During the fourth quarter of 2024, the Seafarer Overseas Growth and Income Fund returned -9.24%.¹² The Fund’s benchmark indices, the Bloomberg Emerging Markets Large, Mid, and Small Cap Net Return USD Index and the Morningstar Emerging Markets Net Return USD Index, returned -7.29% and -7.85%, respectively. By way of broader comparison, the S&P 500 Index returned 2.41%.

The Fund began the quarter with a net asset value of $13.01 per share. During the quarter the Fund paid a distribution of approximately $0.195 per share. This payment brought the cumulative distribution, as measured from the Fund’s inception, to $5.497 per share.³ The Fund finished the quarter with a value of $11.62 per share.⁴

During the calendar year, the Fund returned -5.39%, whereas the benchmark indices, the Bloomberg Emerging Markets Large, Mid, and Small Cap Net Return USD Index and the Morningstar Emerging Markets Net Return USD Index, returned 7.12% and 7.05%, respectively.⁵

Please note: this Portfolio Review encompasses only the fourth quarter of 2024, and does not offer a thorough discussion of the entire calendar year. The Fund operates on a fiscal year that concludes April 30; as such, Seafarer offers performance review summaries for the Fund’s annual and semi-annual periods, which are published in the Fund’s Shareholder Reports in late June and December, respectively. Previous Shareholder Reports are available in the Archives.

Performance

As the performance statistics above relate, the fourth quarter of 2024 was a poor one for emerging markets, and a difficult one for the Growth and Income Fund.

Currencies acted as the primary undercurrent for the asset class. During the quarter, the U.S. dollar surged against most currencies from the developing world, such that currency losses accounted for more than half of the decline of both the Bloomberg benchmark and the Fund. While currency markets are notoriously volatile and inscrutable, it is likely that the dollar strengthened for two main reasons: first, inflation remains stubbornly elevated in the U.S., making it unlikely that the U.S. Federal Reserve will make a material cut to rates this year. Some traders believe elevated rates beget higher inflows to the dollar, thus justifying an increase in the dollar’s value. (This mechanism is only likely when the currency in question is widely considered a “global reserve currency.” For currencies that do not enjoy such status, higher inflation combined with higher interest rates often has an ambiguous impact: the currency might experience either inflows or outflows.)

Second, investors assume that the newly-elected Trump administration will, sooner or later, erect a substantial global tariff regime. Some traders believe this regime will reduce U.S. imports and bring the trade deficit into better balance; if so, those same traders assume that the dollar will mechanistically experience reduced selling pressure and thereby enjoy a higher price. (Personally, I think this mechanism will prove far more complicated than has been anticipated, and the dollar may ultimately behave in a counterintuitive fashion.)

Whether traders’ reactions to inflation or tariffs are correct remains to be seen. However, I find it notable that at the very end of the third quarter, the dollar struck a multiple decade low versus a representative basket of currencies from the developing world. In other words, even as the dollar gained a great deal during the fourth quarter, its surge occurred from a multi-decade trough against emerging currencies.⁶

In addition to currency-driven losses, two other effects weighed on the Fund’s performance. First, one of the Fund’s key holdings in the technology sector worked against it, especially relative to the Bloomberg benchmark. The Fund has a large position in Samsung Electronics, a South Korea-based maker of a wide range of consumer electronics, appliances, memory chips, and semiconductors. Even as the company’s profits expanded during 2024, Samsung saw its shares slump dramatically in the second half of the year based on fears that it had lost critical ground to competition. Samsung makes certain “high bandwidth memory” (HBM) semiconductors, meant to be paired with the specialized chips used to run large language models (i.e., artificial intelligence). In the second half of 2024, Samsung revealed that its chips had not passed certain critical vetting necessary for the company to become a preferred HBM supplier, while two of its semiconductor rivals had succeeded, and were reaping outsized profits because of their accomplishment. Despite this setback, the Fund continues to hold a large allocation to Samsung, as it remains a highly profitable company with a strong balance sheet; and we suspect that its HBM chips will soon pass vetting tests and enjoy wider adoption.

The second effect arose from the Fund’s exposure to companies that produce consumer staples – especially such companies based in Latin America. For the past four years or so, the Fund has adopted a relatively high allocation to consumer stocks, with a particular emphasis on companies producing staples (high relative to the Fund’s history, and relative to the Bloomberg benchmark’s allocation). We selected such stocks for the Fund because they seemed to offer lower valuations, steady cash flow, combined with steady opportunities for growth, and the potential for attractive, rising dividends.

