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
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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) -8.8%-0.4%19.4%8.3%9.5%7.8%5.8%
Strategy (net) -9.0%-1.0%18.3%7.4%8.5%6.7%4.8%
MSCI Emerging Markets -8.0%-1.0%18.6%9.0%9.6%6.5%4.6%
QTD YTD 1 year3 years5 years10 years Since inception
Strategy (gross) -8.8%-0.4%19.4%8.3%9.5%7.8%5.8%
Strategy (net) -9.0%-1.0%18.3%7.4%8.5%6.7%4.8%
MSCI Emerging Markets -8.0%-1.0%18.6%9.0%9.6%6.5%4.6%
QTD YTD 1 year3 years5 years10 years Since inception
Strategy (gross) -8.8%-0.4%19.4%8.3%9.5%7.8%5.8%
Strategy (net) -9.0%-1.0%18.3%7.4%8.5%6.7%4.8%
MSCI Emerging Markets -8.0%-1.0%18.6%9.0%9.6%6.5%4.6%
QTD YTD 1 year3 years5 years10 years Since inception
Strategy (gross) -8.8%-0.4%19.4%8.3%9.5%7.8%5.8%
Strategy (net) -9.0%-1.0%18.3%7.4%8.5%6.7%4.8%
MSCI Emerging Markets -8.0%-1.0%18.6%9.0%9.6%6.5%4.6%
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 September 30, 2021)

Benchmark: MSCI Emerging Markets
Asset Allocation
Strategy
Stocks 98.0%
Cash 2.0%
Strategy Characteristics
Strategy Benchmark
No. of holdings 131 1418
Weighted avg. market cap (US $MM) $107,001 $90,555
NTM price/earnings 8.8 12.0
Price/book value 1.5 1.9
Dividend yield (%) 2.7 2.2
NTM EPS revision (wtd. avg) 12.5 2.4
TOP 10 ACTIVE HOLDINGS
Security Country Active weight*
China Construction Bank Corp. China 1.9%
Hindalco Industries India 1.7%
OAO Gazprom Russia 1.4%
JBS SA Brazil 1.2%
Samsung Electronics Co., Ltd. South Korea 1.2%
Fubon Financial Holding Co Taiwan 1.1%
Tencent Holdings Ltd. China 1.1%
Kia Corp. South Korea 1.0%
Sberbank Russia 1.0%
MediaTek, Inc. Taiwan 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
Information Technology 24.6% 20.9%
Financials 18.6% 19.5%
Materials 12.0% 8.7%
Consumer Discretionary 11.7% 14.7%
Communication Services 8.8% 10.3%
Energy 6.8% 5.9%
Industrials 4.4% 4.9%
Consumer Staples 4.2% 5.9%
Equity Funds 4.1% 0.0%
Health Care 2.7% 4.9%
Real Estate 0.0% 2.1%
Utilities 0.0% 2.3%
TOP 10 COUNTRIES
Country Strategy Benchmark
China 29.1% 34.0%
Taiwan 18.3% 14.7%
South Korea 16.7% 12.6%
India 12.9% 12.2%
Brazil 5.5% 4.4%
Russia 5.2% 3.9%
Mexico 2.8% 1.9%
Saudi Arabia 2.2% 3.4%
South Africa 1.7% 3.2%
Thailand 1.7% 1.6%
Regional Allocation
  • Emerging Asia 79.2%
  • Emerging Europe, Middle East, Africa 10.4%
  • Emerging Latin America 8.5%

Commentary (As of September 30, 2021)

Highlights

  • Emerging Markets (“EM”) stocks declined in September as supply chain disruptions and concerns related to leverage in China’s real estate sector weighed on the overall asset class.
  • China’s real estate sector remained under pressure in September with one of its largest developers, China Evergrande, teetering on the edge of bankruptcy. Real estate is a critical component of China’s economy and regulators are trying to ringfence the issue given systemic risk concerns. We have been underweight the Chinese real estate sector in the Portfolio due primarily to bottom-up considerations. We recently sold all Chinese real estate holdings in the Portfolio based on feedback from our fundamental colleagues who believe that there will be continued stress in the sector.
  • Our value-orientation is reflected in our positioning in South Korea, one of the Portfolio’s largest country overweights. While the Fed’s tapering program could pose a challenge for EM currencies, we believe the Korean won should fare relatively well due to the country’s current account surplus, low inflation, and strong fiscal situation. We remain overweight South Korean stocks in the Portfolio due in part to valuation and macroeconomic considerations.

Portfolio attribution

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

Investment outlook

Earnings upgrades in EM have lagged developed markets, which have been buoyed by strong upgrades in the US. Within EM, the strongest sectors were energy, materials, and information technology. All three cyclical sectors reflect analyst optimism that the economic reopening will continue globally. From a country perspective, the major countries with the strongest net upgrades were Russia, Saudi Arabia and UAE, which are benefitting from rising oil prices. We are overweight Russian stocks in the Portfolio due in part to favorable valuation, growth, and price momentum characteristics. China, Thailand, and Indonesia have experienced the weakest earnings revisions. Supply chain issues related to Covid-19, leverage in the real estate sector, and regulatory scrutiny have weighed on Chinese stocks.

The MSCI EM Value Index outperformed the MSCI EM Growth Index in the third quarter and YTD. While our valuation factor performed well during the quarter, our exposure to stocks in the metals and mining industry detracted from relative performance. These stocks are attractive on most valuation metrics, but they were negatively impacted by weak commodity prices related to the slowdown in China. Our value-orientation is also reflected in our positioning in South Korea, one of the Portfolio’s largest country overweights. While the Fed’s tapering program could pose a challenge for EM currencies, we believe the Korean won should fare relatively well due to the country’s current account surplus, low inflation, and strong fiscal situation. We remain overweight South Korean stocks in the Portfolio due in part to valuation and macroeconomic considerations.

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].