After the MSCI Emerging Markets Index (“Index”) fell 15% in 2018, the Index bounced back in 2019 posting an 18.4% rise. In our 2018 review, we wrote that we believed in order for stocks to rebound, much would depend on how the US/China trade talks would evolve. As expected, performance vacillated all year around how likely it was that a deal would be signed. Expectations were high at the start of the year as the Index rose approximately 10% in the first quarter of 2019 only for hopes to be dashed in mid-year as President Trump increased tariffs further. By the end of August, the Index was only up approximately 4%. As we approached December 31st, expectations grew for a Phase 1 deal. As a result, global stocks rallied as a deal was agreed upon in principle with the fourth quarter of 2019 proving the strongest period of the year, with the Index up approximately 12%. During the whole decade, only in one calendar year, 2017, did the Index go up more than 19%, so the 18.4% annual move in 2019 proved highly positive for the asset class.
Russia was the best performing market during 2019 as investors welcomed further improvements to shareholder return policies in some of the country’s largest companies. Gazprom, a core Fund holding, announced a significant increase in dividends and confirmed further increases in payout ratios over the next 3 years to 50%. The stock was the Fund’s best performing holding, returning 95%, against Russia’s return of 51%. We continue to believe that Gazprom offers deep value on a PE (price to earnings) of approximately 4x and PB (price to book) <0.5x. Elsewhere in the EMEA (Europe, Middle East & Africa) region, Saudi Arabia joined the Index in mid-year but lagged significantly, and hence our zero exposure helped add alpha. Saudi Aramco, a large national oil company, listed the largest IPO ever in December, raising $25.6bn and making it the most valuable company in history at $1.7 trillion. We did not participate in the IPO believing the company to be unattractively valued, particularly when considering the various ESG risks.
Within Asia, the big 4 technology companies:- Alibaba +55%, Tencent +20%, TSMC +51%, and Samsung Electronics +39% all outperformed over the 2019 year, reversing their declines in 2018. Positive sentiment regarding trade of course helped, while TSMC & Samsung also benefited from the expected upgrades and capex cycle driven by the 5G roll out and smartphone build cycle. The Fund added alpha from its existing large holdings in TSMC and Samsung. Additionally, we identified a rare value opportunity to buy Alibaba right at the start of 2019 after it had fallen over 30% and was trading at an 18 month low. This proved to be a very timely decision, and we increased our holding at the end of November with the Hong Kong listing as we continue to believe in the long term attractive investment case for China’s largest consumer company.
Asia as a whole was up 19% in 2019, led by Taiwan up 36% and China 23%. Local China A shares fared even better though with the MSCI China ‘A’ 50 Index up 44%. During the year, MSCI increased the local China A shares allocation within the Index from 1.4% to 4% and we expect this increasing trend to continue over the next few years. MSCI China lagged the local return in part because it is still dominated by Hong Kong listed ‘H’ shares which somewhat suffered from the damaging anti-government protests that plagued the country in the second half of the year. Elsewhere in Asia, Korea and India both lagged despite positive returns of 12.5% and 7.6% respectively. Both countries’ currencies were slightly weak which held back returns while investors worried about India’s sustainable GDP growth in light of the liquidity crunch that has hurt the financial system. The Fund’s worst performing stock Indiabulls, an Indian mortgage finance company, fell 60% during the year. The company was subjected to various allegations suggesting fraudulent activities which weighed very heavily, much of which we believe to have been market manipulation. Fortunately toward the end of November, the government filed an affidavit in the Delhi High Court stating there were no irregularities with respect to certain loans made by Indiabulls that had been accused of being fraudulent. We believe this should put an end to the rogue accusations the company was subjected to and the company should now be valued more on its robust fundamentals. We increased the Fund’s position after the affidavit was filed.
