What Does China’s Stimulus Mean for its Economy?

In September and October of 2024, Chinese authorities announced a series of stimulus measures to stabilize the economy. This was done in response to a multi-year contraction in the housing market, growing debt problems for local governments, and weak consumption.

The stimulus policies focus on four major areas of the economy: real estate, consumption, fiscal, and the private sector:

Additionally, China announced policies to support the capital markets and the banking system.

While these policies could significantly impact the economy, many critical details, such as size, scope, and timeline for implementation, have not yet been revealed. Until then, it is unclear whether China is simply trying to stabilize the economy or reinvigorate growth through large-scale stimulus and structural reforms.

Useful Articles:

• Arthur Kroeber. China’s Real Intent Behind its Stimulus Inflection, The Financial Times, October 10, 2024
• Lingling Wei, Behind Xi Jinping’s Pivot on Broad China Stimulus, The Wall Street Journal, October 15, 2024.
• Lizzi Li, Is Beijing’s Surprise Pivot Built to Last?, The Wire China, October 13, 2024.

August 2024 – The Seafarer Funds’ Retail Share Class

Why did Seafarer launch a Retail Class of the Seafarer Funds?

On August 30, 2024, Seafarer Capital Partners launched a Retail Class of both the Seafarer Overseas Growth and Income Fund (ticker: SFGRX) and Seafarer Overseas Value Fund (ticker: SFVRX).

The Retail Class includes a 12b-1 fee (0.20%). The Seafarer Funds’ existing share classes (Institutional and Investor) do not include a 12b-1 fee.

The Retail Class was launched in response to requests to make the Seafarer Funds available to new investors on No Transaction Fee (NTF) brokerage platforms. Since the Growth and Income Fund’s Investor Class was closed to most new investors in 2016, the availability of the Funds has been limited for individual investors and financial advisors who utilize NTF platforms.

While the new Retail Class broadens the availability of the Funds, we expect that many investors will prefer to utilize the lower cost Institutional Class that is available direct from the Funds and on Transaction Fee (TF) brokerage platforms. A waiver of the Institutional Class investment minimum is available to shareholders who sign up for an Automatic Investment Plan (AIP). Also, an NTF platform may allow a Retail Class shareholder to transfer to the Institutional Class of the same Fund. Please note: platforms may restrict share class transfers, or they may impose fees on such transfers. A share class transfer is generally not considered a taxable transaction. Please consult your tax adviser for further information.

Seafarer currently has no plans to change the availability of the Funds’ Institutional and Investor Classes or the ability of existing shareholders of the Growth and Income Fund’s Investor Class to add to their positions.

If you have questions about the Funds’ Retail Class or its availability on NTF platforms, please contact us.

July 2024 – The benchmark indices for the Seafarer Funds

Why does Seafarer favor the Bloomberg Emerging Markets benchmark for discussing and analyzing the Funds’ performance?

The Seafarer Funds employ two benchmarks to gauge performance, the Bloomberg Emerging Markets Large, Mid, and Small Cap Net Return USD Index and the Morningstar Emerging Markets Net Return USD Index. Seafarer believes both benchmarks serve as robust, differentiated indicators of performance of the emerging market asset class. However, when discussing or analyzing performance, Seafarer favors the Bloomberg index, for three key reasons:

1. The Bloomberg benchmark is the best-designed emerging market index available today. Its construction principles favor breadth, depth, and inclusion of the largest number of stocks in the developing world; that approach ensures that it has a higher degree of fidelity to the underlying structure of the stock markets that comprise the asset class (and therefore is less likely to present a distorted representation of the emerging markets’ capitalization structure).
2. Bloomberg has taken care to build the index in a manner that facilitates analysis: its construction is highly transparent, allowing it to be decomposed into its constituent parts, allowing for efficient study of how the index has performed over a given period. Also, Bloomberg has provided ancillary analytical products that isolate the impact of currency movements and currency risk on the index’s aggregate performance and its underlying constituent stocks (which otherwise makes for complicated work).
3. The aforementioned construction principles (favoring “fidelity”) typically ensure the Bloomberg index produces the highest total rate of return over a given investment horizon (relative to competing indices from other providers). Seafarer prefers to utilize the benchmark that is (typically) hardest to beat; we want to hold the Funds’ performance up against the toughest, realistic benchmark. The Bloomberg index’s breadth and depth affords it exposure to more companies in various states of evolution and growth – essentially, the index’s breadth and depth make it more likely to capture the parts of the market that are growing and performing at a given point in time. Conversely, the same breadth and depth also ensure the index is not over-concentrated in larger stocks that are popular among investors and widely held, but which have already passed their peak performance. Essentially, the data suggests strongly that for index performance – measured over a suitably long period of time – diversification (driven by breadth, depth, and fidelity of representation) trumps concentration.

