During May the fund outperformed the MSCI Emerging Markets index by 3.3%.
The largest contributions to performance came from Taiwan and Brazil but on a relative basis we also benefitted from our stock selection in China. Most other markets also had positive contributions with the exception of Korea. We have continued trimming exposures to commodity stocks in favour of adding to some of our Taiwanese and Brazilian holdings.
Much has been made of the lack of breadth in markets. In the US this is a valid concern – at time of writing over 80% of the 12% YTD return comes from just seven usual suspect “mega-cap tech” companies – the remaining 493 stocks are barely contributing. In other words if a manager hasn’t owned the correct 1.5% stocks in the index, they will have almost certainly underperformed. Our fund is up slightly more than the S&P in US dollars but this comes from a much wider range of stocks.
Given the nature of these seven stocks, this has translated into the S&P growth index outperforming its value equivalent by almost 7% YTD as well, partly reversing last year’s trend. In sharp contrast to the US, the MSCI EM value index remains ahead of the wider index this year. We like saying that “value is where value is” – we don’t consider growth as the opposite of value and certainly don’t believe in fixed sector definitions.
As it happens, some of the best quality stocks with structural growth potential in our universe are also value stocks. Our technology dominated portfolio in Taiwan trades on a 12 month forward P/E of 12x with a 4.5% dividend yield and a low domestic cost of capital of 1%. But even classic value has been contributing nicely – our Brazilian stocks are still on a P/E of 5.5x even after the recent rally in anticipation of lower rates. Our China portfolio has also been outperforming and trades on a P/E of 7x with a 7% dividend yield. Value investing remains alive and well even as the world chases the next imaginary AI winners.
Aside from more breadth, our markets also benefit from a significant dispersion of returns – a degree of diversification that is hard to achieve for most equity managers. The Brazilian market is driven entirely by the potential for interest rate declines to unlock cashflows and valuations. Taiwan is of course being lifted by the AI craze. The focus in China is on potential stimulus and recovery as well as geopolitics – largely uncorrelated with the current mood at the Fed. Valuations across the board remain attractive relative to developed markets.
Past experience tells us that when markets sell off, there is no such thing as uncorrelated markets. This may sadly still prove to be true during the next downturn. However, diversified sources of returns are equally important outside bear markets. They can protect investors from FOMO trading and chasing an increasingly narrow group of stocks at excessive valuations. We will be the first to admit that Emerging Markets have had a disappointing decade of returns. What stands in their favour though is this opportunity to diversify which we will always grab wholeheartedly.