Unfortunately, we have seen investors disfavor such stocks for two primary reasons: first, weak demand, and second, rising costs that crimp profit margins. Like the United States, many emerging markets have experienced inflation; this has prompted central banks in the developing world to hike rates aggressively in response – so much so that higher rates seem to have crimped households’ demand, even for staples. In the meantime, while few countries are experiencing rampant inflation, price escalation on inputs and raw materials is nonetheless sapping some companies’ profit margins. These effects have been particularly acute among the Fund’s staples stocks in Latin America – and that same region also experienced pronounced currency weakness during the fourth quarter, as described above. Essentially the Fund’s holdings in Latin America were hit on two fronts at the same time: the stock prices swooned even as the currencies eroded versus the dollar. Yet despite this gloom, we remain optimistic holders of these same stocks, as most all of them are experiencing positive financial performance, even as their stock prices have lagged as of late.

Allocation

During the quarter, the Fund initiated one new position (Advantech, a Taiwan-based producer of a wide array of specialized computer products, modules, and automation systems for industrial customers); and just days after the quarter’s end, it exited one position (Rohm, a Japan-based manufacturer of integrated circuits and semiconductor devices).⁷

We’ve added Advantech for a number of reasons. Its broad offering of computer products, designed to meet the specifications of a wide variety of industries – transportation, logistics, gaming, energy, communications, urban management, healthcare, manufacturing and design – gives it numerous avenues for growth, and helps it avoid being dependent on the success of any one industry. At the same time, it offers customized products and “solutions” engineered for a given customer’s specific needs; such customization prevents Advantech’s products from easy commodification, thereby mitigating the risk of sharp competition. Perhaps most importantly, we perceive a future where Advantech’s products will play a practical role in the deployment of artificial intelligence and automation among the company’s commercial customers. The hype about AI is now rife within capital markets; however, proponents have yet to identify a single, large-scale commercial, revenue-generating use case. We suspect that Advantech’s ability to embed AI in customized applications may drive adoption in practice – by customers willing to pay for it.

Rohm was shed from the portfolio after a disappointing run. The Fund held the position for about three years. Initially, the shares performed well as the company profited handsomely from higher prices amid industry-wide supply constraints; the resulting cash flow was channeled into share repurchases and higher dividends. However, the company also channeled its cash into a substantial capacity expansion – an expansion that in hindsight appears to be poorly-timed, as the industry swung from tight supply to a glut in less than two years. This dramatic swing appears exacerbated by the rapid and forceful entry of competitors from China, who have managed to build capacity quickly while enhancing product quality to be competitive with Rohm. Rohm’s profits have collapsed, and the shares have swooned in response; rather than wait for a recovery, we have exited because the competitive pressure from China seems relentless.

Outlook

It was a poor quarter for the Fund’s stocks, capping off a disappointing year. Yet even as the Fund’s shares sank, I believe that investors have lost the plot. To be clear, I am referring to investors that set the marginal prices for stocks in the marketplace – not those of you invested in this Fund.

I believe investors have lost the plot because even as the Fund’s share prices sagged, the fundamental performance of the underlying companies was quite impressive. The disparity between declining prices and rising fundamentals was stark, and frankly counterintuitive. My entire experience suggests that share prices always follow fundamentals over the long term (and usually over the medium term), and thus last year’s dispersion is odd. During the year, the Fund’s aggregate dividends grew nearly 18%, and the Fund’s gross investment portfolio yield rose to 3.85%, about 0.70% higher than where it began the year.⁸ The Fund’s two current income distributions during the calendar year cumulatively represent the highest annual distribution yield in the Fund’s history.⁹

What’s behind this surge in yield? The Fund’s companies are, by and large, raising their dividends – in many cases, dramatically so. The companies’ motivations remain varied and unclear – but most seem to be distributing higher dividends because profitability is improving, and they have surplus cash on hand as a result.

Indeed, the telling fact about 2024 is that the Fund’s companies are on track to produce about 10% earnings growth for the year; meanwhile the consensus estimate for growth in the broader emerging markets is about 11%. Further, both the Fund and the market are forecast to generate earnings growth of about 13% in 2025 (based again on consensus estimates).¹⁰ These are the first two consecutive years of material growth in earnings from the emerging markets in over a decade. Impressively, this growth has manifest against a backdrop devoid of any artificial or unsustainable fiscal stimulus (China announced a plan for large stimulus late in the third quarter of 2024, but it has yet to materialize). The growth has occurred even as the largest economy within the developing world – China – is languishing. Personally, I find this growth to be compelling – particularly in that it appears to have resulted in substantially higher dividends. We have a strong, cash-based signal that profitability is likely shifting, probably recovering. It is enough for me to believe that the “lost decade” in the emerging markets is likely drawing to a close.