In summary, Seafarer believes the Bloomberg index is the best benchmark for the Funds and their shareholders: it is built best; it is easiest to analyze; and it is the hardest to beat.

July 2024 – Update to Market Capitalization classifications

Why did Seafarer update its Market Capitalization classifications?

Effective June 30, 2024, Seafarer updated the market capitalization criteria it uses to classify Fund holdings.

The prior definitions were first developed about two decades ago. Seafarer believes the revised market capitalization criteria better reflect the range and size of companies in a modern market environment. In addition, while no definitive global capitalization criteria exist, Seafarer believes the new criteria will harmonize better with common practices among investors around the world. The resulting classification intends to offer investors a clear representation of the distribution of capitalization within the Seafarer Funds and in stock markets more broadly. Many investors consider market capitalization to be a key metric when assessing the size of a company.

August 2023 – The benchmark indices for the Seafarer Funds

Why was the Bloomberg Emerging Markets Large, Mid, and Small Cap Net Return USD Index added as a benchmark index for the Seafarer Funds?

Effective August 31, 2023, the Seafarer Funds’ Prospectus includes the Bloomberg Emerging Markets Large, Mid, and Small Cap Net Return USD Index as a second benchmark for the Funds. The Morningstar Emerging Markets Net Return USD Index remains a benchmark for the Funds.

Seafarer believes that the inclusion of a second benchmark will provide additional clarity and transparency to shareholders regarding the Seafarer Funds’ performance.  Much like the Morningstar index, the Bloomberg index has a high degree of fidelity to the equity markets that it tracks:  the index’s methodology favors inclusivity, aiming to track a greater-than-typical portion of the emerging markets’ equity capital structure.  Such “inclusivity” is visible in the extensive number of underlying constituent securities.  Relative to other prevalent indices, the Bloomberg index tracks a larger number of companies within the emerging markets universe and accordingly tracks a larger portion of the total, unadjusted equity capitalization (i.e., unadjusted for size, replicability, scalability, and free float).  The resulting “fidelity” means the index is less concentrated in individual securities and, in the opinion of the Adviser, more accurately reflects the actual structure and performance of the emerging markets.  In addition, the Bloomberg index is accompanied by a suite of useful analytical tools that enhance the Adviser’s ability to research the structure, growth, risks and evolution of the equity capital markets throughout the developing world.

July 2022 – A retrospective on U.S.-China relations

What lessons from recent history can help inform how policymakers should deal with China?

Bob Davis, "Lawrence Summers on the Principles of a Multipolar System," The Wire China, 17 July 2022.

January 2022 – A comprehensive update on China’s economic development and policies

Are increased state intervention and imbalances in the Chinese economy delaying China’s transition to “high-quality” consumption-driven growth?

“People’s Republic of China: 2021 Article IV Consultation,” International Monetary Fund, 28 January 2022.

December 2021 – Insight on Xi Jinping’s recent interventions in the Chinese economy

Are the Xi administration’s interventions intended to accomplish necessary economic reforms or reassert Communist Party control?

Barry Naughton, “What’s Behind China’s Regulatory Storm,” The Wall Street Journal, 12 December 2021.

October 2021 – A perspective on U.S.-China Relations

How can the Biden administration pursue a constructive relationship with China?

Susan Thornton, “This is How Biden Can Get the Edge Over China,” The New York Times, 21 October, 2021.

November 2020 – A view on the leadership of China's financial system

How have politics and a lack of independence impacted the work of China's central bank?

Shuli Ren and Anjani Trivedi, "China’s Financial System Needs a Greater Helmsman," Bloomberg Opinion, 28 October 2020.

August 2020 – The benchmark indices for the Seafarer Funds

Why was the Morningstar Emerging Markets Net Return USD Index added as a benchmark index for the Seafarer Funds effective August 31, 2020?

In the Seafarer Funds Prospectus as of August 31, 2020, the Morningstar Emerging Markets Net Return USD Index was added as a benchmark for the Funds. The MSCI Emerging Markets Total Return USD Index remains a benchmark for the Funds.

Seafarer believes the Morningstar Emerging Markets Net Return USD Index offers a broad representation of the equity market performance of emerging markets and therefore is a suitable benchmark for the Funds.

