Seafarer®

Pursuing Lasting Progress in Emerging Markets

Seafarer Overseas Growth and Income Fund

Portfolio Review Second Quarter 2012

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During the second calendar quarter of 2012, the Seafarer Overseas Growth and Income Fund declined -2.61% and -2.66% for the Investor and Institutional classes, respectively, while its benchmark, the MSCI Emerging Markets Total Return Index, fell -8.78%.

The Fund’s policy for distributions, as stated in the Prospectus, is that it will normally pay dividends and net investment income, if any, on a semi-annual basis. The Adviser is pleased to report that the Fund paid its first semi-annual distribution to shareholders in June. The Fund distributed $0.04995 and $0.03484 per share for the Investor and Institutional classes, respectively.

Performance

The first three months of the year were characterized by sharp gains in the emerging markets; stocks rallied in relief as Europe’s central bank (the ECB) undertook various policy measures to stabilize financial markets within the Eurozone. However, such relief was short-lived; markets stumbled in the second quarter due to renewed concerns over Greece’s ability to remain a member of the Eurozone, fears over Spain’s solvency, and worries that China’s economic growth will falter. At one point in early June, the emerging market benchmark index declined over -14% versus its closing level at the end of March; however, stocks recovered a bit, and the index finished the quarter down -8.78%.

Amid the volatile environment, the Fund declined, but less so than the benchmark index. The Fund’s exposure to Eastern Europe and Africa generated slight positive returns, while its holdings in Latin America were a slight drag on performance. Meanwhile, the Fund’s exposure to Asia caused the bulk of the Fund’s decline, though the Fund’s losses within that region were subdued relative to Asian stock indices.

Nearly every sector contributed to the Fund’s decline, but the information technology stood apart from the rest, causing the largest loss. The Fund has substantial exposure to technology – the sector accounts for 18% of the Fund’s net assets, and it is the second largest industry represented within the investment portfolio (after financial services). The fundamental reasons behind the sector’s decline were not immediately clear, though it appears that some investors have sold off their exposure for fear that a deceleration in the global economy will impact technology more so than other sectors. We disagree with this presumption, particularly when we consider potential growth over the next three years; consequently, the Fund will remain invested in the technology sector, with a particular emphasis on the software industry.

Allocation

At the end of June, the Fund’s composition was broadly similar to that of the end of the prior quarter.

The portfolio was largely invested in East and South Asia, as we believe the fundamentals of that region warrant it (please see the presentation from our recent Shareholder Conference Call for more details). However, exposure to Eastern Europe and Latin America grew incrementally, with 5 holdings in the former (versus 2 previously) and 3 holdings in the latter (versus 2 previously). We are particularly positive on the investment opportunities that exist in Eastern European markets such as Turkey and Poland. We believe that these two markets are capable of producing positive economic growth, despite the persistent uncertainties in the Euro area. We also think that valuations on selected stocks in Turkey and Poland are attractive, albeit only for investors willing to hold for the medium term (e.g. at least three years), and possibly through considerable volatility.

Looking forward, we anticipate the Fund will complete its registration for the Vietnamese market during the coming months. Vietnam’s market has recently declined; the government recently acknowledged that the country’s growth will likely fall short of its original forecast, and consequently investors have expressed some frustration by selling shares. However, we remain enthusiastic about the country’s long-term prospects and will be investing directly in the country when permitted to do so.

Andrew Foster Seafarer Capital Partners, LLC
  • 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.