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Seafarer Overseas Value Fund

Portfolio ReviewFourth Quarter 2021

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During the fourth quarter of 2021, the Seafarer Overseas Value Fund returned 1.41%.12 The Fund’s benchmark indices, the Morningstar Emerging Markets Net Return USD Index and the MSCI Emerging Markets Total Return USD Index, returned -0.82% and -1.24%, respectively. By way of broader comparison, the S&P 500 Index returned 11.03%.

The Fund began the quarter with a net asset value of $13.27 per share. During the quarter, the Fund paid a distribution of approximately $0.463 per share. This payment brought the cumulative distribution, as measured from the Fund’s inception, to $1.867 per share.3 The Fund finished the period with a value of $12.99 per share.4

During the calendar year, the Fund returned 10.04%, whereas the benchmark indices, the Morningstar Emerging Markets Net Return USD Index and the MSCI Emerging Markets Total Return USD Index, returned -0.33% and -2.22%, respectively.5

[Please note: this portfolio review encompasses only the fourth quarter of 2021, 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 comprehensive performance reviews 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.]


As pleasing as the Value Fund’s quarterly and full year outperformance versus the benchmark indices is, I would draw investor attention to the Fund’s absolute return figure for the 2021 calendar year of 10.04%. I am satisfied with the Fund’s absolute performance because, in my opinion, it delivers what investors need over what they may want. In my estimation, while most investors may be satisfied with tracking the index (judging by the prevalence of benchmarking and the popularity of passive strategies), what they require is something different: the appreciation of their savings in real terms, after the effect of inflation. Please refer to the recent Letter to Shareholders in the Seafarer Funds Semi-annual Report as of October 31, 2021 for a more extended discussion of the topic.

Thus, rather than simply acknowledging that the Value Fund outperformed the benchmark indices in 2021 and explain said performance with a few “factors,” I think two points are significant. First, in a year when the benchmarks delivered a negative return, the Value Fund delivered a meaningfully positive return, even if investors may theoretically have been satisfied with a zero return that would have outperformed the benchmark but would have failed to serve their actual needs. Second, the Value Fund delivered its total return in a manner that emphasizes stock selection rather than market-related factors.

Indeed, the top contributor to the Fund’s performance for the full year as well as the fourth quarter of 2021 was as far removed from the beaten path of index membership and financial headlines as one could hope for. Petrovietnam Fertilizer and Chemicals (Management Change and Asset Productivity sources of value; the “source of value” for a Fund holding is hereafter referenced in parentheses) is a Vietnamese fertilizer manufacturer. While the appreciation of urea prices during the year is a market factor that contributed to the stock’s performance, in my opinion it served to amplify the return of an extraordinarily cheap stock that the Fund purchased for reasons unrelated to the price of urea: a cash-rich balance sheet, rising production volume from a new plant that manufactures higher value-added products, coupled with an extraordinarily high cash flow yield.

The second highest contributor to the quarter’s total return was also far removed from indexes and headlines: Georgia Capital (Breakup Value), a conglomerate operating in the country of Georgia. Value realization in the form of an agreement to sell a majority stake in the company’s water business during the fourth quarter drove meaningful stock price appreciation. The nature of this price performance is consistent with the Fund’s categorization of Georgia Capital as a “Breakup Value” holding.

Similarly, the contribution of Moneta Money Bank (Asset Productivity), a bank operating in the Czech Republic, to the Fund’s performance during the fourth quarter and the full year was as detached from market growth expectations or country factors as one could wish for. The bank dedicated most of 2021 to the purchase of a local competitor, a process that drove price discovery in Moneta’s own shares.

To emphasize the point from the opposite end of the spectrum, detractors to the Fund’s annual performance tended to correlate more strongly with market-related factors. The stock price of Melco International Development (Breakup Value and Asset Productivity), a Macau casino owner and operator, continued to suffer from persistent travel restrictions to Macau. Recent Fund addition Dairy Farm International (Management Change and Asset Productivity), a multi-format retailer operating in Asia, posted weak fourth quarter stock price performance on continued business pressure from the surge in the Omicron variant. Interestingly, the stock price of Shangri-La (Breakup Value and Asset Productivity), a hotel owner and operator in Asia, was not as impacted by Covid’s resurgence. One might conjecture that the stock price’s resilience may be a sign that the market is recognizing value in the name.

Fourth quarter detractors to performance were also more sensitive to market-related factors. The stock price of Itaú Unibanco (Asset Productivity), the largest privately-owned bank in Brazil by assets, suffered under pressure from the country’s continued macroeconomic difficulties, despite the bank’s track record of navigating such circumstances and its already compelling valuation. Unlike the case of Shangri-La, my judgment that Itau’s valuation and management skill should largely insulate the stock price from market-related factors over time has yet to prove correct.

The case of Pacific Basin (Asset Productivity), a dry-bulk shipping company, is different from that of Itaú in that its stock price weakness during the fourth quarter comes after strong performance for the past two years. I would argue that the stock’s dearer valuation at this stage made it more vulnerable to the volatility in the Baltic Handysize Index, a measurement of spot rates for chartering small dry bulk sea vessels, which declined in the fourth quarter after reaching a 13-year high in the third quarter. While chartering rates will vary due to the confluence of structural and cyclical factors, the Fund remains invested in Pacific Basin on the view that structural new vessel supply impediments will persist for the next few years, and in anticipation of significantly higher dividends from the company. The Fund originally entered its position in Pacific Basin in 2016 at what we believed to be an unsustainably distressed valuation to the book value of its assets at the time.


During the quarter the Fund added Emaar Properties (Breakup Value), a property developer and investment company operating primarily in the United Arab Emirates. The Fund established this position in an effort to capture the potential value-unlocking of a group restructuring designed to improve the company’s credit profile, the value that may be derived from possible tax law changes in the country, as well as opportunity that may arise due to the difference between the net market value of the company’s assets and its market capitalization.