Benchmarking can be a useful tool in assessing the performance of an investment portfolio. However, benchmarks from competent index providers that track a given market demonstrate little material difference in characteristics or performance. And, the costs associated with licensing certain benchmarks have grown significantly in recent years. In response to these trends, Morningstar launched the Open Index Project in 2016 with the goal of lowering the cost of equity indexes in order to improve outcomes for all investors. Morningstar offers the Morningstar Emerging Markets Net Return USD Index as part of the Open Index Project.

By embracing innovations such as this new benchmark, Seafarer aims to reduce Fund expenses, over time and with scale, for the benefit of shareholders.

July 2020 – A view on China, democracy and foreign engagement

What are the merits of foreign engagement with China?

• Li Fan, It’s True That Democracy in China Is in Retreat, But Don’t Give up on It Now, ChinaFile, 2 July 2020.

December 2019 – Perspectives on U.S.-China relations

What resources might be useful in explaining how the U.S. can work toward a more sustainable relationship with China?

• Scott Kennedy and Jude Blanchette, U.S. Doesn’t Need to Break Up With China, Bloomberg, 14 November 2019.
• Can America and China be Stakeholders?, Remarks of Robert B. Zoellick at the U.S.-China Business Council’s Gala 2019, 4 December 2019.

January 2016 – Worthwhile resources regarding recent events in China

What resources might be helpful in explaining recent events in China, and how these events impact the rest of the world?

Morningstar has published two videos addressing these topics:

• What’s Fueling the Volatility in China?
• Q&A: What to Make of China’s Troubles

What is the role of government bonds in the Fund? What is the process for evaluating and selecting government bonds?

The First Quarter 2014 Portfolio Review discussed the rationale for adding a small basket of long-dated, foreign currency-denominated government bonds to the Seafarer Overseas Growth and Income Fund in early 2014.

Government bonds are one of the security types included within the Fund’s “principal investment strategies” in the Prospectus. As such, there are no formal limits on the Fund’s allocation to government bonds – in a theoretical sense, they could comprise 100% of the Fund’s net asset value. However, it is highly unlikely that the Fund’s total “straight” fixed income exposure (government bonds and corporate bonds, but excluding convertible bonds) would exceed 20% of net assets. For practical purposes, government bonds are likely to be less than 5% of net assets for the foreseeable future. Also, no single bond exposure (i.e. to one government) is likely to exceed 2% of net assets (measured at the time of purchase).

The Role of Government Bonds in the Fund

Seafarer believes government bonds play a unique role within the portfolio:

• They provide substantial liquidity, both different in source, and typically higher than, most common equities;
• They exhibit much lower price volatility than emerging market equities;
• Provided they are issued in the local currency of the sovereign, they have a low likelihood (near zero) of default;
• Provided they are held to maturity (which is Seafarer’s foreseeable intention), they have a near-guaranteed rate of return, as expressed in the local currency.

Seafarer does not consider government bonds to be a direct proxy for cash, for three reasons:

1. They have marginally lower liquidity than cash;
2. They have greater price volatility than cash — but much less than emerging market equities; and
3. They have much better absolute return potential than cash.

However, from a functional perspective, Seafarer intends to treat government bonds as a cash-like reserve, to manage the Fund’s overall liquidity, to dampen the portfolio’s overall volatility, and as a resource that could be re-deployed into equities during extreme market conditions.

Primary Risks

The Fund’s Prospectus describes certain risks associated with government bonds. Seafarer would highlight two risks in particular:

1. The bonds are denominated in local currencies, and if the local currencies depreciate against the dollar over the maturity of the bond, the dollar-denominated return from the bonds will be depressed; and
2. It is possible that Seafarer might need to sell the bonds prior to their maturity in order to manage the Fund’s overall liquidity levels; doing so at a disadvantageous time might undermine the realized returns from the bonds.

Selection Criteria

Seafarer employs a number of criteria when selecting government bonds, but the four most important are:

1. The bond’s liquidity must be ample, and the source of that liquidity must be distinguishably different from the liquidity prevalent among emerging market stocks;
2. Yield to maturity must be roughly on par with equity-like returns (i.e. higher than 8%);
3. The maturity must be long-dated, typically over five years, so that imminent currency risks are less likely to determine (or overwhelm) the entire return profile of the bond; and
4. Ideally the bond’s coupon must comprise a high proportion of the bond’s yield to maturity, such that duration risk is mitigated.

Selection Decision

To date, the Fund has accumulated government bonds when:

1. The Fund had an excess of liquidity (as embodied in a then-outsized cash position);
2. Yields on the bonds had risen to levels that Seafarer considered to be roughly on par with emerging market equities (i.e., local currency yields to maturity in excess of 8%); and
3. Sufficient bonds were available at favorable valuations issued by a diverse group of governments, such that the Fund could readily compose a small “basket” of bonds so as to diversify against currency, default and liquidity risks.

