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) -2.3%-29.1%-29.7%-3.4%-3.1%2.0%3.1%
Strategy (net) -2.4%-29.7%-30.3%-4.2%-4.0%1.1%2.1%
MSCI Emerging Markets -3.1%-29.2%-30.7%-4.1%-2.7%1.2%1.9%
QTD YTD 1 year3 years5 years10 years Since inception
Strategy (gross) -2.3%-29.1%-29.7%-3.4%-3.1%2.0%3.1%
Strategy (net) -2.4%-29.7%-30.3%-4.2%-4.0%1.1%2.1%
MSCI Emerging Markets -3.1%-29.2%-30.7%-4.1%-2.7%1.2%1.9%
QTD YTD 1 year3 years5 years10 years Since inception
Strategy (gross) -10.2%-27.5%-27.4%-1.4%-2.0%2.3%3.3%
Strategy (net) -10.4%-28.0%-28.1%-2.2%-2.9%1.3%2.3%
MSCI Emerging Markets -11.4%-26.9%-27.8%-1.7%-1.4%1.4%2.1%
QTD YTD 1 year3 years5 years10 years Since inception
Strategy (gross) -10.2%-27.5%-27.4%-1.4%-2.0%2.3%3.3%
Strategy (net) -10.4%-28.0%-28.1%-2.2%-2.9%1.3%2.3%
MSCI Emerging Markets -11.4%-26.9%-27.8%-1.7%-1.4%1.4%2.1%
Fund 20212020201920182017201620152014201320122011201020092008
Strategy (gross) -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) -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 -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
20212020201920182017201620152014201320122011201020092008
-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%
-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%
-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 October 31, 2022)

Benchmark: MSCI Emerging Markets
Asset Allocation
Strategy
Stocks 98.1%
Cash 1.9%
Strategy Characteristics
Strategy Benchmark
No. of holdings 184 1386
Weighted avg. market cap (US $MM) $41,506 $46,255
NTM price/earnings 6.0 10.2
Price/book value 1.0 1.5
Dividend yield (%) 5.6 3.7
NTM EPS revision (wtd. avg) 2.1 -6.6
TOP 10 HOLDINGS
Security Country Active weight*
China Construction Bank Corp. China 2.0%
Banco do Brasil SA Brazil 1.6%
PICC Property & Casualty Co., Ltd. China 1.2%
Kia Corp. South Korea 1.2%
Sun Pharmaceutical Industries Ltd. India 1.1%
PetroChina Co., Ltd. China 1.1%
Hon Hai Precision Industry Co., Ltd. Taiwan 1.1%
CITIC Ltd. China 0.9%
Hana Financial Group, Inc. South Korea 0.9%
Tongwei Co China 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
Financials 21.6% 23.6%
Information Technology 18.0% 19.1%
Consumer Discretionary 11.1% 12.3%
Energy 10.2% 5.6%
Materials 9.6% 9.1%
Industrials 9.6% 6.1%
Consumer Staples 6.8% 6.5%
Communication Services 4.5% 8.7%
Health Care 4.5% 4.1%
Utilities 1.9% 3.2%
Real Estate 0.4% 1.7%
TOP 10 COUNTRIES
Country Strategy Benchmark
China 28.3% 26.9%
India 16.6% 16.2%
South Korea 13.0% 11.9%
Taiwan 12.3% 13.5%
Brazil 6.6% 6.4%
Saudi Arabia 5.9% 5.1%
Thailand 3.4% 2.2%
Indonesia 3.2% 2.3%
United Arab Emirates 3.1% 1.5%
South Africa 2.1% 3.7%
Regional Allocation
  • Emerging Asia 76.8%
  • Emerging Europe, Middle East, Africa 12.9%
  • Emerging Latin America 8.3%

Commentary (As of October 31, 2022)

Highlights

  • Market volatility in China and continued rising interest rates across several markets weighed on emerging market (“EM”) equities in October.
  • In October, we adjusted our earnings growth factor to, in our view, better reflect sentiment for commodity-related stocks. Based on our research, sell-side analyst earnings revisions for this cohort of stocks may be inconsistent with the price movement of the underlying commodities. In some cases, analysts are slow to update estimates, while in other cases, analysts base their forecasts on forward contracts, which adjust with a lag compared to spot prices.
  • While we incorporate growth expectations into our multi-factor investment process, we continue to emphasize valuation in our approach. 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.

Portfolio attribution

The Portfolio outperformed the Index in October 2022. 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 and technical factors were positive indicators during the month. Our valuation and competitive strength factors were negative. Of our top-down factors, sector was a positive indicator. Our currency, macroeconomic, and country factors were negative indicators in October.

Investment outlook

Earnings growth upgrades for EM equities continue to lag those in ex-US developed markets. The EM sectors with the weakest net upgrades were materials, communication services, and industrials. Slowing global growth has contributed to lower expectations for industrials, which reflect weakness in the shipping sector, and materials companies. Communication services is primarily driven by the Chinese platform companies, which have been impacted by the country’s slowing growth. Sectors with positive net upgrades were financials and energy. Financials are benefitting from positive credit cycles in India and Brazil, countries where we are identifying attractive investment opportunities in banks. The energy sector has been buoyed by oil, coal, and natural gas prices, which remain relatively strong. From a country perspective, South Korea, South Africa, and China had the weakest net upgrades. The export-dependent, technology-oriented South Korean economy has been impacted by slowing global growth. South Africa is a commodity-oriented economy and reflects the falling commodity prices. Covid-19 restrictions continue to slow growth in China. While we incorporate growth expectations into our multi-factor investment process, we continue to emphasize valuation in our approach. 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.

In October, we adjusted our earnings growth factor to, in our view, better reflect sentiment for commodity-related stocks. Based on our research, sell-side analyst earnings revisions for this cohort of stocks may be inconsistent with the price movement of the underlying commodities. In some cases, analysts are slow to update estimates, while in other cases, analysts base their forecasts on forward contracts, which adjust with a lag compared to spot prices. Additionally, extreme movements in commodity prices are often met with supply and demand responses, resulting in price reversals. For these reasons, we believe that adjusting our earnings growth factor for commodity-related stocks can potentially improve the Portfolio’s risk-adjusted returns.

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].