The Seafarer Overseas Growth and Income Fund launched on February 15, 2012; on April 30, the Fund completed the first (partial) fiscal year of its existence. Between the Fund’s inception and the end of the fiscal year, the Fund returned 1.80%, while its benchmark, the MSCI Emerging Markets Total Return Index, fell -2.52%.

Performance

During the truncated period under review, the Fund's primary goal was to establish its initial portfolio in an efficient fashion. We have done so to our satisfaction. The Fund’s holdings in Latin America and South Africa made marginally positive contributions to performance. However, the bulk of the Fund’s outperformance versus its benchmark was due to its holdings in the East and South Asia region. In that region, the Fund’s holdings held nearly flat on balance, which stood in contrast to the underlying markets, which declined. The Fund’s exposure to Vietnam was of particular benefit, producing gains that offset other declines within the Asia region.

From a sector perspective, no sector stood out in its contribution to the Fund’s gains. Meanwhile, the Fund’s exposure to two sectors—healthcare and utilities—detracted a bit from performance, though neither sector’s loss was pronounced in the context of the broader market’s volatility and decline.

Allocation

The Fund’s initial portfolio has taken up a substantial allocation to the Asia region, with more limited exposures to Latin America, Eastern Europe and Africa. The Fund is also substantially allocated to equities over convertible bonds or fixed income. There are several tactical considerations that drive this allocation:

• Despite concerns over China’s future, we are presently finding attractive valuations and growth in that region—and we think we can add the most value there;
• We think very few equity markets, if any, will go unscathed following Europe’s likely economic disintegration; however, we believe Asia may be able to withstand such losses best;
• We believe that current valuations on equities already reflect a great deal of stress, and thus offer reasonable value (please see the Shareholder Letter for additional discussion).

However, apart from short-term tactical considerations, the Fund’s strategy is also likely to place emphasis on the Asia region. Our research suggests that certain biases and shortcomings exist in the prevalent benchmark index which tracks emerging markets. That index tends to chronically underweight Asia Pacific and Eastern Europe, and in commensurate fashion, overweight Latin America and Africa. While the Fund is likely to shift its regional allocation over time, our ultimate intent is to build a portfolio that is more reflective of the underlying market fundamentals than the index – and thus we are likely to maintain this “tilt” toward Asia for some time to come.

Looking forward, the Fund is currently in registration to invest directly in the Vietnamese market. We anticipate building exposure in that market once the registration is complete. Also, we are reviewing Eastern European markets on the premise that events in Europe may provide opportunities to accumulate long-term positions at attractive prices.

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.