A new position in Want Want China Holdings (Balance Sheet Liquidity and Structural Shift), a Chinese snack food and beverage company, is designed to capture an extraordinarily high and secure dividend yield based on steady demand for its brands, a substantial free cash flow yield, and the potential success of initiatives intended to reinvigorate earnings momentum, with all of these attributes backed by an extremely liquid balance sheet.

The Fund’s fourth quarter world tour also stopped by Latin America with a new position in Credicorp (Asset Productivity), Peru’s largest bank. Credicorp represents a classic Gem stock (please refer to the commentary How the Value Team Finds “Gems” in Emerging Markets) in that it has a track record of successfully navigating complex macroeconomic and political environments, and its low stock price does not correspond to the high value the bank generates (the bank earns a return in excess of its cost of capital over a full business cycle).

Finally, the Fund received shares in XP, Inc. (Structural Shift and Asset Productivity) as a distribution from its holding in Itaú Unibanco. XP is a fast-growing, technology-driven investment management company operating in Brazil. Beyond the value-realization for Itaú shareholders derived from the spin-off of XP shares, the business of XP itself holds great potential in a country where savers have traditionally suffered from the crowding out effect of excessive fiscal deficits. In other words, Brazilian savers are starved for investment alternatives to government bonds, and for lower borrowing costs. XP’s digital platform holds the potential to address these long-standing needs in a more efficient and effective manner than traditional banks have historically managed.

The Fund did not exit any holdings during the quarter.


The Fund’s new holdings discussed above bring a different combination of value sources to the portfolio. While the Value strategy may profit from purchasing Emaar’s substantial portfolio of revenue-generating properties (long-term assets) at a discount to book value, Want Want offsets this duration risk with a cash balance (short-term asset) that is roughly half of its total asset base. Both are “fallen angels” in that the market de-rated the valuation of these former market darlings. Emaar shot itself in the foot by engaging in a series of poorly-designed subsidiary listings that – instead of releasing hidden value – had the effect of de-rating the parent-company stock. Want Want, like virtually all Chinese consumer stocks, eventually posted lower growth numbers – lifting the veil from the eyes of investors who had to accept that not every Chinese consumer company will grow forever. While Emaar is undergoing a corporate restructuring that will redress its ill-advised group structure, Want Want is deploying its considerable cash flow into research and development to restart growth concurrently with a rising dividend. Finally, Credicorp represents an unusually profitable business combined with the potential to increase its organic growth rate as it attempts to transform a pandemic-subsidized credit program into a long-term recurring revenue base. The future dividend yield of this overcapitalized bank may reach the high single digits.

The point of this Outlook section reformulating the attributes that new Fund holdings contribute to the strategy is to reinforce the idea that the Value Fund seeks to generate a return by aggregating sources of profit specific to each company. It does not seek to generate a return by buying “market growth” or “country growth” or “industry growth” at any price, or even at a “reasonable price.” Furthermore, the Fund lays bare the idea that, contrary to most market commentary, growth is not the only way to generate an investment return.

I find it important to emphasize the idea in this quarterly review because the ground does appear to be shifting under investors’ feet: China’s arbitrary new regulation of after-school tutoring and internet companies, among others, arguably forced a reassessment of equity risk in the country during 2021. The central banks of Mexico, Brazil, the Czech Republic, Poland, South Korea, and other emerging markets raised interest rates ahead of the U.S. Federal Reserve, a rare occurrence. Extending the context beyond the emerging market cost of equity, the Federal Reserve signaled this month that it is likely to increase the risk-free rate (the Federal Funds Rate) this year as well. In short, there is no shortage of excuses to make equities an unpopular topic.

Thus, dear reader, as you assess your investment allocations for 2022 and beyond, I would humbly suggest asking not just what equity and fixed income asset allocation is appropriate for you, but also how the funds under your consideration generate returns. In my opinion, the latter question is as important as the former.

Thank you for entrusting us with your capital. We are honored to serve as your investment adviser in the emerging markets.

Paul Espinosa,
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, 2021, Petrovietnam Fertilizer & Chemicals JSC comprised 2.5% of the Seafarer Overseas Value Fund, Georgia Capital PLC comprised 4.8% of the Fund, Moneta Money Bank AS comprised 4.7% of the Fund, Melco International Development, Ltd. comprised 2.7% of the Fund, Dairy Farm International Holdings, Ltd. comprised 1.9% of the Fund, Shangri-La Asia, Ltd. comprised 3.9% of the Fund, Itaú Unibanco Holding SA comprised 2.7% of the Fund, Pacific Basin Shipping, Ltd. comprised 3.2% of the Fund, Emaar Properties PJSC comprised 3.1% of the Fund, Want Want China Holdings, Ltd. comprised 1.5% of the Fund, and Credicorp, Ltd. comprised 1.7% of the Fund. View the Fund’s Top 10 Holdings. Holdings are subject to change.
The Seafarer Overseas Value Fund is not sponsored, endorsed, sold, or promoted by Morningstar, Inc. Morningstar, Inc. makes no representation or warranty, express or implied, to the shareholders of the Fund or any member of the public regarding the advisability of investing in the Fund 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: SIVLX). The Investor share class (ticker: SFVLX) returned 1.35% during the quarter.
  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 Fund’s inception date is May 31, 2016.
  4. The Fund’s Investor share class began the quarter with a net asset value of $13.24 per share; it paid a distribution of approximately $0.455 per share during the quarter; and it finished the quarter with a value of $12.96 per share.
  5. The Fund’s Investor share class returned 9.90% during the calendar year.