May 2014 – Taking advantage of the lower expenses afforded by the Funds’ Institutional classes

How might shareholders gain access to the Institutional share class, even if they are unable to immediately meet the investment minimum?

Seafarer would like to encourage broader usage of the Institutional class. We will describe three ways that certain shareholders might gain access to this share class, even if they are unable to immediately meet the investment minimum.

First, financial advisers might discover that their platform will waive the minimum if the adviser invests with the intention to reach the minimum. Every platform evaluates waiver requests differently, and Seafarer has no influence over whether a particular platform will entertain such requests. Platforms that do grant waivers may require that Seafarer submit the request on behalf of the adviser. We are happy to help with such waiver requests. Advisers can contact us at (415) 578-9080 or contact@seafarerfunds.com.

Second, advisers can meet the investment minimum for the Institutional class by aggregating Fund holdings across multiple client accounts, if permitted by the platform.¹ If you are an adviser and you encounter difficulty with aggregation at the platform, please let us know; we will try to resolve the issue with the platform.

Third, our firm has some influence over the application of the minimum as it pertains to shareholders who subscribe to a Fund on a direct basis via an Automatic Investment Plan (“AIP”). We will do our utmost to waive the Institutional class minimum for accounts that activate an AIP. Learn more about the Institutional Class Waiver Program.

What is the Institutional Class Waiver Program?

Shareholders who sign up for an Automatic Investment Plan (“AIP”) can request a waiver of the Institutional class investment minimum.² Accounts must satisfy all of the following criteria:

1. The account must be established directly with Seafarer Funds, not with a platform or intermediary.
2. The account must activate an AIP.
3. The account holder must request the waiver on the Account Application or Account Options Form; when establishing a new account online; or by calling Shareholder Services at (855) 732-9220. The applicant must request the waiver in good faith, with the intent to eventually meet the Institutional class minimum via a program of sustained investment over time.

In addition, existing AIP participants can convert from the Investor class to the Institutional class of the same Fund (known as a “share class transfer”), provided they satisfy all three criteria above. To request a share class transfer, call (855) 732-9220.

1. Similarly, individual investors can reach the investment minimum for the Institutional class by aggregating multiple accounts within a Fund, if permitted by the platform.
2. In the case of the Institutional class waiver, the Investor class AIP initial investment minimum ($1500) applies.

What type of growth does the Fund seek?

As stated in the Prospectus, the Seafarer Overseas Growth and Income Fund seeks to provide long-term capital appreciation (growth) along with some current income (typically dividends from common stocks). When I seek growth, I favor “sustainable growth” – companies that are capable of producing steady growth that can compound over long periods of time. I measure such growth mainly by looking at a company’s revenues but also by examining free cash flow. I prefer companies with seasoned operating histories and proven business models, even as they may operate in fast-growing and risky markets. I avoid companies that derive growth from one-off or temporary events, even if this would result in dramatic short-term growth. I also de-emphasize companies that derive their growth from government protection or subsidy, as those advantages might be withdrawn in an unpredictable manner, for political reasons, in the future.

Why is income important to the Fund’s strategy?

Seafarer seeks to combine growth (as described in the question above) with current income for three reasons:

• Income as a common metric. Seafarer invests across a broad geographical range of countries, with widely-varying standards for accounting and corporate transparency. Seafarer utilizes current income (dividend yield) as a tangible, standardized means to measure both relative and absolute valuation.
• Income as a valuation anchor. In Seafarer’s experience, stocks in emerging markets with sustainable yields exhibit lower volatility during periods of market distress. Seafarer believes that due to certain structural inefficiencies in emerging markets, stable dividends act as a “valuation anchor,” helping to mitigate volatility and to establish the “defensiveness” of the portfolio.
• Income as an indicator of quality. In Seafarer’s experience, businesses that generate steady cash earnings are far less risky than those that produce accounting profits on paper. Seafarer values current income as a means to validate a company’s cash flow, which serves as a proxy for its overall quality.

How do you mitigate currency risk in the Fund?

Currency risks play a central role in both the research process and the portfolio construction process. Our aim is to mitigate such risks (even as we can’t completely negate them) through individual security selection and by limiting (or outright constraining) the portfolio’s exposure to riskier currencies. However, to be clear, the Seafarer Overseas Growth and Income Fund has not yet (and may never) explicitly hedge a currency via a financial derivative.

Within the research process, we spend a lot of time evaluating what I call “micro foreign exchange risk” (“micro FX,” abbreviated). When we research a prospective investment candidate, we focus on companies that issue stocks or bonds, or an “issuer.” I view “micro FX” as the currency risk that impacts a specific issuer (as opposed to the risk that might impact a broad-based macro-economy).

