Overview

Prospectus Semi-Annual Report October 31, 2012

Investment Objective

The Fund seeks to provide long-term capital appreciation along with some current income; it also seeks to mitigate adverse volatility in returns.

Strategy

The Fund invests primarily in the securities of companies located in developing countries. The Fund invests in several asset classes including dividend-paying common stocks, preferred stocks, convertible bonds, and fixed-income securities.

The Fund seeks to offer investors a relatively stable means of participating in a portion of developing countries’ growth prospects, while providing some downside protection compared to a portfolio that invests only in the common stocks of those countries.

Share Classes

Underlying Portfolio Holdings as of 3/31/13

• Gross expense ratio: 4.48% for Investor Class; 4.59% for Institutional Class¹ All performance is in U.S. dollars with gross (pre-tax) dividends and/or distributions reinvested. The performance data quoted represents past performance and does not guarantee future results. Future returns may be lower or higher. The investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than the original cost. Shares of the Fund redeemed or exchanged within 90 days of purchase are subject to a 2% redemption fee. Performance does not reflect this fee, which if deducted would reduce an individual's return.

• Sources: ALPS Fund Services, Inc., FactSet Research Systems, Seafarer
• Portfolio holdings are subject to change.
• The "Underlying Portfolio Holdings" table above presents indicative values only; Seafarer does not warrant the data's accuracy, and disclaims any responsibility for its use for investment purposes.
• William Maeck and Kate Jaquet are Registered Representatives of ALPS Distributors, Inc.

1. Seafarer Capital Partners, LLC (the “Adviser”) has agreed contractually to waive and/or reimburse fees or expenses in order to limit Total Annual Fund Operating Expenses After Fee Waiver / Expense Reimbursements (excluding acquired fund fees and expenses, brokerage expenses, interest expenses, taxes and extraordinary expenses) to 1.60% and 1.45% of the Fund’s average daily net assets for the Investor and Institutional share classes, respectively. This agreement is in effect through August 31, 2013. In addition to the Adviser’s agreement to contractually waive and/or reimburse fees or expenses, the Adviser has voluntarily agreed to waive a portion of its management fee payable by the Fund so that such fee is reduced to 0.75% of the Fund’s average daily net assets. Further, after giving effect to this voluntary agreement to waive a portion of its management fee, the Adviser has also agreed to voluntarily waive and/or reimburse fees or expenses of the Fund in order to limit total annual fund operating expenses (excluding acquired fund fees and expenses, brokerage expenses, interest expenses, taxes and extraordinary expenses) to 1.40% and 1.25% of the Fund’s average daily net assets for the Investor and Institutional share classes, respectively. The Adviser intends to continue these voluntary arrangements through at least August 31, 2013 (the date the existing contractual agreement expires), at which point they may be extended further. However, the Adviser may reduce or terminate these voluntary arrangements at any time without notice.
2. Calculated as a harmonic average of the underlying portfolio holdings.

Performance

Historical Fund Data

• Gross expense ratio: 4.48% for Investor Class; 4.59% for Institutional Class¹ All performance is in U.S. dollars with gross (pre-tax) dividends and/or distributions reinvested. The performance data quoted represents past performance and does not guarantee future results. Future returns may be lower or higher. The investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than the original cost. Shares of the Fund redeemed or exchanged within 90 days of purchase are subject to a 2% redemption fee. Performance does not reflect this fee, which if deducted would reduce an individual's return.
• Source: ALPS Fund Services, Inc.

• Sources: Bloomberg, Seafarer
• The NAV Contribution charts present indicative values only; Seafarer does not warrant the data's accuracy, and disclaims any responsibility for its use for investment purposes.

