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) 9.1%-1.8%7.9%2.2%5.7%5.4%4.9%
Strategy (net) 9.0%-2.3%6.9%1.2%4.7%4.4%3.9%
MSCI Emerging Markets 9.0%-1.5%6.9%3.2%6.5%3.7%3.6%
QTD YTD 1 year3 years5 years10 years Since inception
Strategy (gross) 9.1%-1.8%7.9%2.2%5.7%5.4%4.9%
Strategy (net) 9.0%-2.3%6.9%1.2%4.7%4.4%3.9%
MSCI Emerging Markets 9.0%-1.5%6.9%3.2%6.5%3.7%3.6%
QTD YTD 1 year3 years5 years10 years Since inception
Strategy (gross) 16.5%-10.0%-3.1%1.3%2.4%5.5%4.3%
Strategy (net) 16.3%-10.4%-4.0%0.4%1.4%4.4%3.2%
MSCI Emerging Markets 18.2%-9.7%-3.0%2.3%3.2%3.6%3.0%
QTD YTD 1 year3 years5 years10 years Since inception
Strategy (gross) 16.5%-10.0%-3.1%1.3%2.4%5.5%4.3%
Strategy (net) 16.3%-10.4%-4.0%0.4%1.4%4.4%3.2%
MSCI Emerging Markets 18.2%-9.7%-3.0%2.3%3.2%3.6%3.0%
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 June 30, 2020)

Benchmark: MSCI Emerging Markets
Asset Allocation
Strategy
Stocks 96.4%
Cash 3.6%
Strategy Characteristics
Strategy Benchmark
No. of holdings 115 1384
Weighted avg. market cap (US $MM) $119,958 $97,477
NTM price/earnings 11.0 13.7
Price/book value 1.4 1.6
Dividend yield (%) 3.1 2.5
NTM EPS revision (wtd. avg) 2.1 -4.4
TOP 10 ACTIVE HOLDINGS
Security Country Active weight*
Samsung Electronics Co., Ltd. South Korea 1.9%
Tencent Holdings Ltd. China 1.9%
China Construction Bank Corp. China 1.8%
Anhui Conch Cement Co., Ltd. China 1.2%
Jd.com China 1.0%
Baidu China 0.9%
Lukoil Russia 0.9%
Investimentos Itau Brazil 0.9%
MediaTek, Inc. Taiwan 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 20.2% 16.9%
Financials 17.0% 19.1%
Communication Services 15.5% 13.5%
Consumer Discretionary 14.1% 17.4%
Energy 6.1% 5.9%
Materials 5.9% 6.9%
Equity Funds 5.1% 0.0%
Consumer Staples 4.7% 6.5%
Industrials 3.1% 4.7%
Health Care 2.4% 4.3%
Real Estate 2.0% 2.6%
Utilities 0.3% 2.3%
TOP 10 COUNTRIES
Country Strategy Benchmark
China 41.8% 41.0%
South Korea 13.4% 11.6%
Taiwan 13.3% 12.3%
India 8.1% 8.0%
Brazil 6.0% 5.1%
Russia 5.6% 3.2%
Mexico 1.7% 1.7%
South Africa 1.4% 3.8%
Thailand 1.3% 2.3%
Malaysia 1.1% 1.8%
Regional Allocation
  • Emerging Asia 79.4%
  • Emerging Europe, Middle East, Africa 8.8%
  • Emerging Latin America 8.2%
  • Multi Region Emerging (ETF) 0.0%

Commentary (As of June 30, 2020)

Highlights

  • Emerging Market (“EM”) equities continued to rebound in June, outperforming developed market equities during the month.
  • According to Bloomberg consensus estimates, analysts expect overall EM gross domestic product (“GDP”) growth to be -0.3% in 2020. The countries with the weakest 2020 GDP growth expectations include the commodity-oriented economies of Brazil, Russia, and South Africa. With growth expectations for most EM countries falling, inflation is expected to be benign.
  • Compared to developed markets, earnings growth prospects for EM companies have been relatively positive over the past three months. Despite this relative resilience, all sectors within EM except for communication services and health care experienced net downgrades. Earnings growth expectations for cyclical sectors such as financials, real estate, and energy have been the most negatively impacted by economic shutdowns.

Portfolio attribution

The Portfolio underperformed the Index in June 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 the weakest bottom-up indicator in June, continuing to lag over the year-to-date period after underperforming in 2019. Our earnings growth factor was modestly positive. Price momentum was our strongest bottom-up indicator during the month. Of our top-down factors, sector, country and macroeconomic were negative indicators. Currency was a positive indicator in June.

Investment outlook

Compared to developed markets, earnings growth prospects for EM companies have been relatively positive over the past three months. Despite this relative resilience, all sectors within EM except for communication services and health care experienced net downgrades. Earnings growth expectations for cyclical sectors such as financials, real estate, and energy have been the most negatively impacted by economic shutdowns. Communication services experienced net positive upgrades as internet stocks displayed earnings resilience through the COVID-19 lockdown and telecommunications stocks benefitted from their more defensive profiles. Health care stocks also experienced net positive upgrades due to their role in combating the pandemic. Information technology, the Portfolio's largest sector overweight, had median earnings upgrades relative to downgrades. From a country perspective, China and Taiwan experienced net positive upgrades over the past three months. In the case of China, this reflects the significant presence of online economy stocks, the expectation of supportive fiscal and monetary stimulus, and its relative success in controlling the COVID-19 pandemic. Compared to other EM countries, Taiwan has been one of the least affected by COVID-19. Furthermore, Taiwan’s export sector continues to be strong as the positive impact from increased global technology spending and 5G investment outweigh the negative impact of the country’s connections with the Chinese telecom equipment and smartphone manufacturing giant, Huawei. We are overweight Taiwanese stocks in the Portfolio due in part to attractive valuation, earnings growth, and momentum characteristics.

Following a poor 2019, the MSCI Emerging Markets Value Index has underperformed the MSCI Emerging Markets Growth Index every month this year. While strong absolute performance in broader markets has typically provided a good backdrop for value stocks, this was not the case in June as the MSCI Emerging Markets Value Index lagged the MSCI Emerging Markets Growth Index. The MSCI EM Value Index is trading at a sizable discount 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 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].