Every time we assess a prospective issuer, we examine its micro FX risk. We do so by imagining a scenario where the issuer’s local currency suffers an extreme event (i.e., the currency depreciates by 20% versus the U.S. dollar or the Euro, or capital controls are imposed, or there is a sudden and steep change in local interest rates). We then look for quantitative and qualitative ways to measure 1) whether the issuer’s balance sheet would be severely impaired by the event, and 2) whether the issuer’s business model (i.e. revenue stream or cost structure) would be eroded by the event. If either risk is severe, we will most likely avoid the issuer’s securities altogether; if the risk is less severe, and the issuer is otherwise attractive, we may initiate the position, but we might a) limit its individual size, or b) seek to pair it against another issuer’s securities that might benefit (or act in an inverse manner) during the currency event. For example, we might pair an exporter – which would generally benefit from currency weakness – with an importer – which would generally benefit from currency strength.

At a portfolio construction level, we have a proprietary model that tries to assess “macro FX risk,” i.e. the risk that a currency would undergo an extreme event (like the one described above). The model is very simple: it does not try to predict “fair valuation” or “over valuation,” but rather it aims to give us some basic warning about where future trouble may arise. Currencies are graded green (risky and volatile, but no more so than the “average” emerging market currency), amber (heightened risk, above average), or red (severe risk, with an “extreme event” possibly looming). I use these color codes to constrain the amount of capital that the Fund has at work in each currency: green has no constraint; amber, bordering on green, 10% – 11% at the time of purchase; amber, bordering on red, 5% – 6% at the time of purchase; red, no investment whatsoever.

I take currency risk very seriously. Until 2013, when some “extreme events” were realized in certain currencies (e.g. the Turkish lira, the Indian rupee, the Indonesian rupiah, etc.), I think many professional investors paid too little attention to this risk. By contrast, I have been discussing it as an under-appreciated source of risk for some time; please see this essay on the Brazilian real, or these two essays (part 1 and part 2) on the Chinese yuan.

However, as concerned as I am about currency risks, I would simultaneously acknowledge that there is little I can do about them. The timing, magnitude and consequence of such risks are notoriously difficult to predict. Hedging (via financial derivatives) is either impossible, too costly, or fraught with too much risk to work as intended. I prefer to manage the risk in a more direct fashion, as described above, by controlling micro and macro FX. But such management has limited efficacy, and I would acknowledge the Fund is and will always be exposed to substantial foreign exchange risk. Thus I recommend the Fund only to investors who can withstand such risks, and who can afford to invest, without interruption or liquidation, for an extended period (i.e. five years or more). Over longer horizons, the acute risks arising from currency are both less severe and more manageable, and thus a longer investment horizon on the part of the investor / Fund shareholder is ultimately the best tool to manage such risks.

Does the Fund engage in currency hedging?

The Seafarer Overseas Growth and Income Fund’s Prospectus does contemplate the possibility of hedging, but in practice it would be a rare event. (Importantly, I would note that Seafarer does take steps to mitigate currency risk – see the question above for more details.)

I prefer not to do much currency hedging – with derivatives or swaps – due to two main concerns. First, from a practical perspective, it’s often very difficult to create long-term stable currency hedges at a reasonable cost. We are investing in a portfolio on a long-term basis and in most of the markets in which we invest, hedging tools don’t exist, except for some shorter horizons. If we were to attempt to purchase longer-term hedges, they would be inordinately expensive or non-existent.

Second, I have a philosophical concern. Even though financial theory says that one can unbundle a currency risk from a security risk, I find it a very difficult thing to do in the context of my research process. I’m trying to find companies and invest in their securities for the portfolio over the longer term, ideally for an undefined period that is as long as possible. It is difficult for me to separate the security risk from that of the underlying currency over such a horizon.

The analogy I use is finding the perfect home for your family. You find that home, and your intent is to buy it and hopefully live there for 20-30 years. You also hope it will be a good investment along the way. It’s obviously a key financial asset for you. In my view, the notion that you would somehow short or hedge out the risk of the property that is sitting underneath that house, or indeed the neighborhood around the house, is problematic over such a time horizon. Formally speaking, the property and the house are different financial assets and can – on paper – be unbundled, but their values are inextricably intertwined to an extent that you have to invest in them together, along with the surrounding neighborhood. To me, the house is analogous to the security, and the property underneath the house is analogous to the currency.