1. Seafarer Capital Partners, LLC (the “Adviser”) has agreed contractually to waive and/or reimburse fees or expenses in order to limit Total Annual Fund Operating Expenses After Fee Waiver / Expense Reimbursements (excluding acquired fund fees and expenses, brokerage expenses, interest expenses, taxes and extraordinary expenses) to 1.60% and 1.45% of the Fund’s average daily net assets for the Investor and Institutional share classes, respectively. This agreement is in effect through August 31, 2013. In addition to the Adviser’s agreement to contractually waive and/or reimburse fees or expenses, the Adviser has voluntarily agreed to waive a portion of its management fee payable by the Fund so that such fee is reduced to 0.75% of the Fund’s average daily net assets. Further, after giving effect to this voluntary agreement to waive a portion of its management fee, the Adviser has also agreed to voluntarily waive and/or reimburse fees or expenses of the Fund in order to limit total annual fund operating expenses (excluding acquired fund fees and expenses, brokerage expenses, interest expenses, taxes and extraordinary expenses) to 1.40% and 1.25% of the Fund’s average daily net assets for the Investor and Institutional share classes, respectively. The Adviser intends to continue these voluntary arrangements through at least August 31, 2013 (the date the existing contractual agreement expires), at which point they may be extended further. However, the Adviser may reduce or terminate these voluntary arrangements at any time without notice.
2. The MSCI Emerging Markets Total Return Index, Standard (Large+Mid Cap) Core, Gross (dividends reinvested), USD is a free float-adjusted market capitalization index designed to measure equity market performance of emerging markets. The MSCI Emerging Markets Total Return Index consists of the following 21 emerging market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey. Index code: GDUEEGF. It is not possible to invest directly in this or any index.

Composition

Historical Fund Data

30-Day SEC Yield: SFGIX 1.78%; SIGIX 1.95% (4/30/13)
The performance data quoted represents past performance and does not guarantee future results. Future returns may be lower or higher. The investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than the original cost. View the Fund’s most recent month-end performance.

The tables and charts above present indicative values only; Seafarer does not warrant the data's accuracy, and disclaims any responsibility for its use for investment purposes. Percentage values may not sum to 100% due to rounding.

1. Yield = dividend yield for common and preferred stocks and yield to maturity for bonds
2. Sindoh Co. Ltd., a small capitalization company located in South Korea, is not followed by enough brokerage analysts so as to have public “consensus” forecasts for its earnings or EPS growth.
3. Weighted Average Market Capitalization of Issuer
4. Calculated as a harmonic average of the underlying portfolio holdings.
5. The Fund’s concentration in the Financials sector includes holdings in property-related stocks, which are classified within the “Financials sector” according to the Global Industry Classification Standard (GICS) methodology utilized herein. Property-related holdings comprised 5% of the Fund’s net assets as of 3/31/13.

Distributions

Estimates for the Seafarer Fund’s mid-year distributions will be available on this page the week of June 10, 2013. Dates for the distributions are provided below.

For more information on the Fund's distribution policies, please see the “Dividends and Distributions” section of the Prospectus.

Should you have any questions, please contact Shareholder Services at (855) 732-9220 (Mon–Fri 9am–8pm ET).

Portfolio Review

April 19, 2013

During the first calendar quarter of 2013, the Seafarer Overseas Growth and Income Fund gained 3.17% for both the Investor and Institutional classes, while the Fund’s benchmark, the MSCI Emerging Markets Total Return Index, fell -1.57%. By way of broader comparison, the S&P 500 Index rose 10.61%.

Performance

So far, 2013 has proven to be a tumultuous year for stocks in the developing world. Despite an auspicious start to the year – emerging markets surged in early January – by the end of the quarter, the markets had reversed and were in decline. This reversal occurred despite impressive gains from U.S. equities during the same period. Investors in the emerging markets have long hoped their performance would “decouple” from the developed world; unfortunately, decoupling was all too evident during the quarter, but not in a manner that was beneficial to short-run returns.

There are competing explanations as to why emerging markets performed so poorly. The list includes weak growth in China; a sharp, cyclical decline in commodity markets; major shifts in economic policy in Brazil; and elevated inflation in some of the largest markets, such as China, India and Brazil. However, in my view, the most important causal factor was identified in Seafarer’s semi-annual shareholder letter last fall, and again in our shareholder conference call in January: namely, that growth in corporate profits was likely to fall below the market’s elevated (and misplaced) expectations. As of late February, Bloomberg News reported that over 60% of the companies tracked within the MSCI Emerging Markets Index (the Fund’s benchmark) reported fourth quarter results that fell short of forecasts.¹ I am convinced that the resulting disappointment was directly responsible for the volatility and poor performance that ensued. The same report stated that the equivalent ratio for the MSCI World Index – which includes most developed markets – was just over 30%, suggesting growth in the developed world was far more resilient.

