During September, the fund outperformed the MSCI Emerging Markets index by 0.8%.
In September, the fund outperformed the MSCI Emerging Markets index by 0.8% and 1.4% for the third quarter. This outperformance resulted from stock selection, with the most significant gains coming from our holdings in UAE, Taiwan, Brazil, Kazakhstan, and Ghana. Our underweights in India and Turkey negatively impacted relative performance.
During the quarter, we added new positions in Mexico and Brazil and exited certain Latin American resource stocks. We also adjusted our Taiwan tech sector holdings, moving from a highly-valued AI stock to a better value option.
Being a value investor isn’t just about snapping up bargains. A key benefit of valuation discipline is the avoidance of costly mistakes. Investment managers are (for now) mostly human and therefore prone to biases. These include the optimism bias and the endowment bias, both of which can lead them to hold stocks that have become overvalued and ultimately underperform as the valuation corrects over time.
With the benefit of hindsight, we can easily spot such mistakes but for investors caught up in the growth prospects of a business it may be more of a challenge. Alibaba, the Chinese ecommerce giant is a perfect illustration of this principle. In 2014 when it listed, it was considered to have outstanding growth prospects driven by continuing expansion of the Chinese middle class and increasing penetration of internet use. It was expected to grow at breakneck speeds.
Broadly speaking this thesis has played out and the optimists have been proven correct. The company has, despite competition, remained the dominant player in Chinese e-commerce and expanded abroad. Alibaba’s revenues will have soared almost twenty-fold since it listed (from RMB50bn in 2014 to near RMB1trn in 2024). For growth investors this should have been a home run. The problem was that in 2014 the stock was already trading on extraordinary valuations. Its prospects were so splendid that anyone who wanted to participate had to pay up for them.
Alibaba’s enterprise value has dropped by approximately a quarter since 2014. Investors who stayed on for the whole ride have lost money. The mistake was not in overestimating Alibaba’s prospects, it was overpaying for them. We think Alibaba today has overshot on the downside to a level where it is now significantly undervalued. We have been accumulating the stock since it entered value territory on our models.