In terms of my house and neighborhood analogy, we look for markets where we think the currency is stable enough that we are willing to tolerate a certain degree of volatility. We believe that we can identify certain currency environments that are relatively healthy; I would liken them to good neighborhoods into which we are willing to move. There is also a set of neighborhoods that we try to identify and stay away from altogether because the risks are just too severe, either because we anticipate a very sharp currency drop – not a small one, but a sharp one – or the imposition of draconian capital controls.

Lastly, there may be a small set of neighborhoods in between that I would liken to transitional neighborhoods, where on limited occasions we might stake out a claim and wait for the neighborhood to improve around us a bit.

How do you define “quality” when researching companies as candidates for the portfolio?

“Quality” is not a term I use much, but here’s how I think about the characteristics that people normally associate with quality.

When researching companies I focus on three primary factors. First, I look for a control party that has the right drive and ambition to grow the company in a sustainable way. I look at the control party’s goals, the direction they set for the company, and how they incentivize management. It’s important that the control party never forgets about the small shareholders along the way. I’ve seen some very, very big companies grow very, very fast and forget entirely about their smaller shareholders, and that does make a difference.

The second key element is the sustainability of growth. Emerging markets produce a lot of types of growth. We are attracted to the kind that can be repeated over time, even if the company generating it appears to be “mature” or a “slow grower.” You can sometimes be dazzled by very high rates of growth but they are often driven by one-off factors that unfold over a year or so. Maybe they are even due to some temporary circumstances like special favors or subsidies that a particular company is receiving. We generally try to avoid these types of situations.

The last key element I seek in a portfolio holding is balance sheet flexibility. People talk about balance sheets in a lot of different ways. For me, the primary reason to invest in a healthy balance sheet – generally one that is liquid and less levered – is that it provides flexibility. So much of long-term success is just driven by survival. Companies that maintain healthy balance sheets have more flexibility to survive and ultimately prosper. During times of broad, macro-economic growth, companies with highly levered balance sheets can often generate flattering profits; but when those same companies enter a downturn, they lose several degrees of freedom, possibly compromising their very survival. I look for balance sheets that are built for long-term survival.

So I would sum up the characteristics I am looking for as: a control party whose interests are aligned with – or at least not at odds with – the interests of public, minority shareholders; sustainable growth; and balance sheet flexibility.

How do you get comfortable investing in countries that may suffer from volatile political environments, dangerous conditions, or institutionalized corruption?

This is one of the hardest things we have to do as bottom-up investors. We focus our efforts on individual companies, and the way we look at the macro environment is largely through the prism of the individual company’s experience. We want to make sure that the environment that surrounds a company is at least not an incredible impediment, and hopefully a benign environment. The simple decision rule that we use, frankly, is whether or not we are willing to put boots on the ground in a particular country. If we are so concerned over our own personal safety or the governance of a country that we are not willing to visit the companies there, that’s a telling sign right there. We don’t put shareholder capital at risk where that is an issue.

It is important to note, however, that while we carefully consider a country’s political environment and governance, we do not aim for some standard of perfection or enlightened governance before we invest. It comes down to this in my view: when you invest in emerging markets you invest in a lot of things. You do invest in the vaunted emerging market consumer and you invest in these countries’ growth. But in my view, what you are really investing in is progress: people who often are coming from very poor and difficult backgrounds, who are working hard to improve their living standards. These people often work in countries that have less than perfect government regimes and institutional frameworks. So it is important to recognize that you are investing in an imperfect environment but one that is transitioning toward a more perfect state. This transition – from a lesser state of existence to a better state – is what we try to capture in our portfolios – because in my view that’s the real “driver” of growth in emerging markets. This transition is also what fuels the expansion of the price to earnings multiple over time. I believe this is an important concept to keep in mind as we observe the political environment and governance in the emerging world.

Why doesn’t the Fund make more use of cash as a means to avoid market risk? What if emerging market stocks become so overvalued that you can't find anything that meets your investment criteria?

Under normal market conditions, the Seafarer Overseas Growth and Income Fund hews towards full investment. We utilize cash or cash-proxies as a means to manage portfolio liquidity, but not as a haven or as a major tool to avoid market risk. There are three primary reasons for this approach:

• The Fund’s fees are simply too high for shareholders to pay them on a portfolio holding large amounts of cash. Shareholders are paying Seafarer to put their money to work, not to sit on it at a high cost.
• I don't have confidence in my own ability to consistently "time" short-term market cycles such that I could move out of stocks and into cash just before markets fall, or the reverse when markets supposedly bottom.
• The Fund has a broad enough geographical mandate that I am always confident of finding growth somewhere in the world that is worthy of investment. To put it bluntly, it’s my job to search for such growth, even when the going gets tough. My investment universe is large, diverse and constantly evolving. In my experience, this means that new and viable opportunities for investment are always present, provided that I search hard enough.