Against this rocky backdrop, the Fund performed reasonably well; I am pleased the portfolio produced gains, even as emerging markets broadly declined. Even so, it was a bruising quarter, and the Fund did not go unscathed. Several of the portfolio’s largest positions – including SIA Engineering, PGE, Ajinomoto, and SQM – reported results that the market perceived as being weak, and those companies’ share prices retreated as a result. Despite short-term setbacks for these four stocks, I remain enthused about the long-term prospects for each, and I believe the market’s response was exaggerated and will ultimately prove misplaced.

The Fund’s outsized allocation to Polish stocks also weighed on performance. The economy there has recently stagnated, with near 0% growth, falling well below forecasts that called for a 2.5% expansion. This unexpected downturn triggered a decline in Polish stocks and the local currency (the zloty). The end result was that Poland finished the first quarter of as one of the worst-performing emerging markets in the world – and unfortunately, the Fund’s three Polish holdings fell in tandem with the market. Yet the valuations for each of these positions (PGE, Bank Pekao and Asseco) are ever more compelling, their cash flows attractive, and their long-term growth prospects undiminished, despite the tepid economic backdrop at present. Nonetheless, I will be travelling to Poland shortly to revisit my assumptions for each of these holdings.

Offsetting these challenges, a number of the Fund’s mid-sized positions performed very well. For example, the portfolio’s two holdings in Mexico (Kimberly Clark and Grupo Herdez) both produced strong gains. Both are makers of consumer products – diapers and sauces respectively – and both are benefiting from strong growth in Mexico that has translated to vigorous spending by consumers. Also, the local currency (the peso) has gained steadily as of late, and this has been beneficial to both companies’ profits, as it has reduced the effective costs of some of their key inputs, which happen to be denominated in dollars.

The Fund’s holdings in Southeast Asia also made notable contributions to the Fund’s gains. The Fund’s Vietnam positions fared well because of their underlying profitability: financial results from the past quarter were reasonably good. At the same time, the Vietnamese government restored a degree of confidence to the market by announcing a series of important economic reforms, and this has boosted shares broadly. However, the government has yet to execute its various initiatives, and if it does not do so reasonably soon, frustration is likely to resurface. Meanwhile, the Fund’s two positions in the Thai financial sector (Bangkok Bank and Thai Reinsurance) also performed well. Both companies ostensibly benefitted from resilient growth in Thailand; and the latter also saw its shares rise because investors determined that the company made sufficient repairs to its balance sheet following Thailand’s flood of 2011.

Allocation

As I survey global stock markets, it seems to me that a number of dramatic shifts are underway. This is an obvious truism: markets are never constant, and change is always at work. Yet at this moment, the shifts strike me as of being of greater magnitude and consequence than is usually the case.

One notable shift is that within the emerging markets, the commodities / materials sector has grossly underperformed most other sectors since the fall of 2011. At that time, markets around the world were under strain due to fears over the sustainability of the Eurozone, and shares in all sectors were depressed. However, by early 2012, most developed and emerging markets staged a partial recovery; but not so for emerging market commodity stocks, which remained depressed throughout the year. Early performance in 2013 has only sustained this trend: growth in China has decelerated, and commodity stocks everywhere have swooned in sympathy, even as other sectors have held up reasonably well.

I cannot yet explain this disconnect between commodities and the rest – Seafarer is currently researching the issue – but I find it intriguing, because for the better part of the past decade, investors bought commodity stocks aggressively as a means to “play” growth in the emerging world. The sector was previously considered to be “high beta”: if emerging markets were set to perform well, investors reflexively assumed commodities would perform all the better. That strategy is now on the rocks. In the past, I have shunned such businesses because I have not been able to make sense of the elevated valuations that investors have placed on their shares. I find it difficult to value businesses that are so deeply cyclical and volatile.

Yet now that valuations have receded so sharply, I believe that value is emerging. As a consequence, the Fund is adding to its exposure to commodities, albeit cautiously and in a very focused manner. To be sure, the Fund remains underweight the materials sector, with a 7% weighting versus 11% in the benchmark index. (Note: non-energy-related commodity businesses are classified as “materials” by the benchmark index.) Further still, I believe the stated 7% allocation for the Fund overstates its true exposure to commodities: the Fund holds only two stocks that are “pure” commodities companies (SQM and Vale, a new holding), both of which are focused on extraction of raw materials. Those two names together account for 5% of the Fund’s 7% allocation.² The Fund’s modest allocation to extraction-based businesses is nevertheless the highest weighting I have ever placed on the sector in my career. To date, it has been the wrong bet: both SQM and Vale have detracted from performance, in line with the sector overall. Yet I am optimistic about the valuations of these two stocks, and despite their cyclicality, I believe both might deliver the sort of long-term sustainable growth that the Fund seeks.

