Letter to Shareholders – Semi-annual Report
Period ended October 31, 2016
I am pleased to address you again on behalf of the Seafarer Funds. This report covers the first half of the 2016-17 fiscal year (May 1, 2016 to October 31, 2016).
Launch of the Seafarer Overseas Value Fund
On May 31, 2016, Seafarer launched the Overseas Value Fund, the second fund in the Seafarer Funds series.
Seafarer’s original fund, the Overseas Growth and Income Fund, is focused on finding relative value within the emerging markets: the Fund seeks to find securities that present balanced characteristics between prospective capital growth, current income, and present valuation.
The new Value Fund’s strategy is dedicated to a traditional form of value investing, adapted for the particular challenges inherent to the emerging markets. Often, value-oriented strategies implemented in the emerging markets simply look for growth-oriented stocks with low valuations (e.g., perhaps cyclically-depressed growth stocks). By contrast, the Fund places particular emphasis on searching for value embedded in corporate balance sheets: the Fund attempts to mine value that has already been created, but perhaps not recognized or realized by investors.
My colleague, Paul Espinosa, has taken up leadership of the Value Fund. I am deeply pleased by the advent of the Fund, as well as Paul’s leadership over it. The new Fund embodies an important evolution in Seafarer’s investment philosophy. As the Fund’s co-manager, I am excited and eager to contribute to its progress over the next decade and beyond.
Reduction in Fees and Economies of Scale
Beyond the launch of the new Fund, I am also pleased to report that Seafarer has lowered its management fee, consistent with its stated objective to reduce operating expenses over time, and with scale.
Effective August 31, 2016, the Funds’ Advisor (Seafarer Capital Partners, LLC) lowered its management fee for both funds by 0.05% (from 0.75% to 0.70%) on consolidated net assets in excess of $1.5 billion.1 Please note that the management fee is one component of each Fund’s total operating expenses. This is the second reduction in management fees in the Funds’ history; it is the fifth time that Seafarer has acted to reduce expenses by either capping expenses at a lower level or reducing management fees.
As of the date of this report, the Growth and Income Fund had net assets of approximately $1.9 billion. Happily, the Fund’s scale has begun to yield additional economies: the Fund’s Prospectus (dated August 31, 2016) states that operating expenses are 0.98% for the Institutional class and 1.08% for the Investor class, below the Funds’ contractual expense caps (1.05% and 1.15%, respectively).
Presently, the much smaller scale of the Value Fund (approximately $5 million in net assets as of the date of this report) means that its expenses are still subject to the Funds’ contractual caps (i.e. 1.05% for the Institutional class and 1.15% for the Investor class).
Expansion of Seafarer’s Team
As Seafarer has grown, it has continued to invest in its research capabilities and operational capacities, particularly via additions to the team. I am delighted by the caliber of the people that have joined our organization, and I am excited by the depth and breadth of talent they embody.
The firm’s new members include: David Lenik, the firm’s Chief Compliance Officer; Kevin Lammert, the firm’s Chief Financial Officer; Ryan Kelley and Natalia Urbanek, who serve in client service functions; Chris Clayton, the firm’s Director of Trading; and Inbok Song, who joins the firm as Director of Research.
I would like to single out Inbok Song, for a moment: it is a privilege to work with her again. Inbok and I worked together in the past; since that time, she held senior portfolio management positions at our former employer and elsewhere. She brings drive, analytical talent, and a wealth of experience, and Seafarer is lucky to have her. Inbok occupies a new role as Director of Research. Her primary remit is to ensure the quality and consistency of our research output, and to oversee the systems and models that drive our research; she will also produce fundamental securities research in support of the firm’s investment strategies.
As long-term shareholders are aware, the Growth and Income Fund has experienced considerable growth in assets under management over the past two years. The Fund passed the third anniversary of its existence in February of 2015, at which time its net assets were slightly below $150 million. As of October 2016, the Fund had approximately $1.9 billion under management.
My goal in managing the Fund is to ensure that it has adequate capacity to serve its existing shareholders’ needs, both in the present and in the future. I currently estimate the strategy has a capacity of $4 billion (I reserve the right to revise this estimate in the future). I imagine that if the Fund were to reach this threshold, Seafarer would likely restrict subscriptions from existing clients. Personally, I have no desire to manage a fund subject to such restrictions, so I place great importance on managing capacity in a manner that reduces the possibility of their imposition.
In an effort to manage capacity and moderate the pace of subscription activity, I closed the Fund to most new investors at the end of September 2016 (known as a “soft close”). I did so at an asset level that should provide existing clients and shareholders ample capacity to expand their allocations to the Fund over time, should they choose to do so. I estimate that, even if existing shareholders increase their allocations considerably, the Fund will have sufficient spare capacity such that it should “undershoot” its $4 billion limit. My intention is to ensure the strategy remains at a manageable size in prevailing market conditions, while still preserving relatively unfettered access to the Fund for existing clients and shareholders.
We appreciate the trust you afford our organization, and we are honored to serve as your investment advisor in the emerging markets.Andrew Foster Seafarer Capital Partners, LLC
- 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.
- The Seafarer Funds, in the aggregate, pay the Adviser an annual management fee of 0.75% of the aggregate average daily net assets of the Funds up to $1.5 billion and 0.70% of the aggregate average daily net assets of the Funds over $1.5 billion. Each Fund pays the Adviser a monthly fee at the annual rate using the applicable management fee calculated based on the Fund’s pro rata share of the Funds’ average daily net assets.