However, even as I might discover a new opportunity that is worthy of investment, I don't know what the price of that investment might do over the next year or two. It could have some very sharp swings downward. Yet I am confident that if we do our job well, the strategy will function as intended over the longer haul.

Lastly, I try to be as clear as I can with clients about the risks I perceive in markets (including the risk that stocks or other assets are broadly over-valued). My hope is that such candor will help them make better decisions, even if it means moving out of our strategy. Yet even as I might warn shareholders (or conversely, inform them that markets are attractive), I still don't know where markets are going to head in the short-term. Ultimately I try to keep my head down and do the job I was hired to do, which is invest to the very best of my ability, even amid what might be challenging circumstances.

I would only utilize cash in substantial quantities if I had absolute certainty (or something very close to it) that markets were going to fall sharply. For better or worse, I think it is unlikely I'll have such clarity earlier than the overall market will.

July 2012 – What are Seafarer’s views on current investment conditions?

During recent months, global financial markets have been shaken by a number of events, including concerns over the viability of the Euro, slowing growth in China, sharp declines in the value of emerging market currencies versus the dollar, and falling prices for commodities. Over the last year, we have shared our views on each of these topics; for more information, please consult the following resources:

Viability of the Euro:

• Shareholder Conference Call Presentation (July 2012)
• Letter to Shareholders (May 2012)
• On Money and Confidence (November 2011)

Slowing growth in China:

• Shareholder Conference Call Presentation (July 2012)
• Letter to Shareholders (May 2012)

Volatile currencies in emerging markets:

• On Teflon and Emerging Market Currencies (October 2011)
• On Double Invoicing and the Yuan, Part 1 and Part 2 (May 2011)
• On the Brazilian Real (April 2011)

Resource prices:

• On Stockpiling and the Commodity Cycle (May 2011)

July 2012 – What’s worth reading regarding the world’s economies and major financial events?

From time to time, we are asked to point to resources that might shed light on the world’s economies and major financial events. The list below includes short articles, blog posts and books that we think are of significant interest.

On the causes and consequences of the Eurozone crisis:

• What Was Spain Supposed to Have Done? Martin Wolf, Financial Times, 25 June 2012.
• A Better Way to Save Spain’s Banks, Juan Ramón Rallo, 14 June 2012.
• Spanish Bailout Saves German Pain [paywall link], Gareth Gore and Sudip Roy, International Financing Review, 1 July 2012

On China’s most pressing challenges:

• Xi Jinping Millionaire Relations Reveal Fortunes of Elite, Bloomberg News, 29 June 2012.
• The Battle over Securities Reform, Caixin Online, 29 May 2012.
• Taking the Higher Ground for Hukou Reform, Caixin Online, 8 March 2012.
• The Renminbi’s Role in the Global Monetary System, Eswar Prasad and Lei Ye, Brookings, February 2012.
• China 2030: Building a Modern, Harmonious, and Creative High-Income Society, World Bank, February 2012.
• Interest Rate Liberalization in China, Tarhan Feyzioğlu, Nathan Porter, and Előd Takáts, IMF Working Paper, August 2009.
• Chinese Banks' Great Leap Backward, Victor Shih, Wall Street Journal Asia, 19 December 2008.

On banking system solvency:

• Moody’s Ratifies Interbank Mistrust, Felix Salmon, Reuters Financial Blog, 22 June 2012.
• The Age of Balance Sheet Recessions: What Post-2008 U.S., Europe and China Can Learn from Japan 1990-2005, Richard Koo, Presentation to the Institute for New Economic Thinking, April 2010.

On noise versus information in capital markets:

• Noise and Signal, Nassim Taleb, 29 May 2012.

The Fund has a large allocation to the Asian region. How is the Fund’s regional composition likely to evolve from here?

At the present time [April 2012], the Fund’s portfolio is fairly heavily weighted toward the Asia Pacific region [81% as of March 31, 2012] for three reasons: it is the region I know best; it is where I see the best trade-offs between current valuation and prospective growth [see the Fund’s Portfolio Review – May 2012]; and lastly, Seafarer’s research leads me to believe the region is structurally underweighted (under-represented) in the prevailing benchmark index for the emerging markets – and this is a structural bias I am keen for the Fund to exploit.

I have emphasized Asia in the portfolio because I know it best: I have been following the Asian companies in the portfolio for several years, and in some cases, for over a decade. In my prior work, I had long-term convictions in those holdings – so it makes sense (to me, at least!) that I would carry over many of those holdings to the new fund. One thing is certain: I am not going to rush to build a more global fund for the sake of representing that I have done so. That stated, much of Seafarer’s current research activity is geared toward non-Asian markets. The team is finding interesting ideas around the world. Thus I expect the Fund will feature other regions more prominently over time, as valuations and market conditions allow.