Another major change in global markets is the drastic shift in monetary policy now underway in Japan. As I discussed in greater depth in my Tokyo Field Notes, I am deeply divided about what is occurring in Japan. On the one hand, I firmly believe that aggressive monetary policy is the correct prescription for what ails the country most: deflation. On the other hand, I think there is a material chance that Japan’s monetary policies will stoke intense speculation in a narrow group of financial assets. Indeed I believe a number of “mini-bubbles” are already forming, with distorted valuations evident for certain stocks and REITs (real estate investment trusts). If those mini-bubbles burst violently, I fear Japan’s new monetary policies will be discredited and withdrawn before they can induce needed change. If that happens, all the major policy options I can envision for the country will be exhausted. Thus there is a certain “go-for-broke” quality to the new policy construct that leaves little room for error. The Fund remains invested in Japan for the time being because of the individual merits of its holdings there; yet I am wary over what is likely to be a very wild ride.

Lastly, the deceleration in China’s growth rate has created yet another notable shift in global markets. I have commented at length about the causes and consequences of the deceleration, so I will not revisit the issue here.³ However, I note that within the span of three months, market sentiment has shifted sharply toward the negative. In the early weeks of 2013, emerging markets were ebullient; there was great hope that China’s growth would accelerate and cause an expansion in corporate profits. Now the pendulum has swung the other way – too far in my view – and valuations in some of the larger emerging markets have grown more attractive (especially in China). As a consequence, the Fund has established new positions within China whose depressed valuations seem at odds with their long-term growth prospects.

• The performance data quoted represents past performance and does not guarantee future results. Future returns may be lower or higher. The investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than the original cost. View the Fund’s most recent month-end performance.
• The MSCI Emerging Markets Total Return Index, Standard (Large+Mid Cap) Core, Gross (dividends reinvested), USD is a free float-adjusted market capitalization index designed to measure equity market performance of emerging markets. The MSCI Emerging Markets Total Return Index consists of the following 21 emerging market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey. Index code: GDUEEGF. It is not possible to invest directly in this or any index.
• The views and information discussed in this commentary are as of the date of publication, are subject to change, and may not reflect the writer's current views. The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investment vehicles. It should not be assumed that any investment will be profitable or will equal the performance of the portfolios or any securities or any sectors mentioned herein. The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation. Seafarer does not accept any liability for losses either direct or consequential caused by the use of this information.
• As of 12/31/2012, SIA Engineering Co., Ltd. comprised 4.9% of the Seafarer Overseas Growth and Income Fund; PGE Polska Grupa Energetyczna SA comprised 4.7% of the Fund; Ajinomoto Co. Inc. comprised 3.2% of the Fund; SQM (Sociedad Quimica y Minera de Chile SA ADR) comprised 2.6% of the Fund; Bank Pekao SA comprised 3.2% of the Fund; Asseco Poland SA comprised 2.4% of the Fund; Kimberly-Clark de Mexico SAB de CV comprised 2.3% of the Fund; Grupo Herdez SAB de CV comprised 2.2% of the Fund; Bangkok Bank PCL comprised 3.0% of the Fund; Thai Reinsurance PCL comprised 1.4% of the Fund; and Taiwan Hon Chuan Enterprise Co., Ltd. comprised 1.4% of the Fund. As of 12/31/2012, the Fund had no economic interest in Vale (Cia Vale do Rio Doce, Pfd.). View the Seafarer Overseas Growth and Income Fund’s Top 10 Holdings. Holdings are subject to change.

