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) 2.1%0.7%8.9%1.0%7.3%4.2%5.0%
Strategy (net) 2.1%-0.1%7.9%0.0%6.3%3.2%4.0%
MSCI Emerging Markets 2.1%1.1%8.6%2.3%8.3%2.8%3.7%
QTD YTD 1 year3 years5 years10 years Since inception
Strategy (gross) 2.1%0.7%8.9%1.0%7.3%4.2%5.0%
Strategy (net) 2.1%-0.1%7.9%0.0%6.3%3.2%4.0%
MSCI Emerging Markets 2.1%1.1%8.6%2.3%8.3%2.8%3.7%
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 October 31, 2020)

Benchmark: MSCI Emerging Markets
Asset Allocation
Strategy
Stocks 98.9%
Cash 1.1%
Strategy Characteristics
Strategy Benchmark
No. of holdings 127 1391
Weighted avg. market cap (US $MM) $179,752 $148,993
NTM price/earnings 10.9 13.8
Price/book value 1.4 1.8
Dividend yield (%) 2.5 2.2
NTM EPS revision (wtd. avg) 19.1 14.2
TOP 10 ACTIVE HOLDINGS
Security Country Active weight*
Tencent Holdings Ltd. China 2.1%
China Construction Bank Corp. China 1.6%
Samsung Electronics Co., Ltd. South Korea 1.3%
Taiwan Semiconductor Manufacturing Co., Ltd. Taiwan 1.2%
Anhui Conch Cement Co., Ltd. China 0.9%
Kia Motors Corp. South Korea 0.9%
Baidu China 0.8%
MediaTek, Inc. Taiwan 0.8%
KB Financial Group, Inc. South Korea 0.7%
Hana Financial Group, Inc. South Korea 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% 18.4%
Consumer Discretionary 18.7% 20.9%
Financials 15.1% 17.1%
Communication Services 15.1% 13.2%
Materials 6.8% 6.8%
Equity Funds 4.7% 0.0%
Energy 4.6% 4.9%
Consumer Staples 4.3% 5.9%
Health Care 3.1% 4.3%
Industrials 2.6% 4.3%
Real Estate 1.7% 2.3%
Utilities 0.2% 1.9%
TOP 10 COUNTRIES
Country Strategy Benchmark
China 42.7% 43.2%
South Korea 15.6% 11.9%
Taiwan 14.3% 12.7%
India 9.4% 8.1%
Brazil 4.9% 4.4%
Russia 3.8% 2.7%
South Africa 2.1% 3.5%
Mexico 1.7% 1.6%
Malaysia 1.2% 1.7%
Thailand 0.9% 1.7%
Regional Allocation
  • Emerging Asia 84.9%
  • Emerging Europe, Middle East, Africa 7.2%
  • Emerging Latin America 6.9%
  • Pacific 0.0%

Commentary (As of October 31, 2020)

Highlights

  • Buoyed by Chinese stocks, emerging markets (“EM”) equities outperformed most developed markets in October.
  • A “blue wave” – Democratic victory in the presidential election combined with a majority in the Senate - would likely be the most positive outcome for EM stocks. We believe this outcome would lead to the most US fiscal spending and higher US debt levels. This would likely stimulate global growth and support EM equities while pressuring the US dollar relative to EM currencies. However, even in other election scenarios, we do not envision a strong US dollar given the fact that fiscal and monetary stimulus will likely continue to be accommodative in the US.
  • We continue to emphasize value factors in our multi-factor investment process. We believe that EM value stocks are poised to rebound given the valuation discount, the anticipated resumption of global growth in 2021, and the likely reduction, ultimately, in uncertainty following the US election.

Portfolio attribution

The Portfolio performed in-line with the Index in October 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. After underperforming over most recent periods, our bottom-up value factor rebounded during the month. Our bottom-up earnings growth and price momentum factors were also positive indicators in October. Of our top-down factors, currency was a positive indicator while our macroeconomic, country, and sector factors were negative.

Investment outlook

Earnings growth prospects have been improving for many EM companies. Earnings growth upgrades have exceeded downgrades in all but three sectors. The information technology, materials, and consumer discretionary sectors have experienced the strongest net upgrades. Information technology companies continue to benefit from increased technological adoption during the pandemic as well as strong demand related to 5G. Materials companies have experienced net upgrades as commodity prices have stabilized amid improving global growth. Consumer discretionary companies have also benefitted from a resumption of global growth as well as exposure to e-commerce. From a country perspective, companies in the technology-orientedeconomies of South Korea and Taiwan experienced the strongest net upgrades. Brazil, India, South Africa, and Russia have also experienced strong net upgrades as economic activity has resumed after declining significantly in the early stages of the pandemic. India and Brazil have also seen sharp rallies in their OECD Leading Economic Indicators. Net upgrades for Chinese companies have declined over the past three months as the country’s economic growth recovered relatively early and many companies already experienced an upgrade cycle. In Thailand, net upgrades have been weak due in part to limited tourism amid the pandemic.

Uncertainty surrounding the COVID-19 pandemic continued to weigh on EM value stocks in October. While our value factor delivered positive performance during the month, the MSCI Emerging Markets Value Index underperformed the MSCI Emerging Markets Growth Index. The MSCI EM 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. We believe that EM value stocks are poised to rebound given the valuation discount, the anticipated resumption of global growth in 2021, and the likely reduction, ultimately, in uncertainty following the US election.

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].