Lastly, regarding the index’s structural underweight toward the Asian region: in summary, I believe that despite generally well-intentioned efforts, the indices designed to track developing countries exhibit certain structural shortcomings. In particular, there is evidence to suggest that some of the prevalent indices are not wholly aligned with the underlying fundamentals (e.g., size, scale and growth) of the markets they are meant to track. This may allow Seafarer to build a portfolio that better represents the emerging market landscape (i.e. allocations that accurately represent the underlying fundamentals), and hopefully complement that strategy with good stock-picking.

Why did you start Seafarer?

My aim in founding Seafarer Capital Partners, the firm that manages the Seafarer Overseas Growth and Income Fund, was to build something new, to take pride in its steady development, and to ensure that what resulted was a lasting endeavor. I wanted to form a small, dedicated team that would share a sense of partnership and a dedicated pursuit of excellence on behalf of clients. I am intent that the firm remains employee-owned and controlled.

At the same time, I wanted to build a firm that would approach investment in the developing world in a manner different than most other emerging market fund managers. In that regard, Seafarer’s mission is to offer products that are transparent, reasonably priced, and that emphasize risk-adjusted performance.

You can read more about my decision to found Seafarer in a commentary “On Starting Out” that I wrote in April 2011.

What are the Firm’s goals?

At Seafarer, our abiding goal as an investment adviser is to deliver long term performance.

However, even as I view performance as paramount, I will not consider our firm a success unless it also achieves three ancillary objectives over the long term:

1. Seafarer is dedicated to lowering the costs associated with overseas investment. Investment in developing countries is legitimately an expensive proposition: there are additional layers of fees, inefficiencies and complexities that drive costs orders of magnitude higher than investment in domestic markets. Nevertheless, it is my opinion that far too few investment firms actively work to drive costs down over time for the benefit of shareholders. I view it as one of the firm’s central duties to ensure that expenses become more affordable with scale, and over time.
2. Seafarer is determined to increase the transparency associated with developing countries. Though there has been much improvement in the past decade, developing countries’ markets are still characterized by a high degree of opacity and inefficiency. In my own view, this opacity is unfortunately augmented when investment firms do not shine sufficient light on their own experience and approach towards investment in such markets. My aim is for Seafarer to continuously improve the transparency it offers to its clients, albeit subject to constraints imposed by fiduciary standards, regulation and compliance.
3. My hope is that Seafarer can reduce some of the frustration that often accompanies investment in developing countries. Emerging markets are typically very volatile, with positive returns often followed by steep, painful corrections. We understand the frustration that accompanies this sort of volatility: markets that are regularly rocky make it difficult to invest in a steady manner, for the long term. Seafarer’s investment strategies are necessarily exposed to risk, and cannot sidestep the volatility that will result. However, my hope is that Seafarer’s investment strategies will mitigate at least a portion of this volatility, so that clients may invest with less frustration and more confidence over time.

How is the Seafarer Overseas Growth and Income Fund different from other emerging markets funds?

The Seafarer Overseas Growth and Income Fund is at heart an emerging markets fund; however it employs an approach that we believe is less conventional in comparison to many of its peers:

• The Fund can provide exposure to multiple asset classes, as its strategy allows for investment in equities, convertible bonds, and fixed income.
• The Fund has a broad geographical mandate, rather than an arbitrary one prescribed by an index; it spans markets that are variously categorized as “frontier” and “emerging.” The Fund can also invest in developed countries that have significant economic and financial linkages to developing countries.

We believe an unconstrained approach of this sort will serve our clients best. The flexibility that it affords will allow the Fund to readily adapt as the world’s markets and economies continue their rapid and complex evolution.

What is the Seafarer Overseas Growth and Income Fund’s objective? What is its purpose?

The Fund seeks to provide long-term capital appreciation along with some current income. The Fund seeks to mitigate adverse volatility in returns as a secondary objective.

The Fund seeks to offer investors a relatively stable means of participating in a portion of developing countries’ growth prospects, while providing some downside protection (in comparison to a portfolio that invests only in the common stocks of developing countries).

The strategy of owning convertible bonds and dividend-paying equities is intended to help the Fund meet its investment objective while reducing the volatility of the portfolio’s returns.

We are excited about the growth and progress that we believe will accrue in the developing world, and we are pleased to offer a fund that seeks to participate in the opportunities afforded by such progress.