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 in USD
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) 1.4%1.4%-16.6%1.3%-2.3%2.0%3.8%
Strategy (net) 1.2%1.2%-17.4%0.3%-3.2%1.0%2.8%
MSCI Emerging Markets 0.9%0.9%-14.9%1.3%-1.5%1.9%2.7%
QTD YTD 1 year3 years5 years10 years Since inception
Strategy (gross) 1.4%1.4%-16.6%1.3%-2.3%2.0%3.8%
Strategy (net) 1.2%1.2%-17.4%0.3%-3.2%1.0%2.8%
MSCI Emerging Markets 0.9%0.9%-14.9%1.3%-1.5%1.9%2.7%
QTD YTD 1 year3 years5 years10 years Since inception
Strategy (gross) 7.7%-21.9%-21.9%-2.7%-2.0%2.0%3.7%
Strategy (net) 7.5%-22.6%-22.6%-3.6%-2.9%1.1%2.7%
MSCI Emerging Markets 9.8%-19.7%-19.7%-2.3%-1.0%1.8%2.7%
QTD YTD 1 year3 years5 years10 years Since inception
Strategy (gross) 7.7%-21.9%-21.9%-2.7%-2.0%2.0%3.7%
Strategy (net) 7.5%-22.6%-22.6%-3.6%-2.9%1.1%2.7%
MSCI Emerging Markets 9.8%-19.7%-19.7%-2.3%-1.0%1.8%2.7%
Fund 202220212020201920182017201620152014201320122011201020092008
Strategy (gross) -21.9%-0.3%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) -22.6%-1.2%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 -19.7%-2.2%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%
Strategy (gross)
Strategy (net)
MSCI Emerging Markets
202220212020201920182017201620152014201320122011201020092008
-21.9%-0.3%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%
-22.6%-1.2%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%
-19.7%-2.2%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 February 28, 2023)

Benchmark: MSCI Emerging Markets
Asset Allocation
Strategy
Stocks 98.6%
Cash 1.4%
Strategy Characteristics
Strategy Benchmark
No. of holdings 183 1373
Weighted avg. market cap (US $MM) $58,777 $66,393
NTM price/earnings 6.7 10.2
Price/book value 1.0 1.6
Dividend yield (%) 4.8 3.3
NTM EPS revision (wtd. avg) -0.4 -9.4
TOP 10 HOLDINGS
Security Country Active weight*
China Construction Bank Corp. China 1.9%
Kia Corp. South Korea 1.8%
Banco do Brasil SA Brazil 1.7%
PDD Holdings China 1.3%
PetroChina Co., Ltd. China 1.3%
Vipshop Holdings China 1.2%
Tencent Music Entertainment Gr China 1.1%
Hana Financial Group, Inc. South Korea 1.1%
Oil & Natural Gas Corp. Ltd. India 1.0%
PICC Property & Casualty Co., Ltd. China 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 19.2% 20.2%
Financials 17.9% 21.7%
Consumer Discretionary 14.8% 13.6%
Industrials 11.1% 6.0%
Energy 7.8% 4.7%
Materials 7.1% 8.8%
Consumer Staples 6.7% 6.4%
Communication Services 6.4% 10.3%
Health Care 5.0% 3.9%
Utilities 1.8% 2.6%
Real Estate 0.9% 1.9%
TOP 10 COUNTRIES
Country Strategy Benchmark
China 36.5% 32.1%
Taiwan 15.3% 15.3%
South Korea 15.1% 11.7%
India 13.4% 13.2%
Brazil 5.4% 5.0%
Indonesia 2.6% 1.9%
Thailand 2.4% 2.1%
Mexico 2.0% 2.6%
Saudi Arabia 1.7% 3.8%
Turkey 1.4% 0.6%
Regional Allocation
  • Emerging Asia 85.4%
  • Emerging Latin America 7.5%
  • Emerging Europe, Middle East, Africa 5.8%

Commentary (As of February 28, 2023)

Highlights

  • In February, emerging market (“EM”) equities lagged developed markets as global inflation remained elevated, leading investors to anticipate greater interest rate hikes.
  • Inverted yield curves have historically been a negative indicator for EM assets as it signals an increased risk of a slowdown in global growth. However, with both China and India expected to post mid-to-high single-digit positive growth in 2023, we believe the slowdown in EM may be less pronounced than in developed markets.
  • We added a new component, the three and six-month change in nominal interest rates, to our currency factor in February. Our research has shown that EM currencies in countries where short-term interest rates are rising have tended to outperform currencies where short-term interest rates are flat or falling, during normal interest rate environments globally.

Portfolio attribution

The Portfolio outperformed the Index in February 2023. 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 growth, valuation, and technical (price momentum) factors were positive indicators during the month. Our competitive strength factor was a negative indicator in February. Of our top-down factors, currency was a positive indicator. Sector, country, and macroeconomic were negative indicators.

Investment outlook

We added a new component, the three and six-month change in nominal interest rates, to our currency factor in February. Our research has shown that EM currencies in countries where short-term interest rates are rising have tended to outperform currencies where short-term interest rates are flat or falling, during normal interest rate environments globally. The component did not perform well in the previous decade during a period of significant interest rate repression. However, we believe we are entering a more normalized interest rate environment as global central banks contend with stubbornly high inflation. In such an environment characterized by lower global liquidity, EM central banks should likely be compelled to support their currencies by offering relatively high interest rates. In terms of earnings growth upgrades, the outlook for EM equities has weakened. The two principal drivers are the externally-oriented economies of South Korea and Taiwan, which reflect fears of slowing global demand. From a sector perspective, the segments with the strongest net upgrades were communications services and financials. Communications services is dominated by China and continues to benefit from the country’s economic re-opening as Covid-19 restrictions ease. With a balance of favorable valuation, growth, and price momentum characteristics relative to the Index, we believe the portfolio offers attractive risk-adjusted return potential looking forward.

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].