1. Bloomberg News, “Emerging Stocks Cheapen as Profits Disappoint,” 24 February 2013.
2. The other 2% of the 7% in the materials sector is attributable to Taiwan Hon Chuan (THC), a producer of plastic bottles for the Asian beverage industry. THC produces plastics, and thus it is officially classified as a “materials” stock. However, I think that designation is debatable. Most companies in the materials sector produce highly commoditized products. By contrast, THC produces very specialized bottles and packaging, designed for consumer use. Its customers are bottlers, and THC is often highly integrated with its clientele, with production lines embedded within its clients’ premises. I think these features distinguish THC’s business from generic plastics companies, and as a consequence I personally believe the company is economically aligned with the consumer staples sector.
3. For more information on this topic, please see the following commentaries and presentations: Letter to Shareholders (Annual Report for the period ended April 30, 2012), Inaugural Shareholder Conference Call (July 2012), Letter to Shareholders (Semi-Annual Report for the period ended October 31, 2012).

Letter to Shareholders

November 12, 2012

Dear Fellow Shareholders,

I am pleased to address you again on behalf of the Seafarer Overseas Growth and Income Fund.

During the first six months of the Fund’s 2012-13 fiscal year (May 1 – October 31), the Investor and Institutional share classes of the Fund gained 7.13% and 7.16%, respectively. By comparison, the Fund’s benchmark, the MSCI Emerging Markets Total Return Index, declined -1.01%. The team at Seafarer is pleased with the Fund’s performance to date; however, we are cognizant the Fund is very new, and that our work has only just begun.

Valuations

A brief note on current market conditions: in the preceding letter to shareholders, I stated, “valuations on emerging equities are very appealing.” I draw your attention to that remark because conditions today are somewhat different. Valuations on many emerging market equities have risen, even if the index has not. In the meantime, the growth of profits, while still positive, has decelerated. In my own opinion, stock valuations are now broadly fair.

To be sure, valuations are not excessive when judged relative to history or the potential for future growth. Yet they are no longer especially attractive, in light of both well-known risks (e.g., slow growth in Europe and the possible dis-integration of the Euro; China’s slowing growth; and fiscal problems in the U.S.) and less-appreciated threats (e.g., the potential for conflict in Syria, Iran or the South China seas). More subtly, it is my opinion that the consensus forecast for profit growth in the emerging world has crept beyond reality. Disappointment will likely ensue, and if I am correct, stocks will gyrate. Investors who wish to safeguard a reasonable expectation of profits should be prepared to hold over a long horizon – at least three years – and through what may be considerable volatility.

China’s Future

In the preceding letter to shareholders, I discussed the changing nature of China’s economy. I made two points: first, the rate of growth in China is declining, and because the deceleration stems from structural causes (as opposed to cyclical ones), it will most likely be permanent. Second, the nature of China’s growth model is also changing, moving away from external and infrastructure sectors, and moving toward sectors that favor domestic demand, human capital, and especially services. I am going to revisit China’s evolution here, not only because it warrants your attention, but also because – to state the obvious! – it is highly complex, and challenging to navigate within the context of a long-term investment portfolio.

The pace of China’s growth is slowing amid transition, but its economy still has plenty of untapped capacity to grow, and perhaps in a more sustainable fashion. This latent potential is most visible in the country’s stunted and underdeveloped services sector, which in my view is leading the current transition. By “services,” I mean a broad spectrum of industries, comprising the consumer (e.g. health care, tourism and leisure); commercial (e.g. media, advertising, publishing, distribution, data processing, software and personnel management); and industrial (e.g. transport, logistics, pollution abatement, systems management).

Bright Prospects

China’s modern economy is decidedly pluralistic. However, over the past six decades, the country’s leadership has mostly favored a command-style system, and it has used its control over the economy to steer resources towards tangible, scalable manufacturing industries. The leadership’s intent was to induce growth and employment; yet it has resulted in an economic model that is unbalanced, as it is overly reliant on exports, construction, and investments in physical infrastructure. By contrast, China’s leadership has mostly overlooked (and perhaps even fears) the small-scale, intangible, information-intensive industries that comprise the services sector.

The consequence of this is that China’s modern service sector is puny by any reasonable measure. I estimate the private service sector comprises roughly one third of total output, whereas the equivalent ratio is 68% in the U.S.¹ The low proportion of services within the economy means that if China can encourage growth in the sector – or at least not hinder it – it has plenty of room to expand.