Still, even as earnings have improved dramatically, and even as dividends have been hiked, as noted above, currencies were the “Achilles heel” of the Fund and the asset class. The dollar’s strength has historically haunted emerging market currencies, and undermined returns to long-term investors that choose to hold emerging market assets. While I do not deny this historical fact, I am not particularly worried about the potential for currency risk to manifest in dramatic fashion in the future. As noted above, emerging currencies swooned in the fourth quarter, but they began by falling from a multi-decade high versus the dollar. While the dollar has enjoyed incredible strength over the past three months, emerging currencies have gained against it over the past decade.¹¹

Further, over the past two decades, returns from emerging currencies have been strongly and positively correlated to returns from emerging equities.¹² In most all instances, when emerging market stocks rose, so too did their underlying currencies; and when stocks fell, so too did the currencies. During 2024, this long-term trend was sharply broken: currencies fell even as local stock prices rose. Trends can change; but personally, I do not suspect this one will. Rather, I suspect that the “counter-trend” observed in 2024 (rising stocks but falling currencies) is not sustainable, and is likely to eventually reverse. If so, currencies might not be the “Achilles heel” they currently seem, particularly if the “lost decade” is winding down. I encourage you to observe events closely over the next year or two.

Thank you for entrusting us with your capital during what was a difficult year for the Fund. We appreciate that you have selected Seafarer as your long-term investment adviser in the developing world, and we will continue to work to earn your trust in the years ahead.

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 views and information discussed in this commentary are as of the date of publication, are subject to change, and may not reflect Seafarer’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 December 31, 2024, securities mentioned in the portfolio review comprised the following weights in the Seafarer Overseas Growth and Income Fund: Samsung Electronics Co., Ltd. (3.0%), Samsung Electronics Co., Ltd. Pfd. (1.5%), and Advantech Co., Ltd. (1.6%). The Fund did not own shares in Rohm Co., Ltd. View the Fund’s Top 10 Holdings. Holdings are subject to change.

Source: ALPS Fund Services, Inc.

Source: Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). Bloomberg or Bloomberg’s licensors own all proprietary rights in the Bloomberg Indices. Neither Bloomberg nor Bloomberg’s licensors approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.

The Seafarer Funds are not sponsored, endorsed, sold, or promoted by Morningstar, Inc. Morningstar, Inc. makes no representation or warranty, express or implied, to the shareholders of the Funds or any member of the public regarding the advisability of investing in the Funds or the ability of the Morningstar Emerging Markets Net Return U.S. Dollar Index to track general equity market performance of emerging markets.

1. References to the “Fund” pertain to the Fund’s Institutional share class (ticker: SIGIX). The Investor share class (ticker: SFGIX) returned -9.29% during the quarter. The Retail share class (ticker: SFGRX) returned -9.33% during the quarter. All returns are measured inclusive of Fund distributions paid (in relation to Fund performance) or dividends paid (in relation to index performance), reinvested in full (exclusive of any U.S. taxation) on the pertinent ex-date.
2. 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.
3. The inception date of the Fund’s Institutional share class is February 15, 2012.
4. The Fund’s Investor share class began the quarter with a net asset value of $12.92 per share; it paid a distribution of approximately $0.188 per share during the quarter, and it finished the quarter with a value of $11.54 per share. The Fund’s Retail share class began the quarter with a net asset value of $12.92 per share; it paid a distribution of approximately $0.192 per share during the quarter, and it finished the quarter with a value of $11.53 per share.
5. The Fund’s Investor share class returned -5.50% during the calendar year. The Fund’s Retail share class returned -7.76% between its inception on August 30, 2024 and the end of the calendar year.
6. Sourced from Bloomberg, using the Bloomberg Emerging Markets Large, Mid, and Small Cap Currency Implied Yield Index.
7. Reported as of January 31, 2025.
8. Sources: ALPS Fund Services, Inc.; Bloomberg; Seafarer.
9. Sources: ALPS Fund Services, Inc.; Seafarer.
10. Sources: J.P. Morgan, “Emerging Markets Equity Strategy Steering Board,” January 2, 2025; ALPS Fund Services, Inc.; Bloomberg; Seafarer.
11. Sourced from Bloomberg, using the Bloomberg Emerging Markets Large, Mid, and Small Cap Currency Implied Yield Index.
12. Sources: Bloomberg; Seafarer. Based on analysis of the Bloomberg Emerging Markets Large, Mid, and Small Cap Net Return Hedged USD Index and the Bloomberg Emerging Markets Large, Mid, and Small Cap Net Return USD Index.