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Seafarer Overseas Growth and Income Fund

Portfolio ReviewThird Quarter 2012

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During the third calendar quarter of 2012, the Seafarer Overseas Growth and Income Fund gained 8.63% and 8.71% for the Investor and Institutional classes, respectively, while its benchmark, the MSCI Emerging Markets Total Return Index, rose 7.89%.


Markets in the developing world rose sharply during the quarter, offsetting nearly all of the losses incurred during the preceding three months. Stocks gained in anticipation of continued stimulus measures on the part of the world’s major central banks; and indeed, both the U.S. Federal Reserve and the European Central Bank maintained relaxed monetary policies throughout the quarter. Equities were further bolstered as valuations were relatively depressed in June, yet second quarter company profits largely exceeded the (low) expectations of investors.

As the emerging markets rose, the Fund managed to slightly outpace the benchmark index. Nearly every position in the Fund contributed positively to the Fund’s performance. However, the Fund’s gains during the quarter were predominantly concentrated in a relatively small number of positions: just ten holdings drove nearly 60% of the Fund’s positive return.

The top contributor within the Fund was a small capitalization company called Kingdee International. Kingdee provides “enterprise management” software to small and mid-sized companies based in China. The company’s software helps companies manage their accounts, track inventory and sales, and engage in online commerce. Kingdee has historically been a leader within its chosen niche. However, the company embarked upon an ill-fated expansion approximately two years ago, one which left the company’s finances stretched thin in light of slowing growth within the Chinese market. As a consequence, Kingdee’s shares dropped over four-fifths between their recent peak in April 2011 and their recent nadir in July 2012.1 Seafarer’s research confirmed that the company’s fundamental position has deteriorated, and that its near-term profitability is compromised. However, Seafarer also judged the extent of the correction overdone, and as such, the Fund began to acquire shares in the company in June. The shares have since recovered a portion of their former value, to the Fund’s benefit.

The Fund’s holding in Aselsan Elektronik also contributed to gains. Aselsan is a Turkish firm that produces electronic systems and communication equipment for military and civilian markets. The company has existed for several decades, yet it has only recently undertaken efforts to operate on a truly commercial basis. In the past, the company operated essentially as a captive supplier to (and subsidiary of) the Turkish Army; consequently, Aselsan’s financial performance took a back seat. However, the company has recently begun to improve upon its commercial potential, expanding into new markets and accelerating its growth. The company’s shares rose during the quarter, ostensibly in reflection of the company’s improved performance.

Another notable positive contribution to the Fund came from its holding in Cerebos Pacific, a Singapore-based purveyor of food and beverage products across Southeast Asia and Australia. The company is a closely-held subsidiary of the Japanese beverage company Suntory. In August, Suntory announced its intent to purchase the roughly 15% of Cerebos that it did not already own; Suntory agreed to pay a premium price in order to take the company private, and the transaction is now on the cusp of consummation. We are pleased to report that this is already the second time a portfolio holding has received such an offer in the relatively short life of the Fund (the first being a Hong Kong company called SinoCom).

The Fund’s holding in the Market Vectors Vietnam ETF was responsible for the largest drag on performance. Vietnam saw its stock market lurch lower during the quarter as a series of scandals and reforms impacted its banking sector. To date, Vietnam’s banks have borne the brunt of the pressure arising from the country’s bloated state-owned enterprise sector. Like its neighbor China, Vietnam’s government has propagated a large number of uncompetitive, state-backed enterprises; and as in China, those entities have borrowed excessively from compliant local banks. Some of the debts have come due, and the state-backed debtors have been either unwilling or unable to repay. This outcome has led to criticism and scandal within the country’s banking sector and throughout its various political circles. Vietnam appears to be redoubling its efforts to reform the sector, yet the market stumbled amid the political and economic strife. Nevertheless, we remain heartily enthusiastic. Much of the country’s private (non-state-backed) sector remains in good health, and valuations on selected stocks appear quite attractive. Seafarer will conduct “on the ground” research in Vietnam during the coming months, with the eventual intent to add individual Vietnamese equities to the Fund, as and when the Fund’s registration status allows.


At the end of September, the Fund’s composition had shifted discernibly from that of the prior quarter, particularly with respect to its regional allocation (more outside Asia), and also relative to company size (a marginal shift toward larger companies).

The Fund’s allocation to the Asia region declined about 10% (from 77% to 67% of net assets) during the quarter, with an offsetting increase in other regions, especially Eastern Europe (+3%) and Latin America (+2%). This shift toward Eastern Europe was driven in large part by attractive valuations in Poland; the portfolio’s holdings there appear to exhibit growth and valuation characteristics that are essential to the Fund’s strategy. We anticipate that the Fund’s exposure in Eastern Europe may grow marginally in the coming quarters, particularly if valuations there remain attractive.

With respect to Latin America, the Fund has added a bit more exposure during the quarter, notably by way of introduction of two new holdings in Chile. We have also grown somewhat more positive about Brazil: valuations on many stocks are still steep, and the immediate outlook for the economy is challenging; however, we see signs that the country is gradually turning the corner for the better, and that stronger growth lies ahead (see our recent Field Notes on São Paulo and Rio de Janeiro for further information).

Regarding the Fund’s marginal shift toward larger companies (from 24% to 34% of net assets): since inception, the Fund has allocated the bulk of its weight toward mid-sized companies. This is because Seafarer typically finds more mid-sized companies that satisfy the Fund’s growth and valuation criteria. However, during the last quarter, the Fund made a small but deliberate shift toward larger companies, due to concerns about rising valuations across markets. At the recent nadir in markets (June 4th), we felt that valuations were quite attractive, as we indicated in our July Shareholder Conference Call. However, from the lows of June, to the date of this report, the emerging market benchmark index has risen 14.4%.2 This pronounced, short-term gain has led us to be just a bit more cautious overall, which in turn has prompted us to favor larger companies, where we find valuations – and safety – to be marginally better. To be clear, valuations on emerging market stocks are not unreasonable at present, even if they are no longer especially attractive.

Andrew Foster,
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.
As of 9/30/2012, Kingdee International Software Group Co. Ltd. comprised 2.8% of the Seafarer Overseas Growth and Income Fund; Aselsan Elektronik Sanayi Ve Ticaret AS comprised 4.0% of the Fund; Cerebos Pacific, Ltd. comprised 1.4% of the Fund; and the Market Vectors Vietnam ETF comprised 3.2% of the Fund. Holdings are subject to change.
  1. Kingdee shares closed at HKD 5.07 on April 27, 2011; and closed at HKD 0.85 on July 30, 2012. Source: Factset.
  2. Performance based on the MSCI Emerging Markets Index, Standard (Large+Mid Cap) Core, Gross-of-Tax (dividends reinvested), Total Return USD. June 4 to October 31, 2012. Source: Bloomberg.