In this respect, I believe present-day China is possibly analogous to the U.S. in 1947. Sixty-five years ago, private sector services accounted for only 48% of U.S. GDP.² For the next six and a half decades, the service sector led our country’s growth, such that it now accounts for over two-thirds of output.³ I believe China’s evolution will follow a similar path, and indeed the evidence already suggests as much: data from China’s National Bureau of Statistics indicates that China’s tertiary sector (comprised mainly of service industries) has recently outpaced the country’s vaunted industrial sector. Since at least 2003, the former expanded at a compounded rate of 15.5% (measured in nominal terms), whereas the latter grew at a 15.1% rate. Meanwhile, China’s leadership also seems to acknowledge that the services sector will make an important contribution to future growth. The Central Committee’s current five-year plan (2011- 2015) prescribes long-term targets whereby the services sector would account for 70% of the country’s output.⁴ In addition, the plan elevates seven key industries – three of which are service-based – and “nurtures” them until they become “pillars” of the economy.⁵

Dark Clouds

Clearly, I remain enthusiastic about China’s economic prospects, especially its service sector; I only wish investing in the country was so simple! Obviously it is not. China faces myriad challenges, encompassing social, political, economic and environmental ills. Most are well known. There are, however, two threats to China’s future that I believe receive insufficient attention: the growing potential for military conflict; and the weakening grasp of the ruling party.

First, regarding the potential for conflict: I think it is unlikely China will go to war; but I cannot dismiss the possibility altogether. If China does engage in a major conflict, clearly it will pose a grave threat to the country’s future (to say nothing of stock markets around the world).

A casual survey of Chinese history suggests that most analysts perceive China as a peaceful power, at least with respect to cross-border conflict. History bears this out: China has occasionally fought lesser wars with its neighbors, but most of its conflicts and intrigues have been confined to its interior. China has always perceived itself as Asia’s central power – it is known as the Middle Kingdom – and historically it has held sway over a network of neighboring states that paid tribute to the center.

Many analysts appear comfortable with the assumption that China will remain a peaceful power amid its rise. I am not so sure: I don’t think the country’s past necessarily prescribes its future. Admittedly, my experience in China is limited, and is that of an outsider. Yet I worry about many things: I worry that the country’s hunger for resources will drive it to become overly assertive; I worry that a substantial portion of the country’s newfound wealth has been channeled into military spending; I worry that claims to seas and lands around greater China have complex and disputed origins; I worry that a large populace within China is restless, frustrated by a deep socio-economic divide and cut off from their roots, courtesy of the Cultural Revolution. Most of all I worry that China’s civilian leadership is struggling to retain its mandate amid economic challenges and scandalous corruption. I am concerned that the leadership will find it convenient to deflect criticism by cultivating chauvinist and bellicose politics.

I do not know whether the Diaoyu Islands will become the flashpoint for conflict. However, events there and elsewhere reveal a new actor: a powerful, modern state eager to assert its interests. Consequently, I assess the probability of conflict there or elsewhere as low, but well above zero. What surprises me is the seemingly relaxed stance of the global investment community. When I began my investment career fourteen years ago, the leading question I received from investors – ahead of every economic and financial issue – was whether war would break out between Beijing and Taipei. I rarely hear concerns about conflict today. Back then, I responded confidently that China’s growth meant it had too much to lose. Perhaps my old argument still holds; but I worry that the balance of power has grown far more complex. I do not advise retreat from China’s markets, but I urge investors to observe events carefully, and to proceed with caution.

Another matter plagues China today, and constitutes a more present threat to the country’s stability: the slipping grasp of the country’s leadership. As of the date of this report, China had nearly completed its once-per-decade transition in government. It did so under an astonishing cloud of scandal and venality. In my view, the country needs to cut a clear path toward reform and a greater degree of openness. However, the Communist Party of China (CPC) appears to be “circling the wagons” to protect its interests. Certain CPC members appear to have been shielded from scrutiny via patronage; meanwhile, the state-backed segment of the economy has literally been given a bigger seat at the table, as more captains of state-owned companies were “elected” to the 205-member Central Committee than ever before.

