. We believe that a reduction in other sources of uncertainty, including the US election, should also support value stocks.

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].