Latin America was mixed with the smaller markets of Argentina, Chile and Peru lagging but Brazil outperformed, up 26% while Mexico was also up 11%. Investors have rather varied opinions of these countries’ respective leaders. Bolsanaro in Brazil has for the most part been delivering on his promise of pension reform which has mostly enthused the markets. In Mexico however, there is apprehension as to what the left leaning leader known widely as AMLO may or may not do. Nevertheless, both of the Fund’s Mexican stocks delivered healthy returns with REIT Fibra Uno +51% and leading bank, Banorte up 21%.
Sector returns were more polarized. The Healthcare sector underperformed, only posting a 4% return. Nevertheless, two of the Fund’s best performing names were Chinese healthcare stocks. CSPC and China Medical System gained 67% and 61% respectively. We bought CSPC in the second quarter after it had fallen heavily on concerns regarding regulatory driven price cuts. These fears were over exaggerated and our entry point was particularly timely for this leading pharma with a diverse, quality portfolio and pipeline of drugs. Materials also lagged with the sector up 6%. Here the Fund suffered more. Indian miner, Vedanta, and South African chemicals company, Sasol, were both down 25%, and Korean petrochemical manufacturer, LG Chem, fell 10%. As referenced earlier, the IT sector was very strong, gaining 42% and consumer discretionary (in which Alibaba sits) outperformed too, up 35%.
2019 witnessed another year of significant outperformance for the MSCI EM Growth Index, +21%, versus MSCI EM Value Index which only rose 12%. Given that backdrop, we were pleased with the Fund’s performance. We took advantage of the weakness in 2018, particularly in China to reorient the Fund which mostly benefited returns.
As a new decade begins, we remain confident in the Fund’s positioning and ability to create alpha over the next ten years. We have focused on high quality, attractively valued companies with strong balance sheets and sustainable positive free cash flow generation. We have been very cognizant of the technological disruption that has afflicted many businesses and tried to avoid where we perceive risks; while looking to buy technology leaders where we see attractive valuations. We are mindful of ESG risks, and have concentrated the Fund around companies with well-regarded and established management teams where capital allocation is in the best interests of shareholders; as opposed to State Owned Enterprises where so many can’t be trusted. The key for us remains delivering a typical Mondrian value portfolio with defensive qualities. Emerging markets remains a highly volatile asset class and the deal or no deal rhetoric will undoubtedly return as thoughts move toward a phase two agreement between China and the US. Irrespective, we will keep our focus on the fundamental valuations of our companies which look attractive.
As of 12/31/2019, the following holdings were held in the Fund at the noted weights:
|Alibaba – 6.7%||Banorte – 1.1%||China Medical System – 1.7%|
|CSPC Pharmaceutical – 1.7%||Fibra Uno – 2.1%||Gazprom – 2.9%|
|Indiabulls – 1.00%||LG Chem – 3.3%||Samsung – 6.3%|
|Sasol – 1.5%||TSMC – 6.2%||Vedanta – 1.4%|
This information should not be relied upon as research or investment advice regarding any particular security. This is intended to provide insight into the manager’s investment process and strategy. Forward looking analytics are not a forecast of the Fund’s future performance.
To determine if the Fund is an appropriate investment for you, carefully consider the fund’s investment objectives, risk, and charges and expenses. This and other information can be found in the funds full and summary prospectus which can be obtained by calling 888-832-4386 or by visiting www.mondrian.com/mutualfunds. Please read the prospectus carefully before investing.
Investing involves risk, including the possible loss of principal. International investments entail risks not ordinarily associated with U.S. investments including fluctuation in currency values, differences in accounting principles, or economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors, as well as increased volatility and lower trading volume. The Fund may invest in derivatives, which are often more volatile than other investments and may magnify the Fund’s gains or losses.
The Mondrian Investment Partners Limited Funds are distributed by SEI Investment Distribution Co. (SIDCO). SIDCO is not affiliated with the advisor, Mondrian Investment Partners Limited. Mondrian Investment Partners Limited. Mondrian Investment Partners Limited is Authorised and Regulated by the Financial Conduct Authority.