I find this shift in China’s direction worrisome, and the country’s top leadership is seemingly concerned, too. In one of his outgoing speeches, President Hu Jintao warned that if the party did not address its deficiencies head on, it could instigate “the fall of the state and the party.”⁶ Hu then used his influence to have his personal doctrine of the “scientific concept of development” enshrined in his party’s constitution, in a bid to ensure his legacy. There is a certain irony in the notion of the term “scientific development.” By it, President Hu means to favor the adoption of pragmatic policies that are unburdened by ideology. This is laudable. Yet what China’s leadership needs, now more than ever, is a truly scientific disposition: an abiding sense of curiosity; an openness to experimentation; a commitment to transparency; and a constant ability to adjust to reality, as informed by evidence.

I am told that President Hu and the leadership mean quite the opposite. They equate “scientific” with “systematic,” and they intend to curtail experimentation, not promote it. Several analysts have commented that Hu’s speeches during the handover effectively put his successors in the equivalent of a political straightjacket.⁷ Hu prescribed narrow limits for acceptable reform; much was left off the table, including the state-backed economy, along with the CPC itself. Unfortunately, it appears the leadership now associates political experimentation with the rogue dealings and cowboy-like leadership of the now disgraced Bo Xilai. The consequence is that rather than embrace change, the party appears set to pursue a closed approach that bears little resemblance to “science.”

For all my concerns, though, there is ample room for hope. I remain impressed that reform-minded factions within China continue to quietly win small but cumulatively meaningful battles, freeing up markets and relaxing central control over the economy. On balance, I still see more promise than pitfall – but the path forward is narrowing, and the footing treacherous. Investors must watch carefully where the country steps next.

Seafarer’s Present

Leaving aside China’s complex future, and moving to Seafarer’s simple present: we are happy to have gotten our business off the ground, and to have achieved a measure of progress. In launching our firm, we harbored no illusions: we knew it would be a challenging, long-term endeavor. I can report that the firm’s growth has surpassed our expectation, and we are pleased to have many new shareholders subscribe to the Fund. We are enthusiastic for the future, and we are honored by the trust each shareholder has placed in us. We will work to earn that trust.

The notion of progress is central to our investment philosophy at Seafarer. We invest in the developing world because it is steeped in growth and change. Individuals and families are striving to improve the conditions of their lives. That act – striving to meaningfully better one’s circumstances, and one’s society – is what begets progress. Some portion of that progress spills over to corporate profits, and to the value of companies. This is ultimately what we attempt to capture in our portfolios: the value that arises from the progress and growth of the developing world.

Thank you for entrusting us with your capital. We are honored to act as your investment adviser.

• The performance data quoted represents past performance and does not guarantee future results. Future returns may be lower or higher. The investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than the original cost. View the Fund’s most recent month-end performance.
• The MSCI Emerging Markets Index, Standard (Large+Mid Cap) Core, Gross (dividends reinvested), Total Return USD is a free float-adjusted market capitalization index designed to measure equity market performance of emerging markets. The MSCI Emerging Markets Index consists of the following 21 emerging market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey. Index code: GDUEEGF. It is not possible to invest directly in this or any index.
• The views and information discussed in this commentary are as of the date of publication, are subject to change, and may not reflect the writer's current views. The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investment vehicles. It should not be assumed that any investment will be profitable or will equal the performance of the portfolios or any securities or any sectors mentioned herein. The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation. Seafarer does not accept any liability for losses either direct or consequential caused by the use of this information.

1. National Bureau of Statistics of China, U.S. Bureau of Economic Analysis (U.S. BEA) and Seafarer. Please note: statistics for both the U.S. and China intentionally exclude services provided by the government and / or the public sector. According to the U.S. BEA, U.S. total service sector activity comprises nearly 80% of U.S. GDP, about 13% of which is attributable to the public sector. China’s most accessible statistics on the tertiary sector do not distinguish between public and private sector services, but together they account for 43% of GDP. My intent here was to focus on private sector services only, and thus I have deducted an estimate for government-related services, which I believe comprise 12% to 13% of China’s GDP. Thus I estimate private sector services to constitute a bit less than one third of China’s output.
2. U.S. BEA, Seafarer.
3. U.S. BEA, Seafarer.
4. Dan Harris, “China’s 12th Five Year Plan: A Preliminary Look,” China Law Blog, 3 March 2011.
5. Xinhua, “China to nurture 7 new strategic industries in 2011-15,” 27 October 2010.
6. Zhuang Pinghui, South China Morning Post, 10 November 2012.
7. Verna Yu, South China Morning Post, 10 November 2012.