During the first quarter of 2019, the Seafarer Overseas Value Fund gained 11.51%.¹ The Fund’s benchmark, the MSCI Emerging Markets Total Return Index, returned 9.95%. By way of broader comparison, the S&P 500 Index returned 13.65%.

The Fund began the quarter with a net asset value of $10.08 per share. It paid no distributions during the quarter and finished the period with a value of $11.24 per share.²

Performance

The most pleasing aspect of the Value strategy’s first quarter 2019 performance extends beyond the restoration of the Fund’s NAV to a pre-October 2018 level, before the sharp fourth quarter drawdown in emerging equity markets. Indeed, the defining characteristic of this quarter’s performance was the nature of the stocks that contributed most to the NAV appreciation. Among the top contributors to total return for the quarter are stocks that lie outside the traditional beaten path of the emerging markets benchmark, stocks that generate value for their shareholders in ways that extend beyond growth expectations, and whose business practices are unique in some way. In other words, stocks emblematic of the Seafarer Overseas Value strategy.

Asia Satellite Telecom Holdings (Deleveraging source of value; the “source of value” for a Fund holding is hereafter referenced in parenthesis), an owner and operator of satellites for data and communication services, is among the top contributors to performance for the quarter. The market is now beginning to recognize what attracted Seafarer to the stock since the inception of the Value strategy – that the balance sheet is on a clear deleveraging path, and that the dividend will continue to rise as the company reduces debt and capital expenditure requirements subside. A unique aspect of the underlying satellite business that I expect will foment further investor interest in the stock is the relative independence of demand for satellite services from fluctuations in gross domestic product (GDP) growth expectations that world economies appear to suffer from these days.

Another characteristic Value strategy holding that contributed meaningfully to this quarter’s performance is Qatar Gas Transport (Deleveraging), an owner and operator of liquified natural gas (LNG) transport vessels. The company’s share price appreciation this quarter is uncharacteristic of a security that is essentially a U.S. dollar bond disguised as equity, in the sense that the underlying business is based on shipping contracts with durations exceeding 20 years. There is a growing recognition in the market that Qatar Gas Transport will expand its fleet significantly in the coming years as the country grows its natural gas output. This newfound recognition by the market appears to coincide with news flow surrounding new orders for LNG vessels placed with Korean shipbuilders. As was the case with Asia Satellite, the Value Fund owned Qatar Gas Transport since the Fund’s inception. While unfortunately the Fund held the position during the surprise announcement in June of 2017 of the embargo on Qatar, it used the associated share price decline to increase its position in the stock on the view that the embargo would not apply to Qatar Gas Transport’s operations, and that the country would substitute natural gas production for the interbank market as a source of U.S. dollars, as explained in the second quarter 2017 portfolio review. On the topic of whether the Korean shipbuilders could constitute another part of the value chain for the Fund to increase its NAV, it is my experience that Korean shipbuilders are a uniquely poor vehicle to translate new order growth into retained earnings, much less dividends.

Lastly, no portfolio review would be complete without a discussion of stocks that detracted from the Fund’s NAV. While there were several such holdings this quarter, their share price retrenchment was of modest magnitude, and no company stood out versus the others. Thus, I will highlight Tabreed (Deleveraging and Structural Shift) as a case similar to that of Qatar Gas Transport in that they are both relatively unknown companies whose growth does not stand out against other emerging market companies, but whose return potential for investors is attractive for reasons that relate to valuation, dividends, and unique business characteristics. The share price of this provider of district cooling services declined modestly during the quarter despite the company’s announcement of its first foray outside of the Middle East into India, a long-awaited event. As was the case with the stocks previously discussed in this portfolio review, the Fund must exercise patience until the market recognizes the growing dividend and reassesses the growth rate of the company as it embarks on a newfound international expansion path.

Allocation

The Fund exited its position in Pou Chen (Breakup Value), a Taiwanese manufacturer and retailer of athletic footwear. The confluence of two factors drove the sell decision. The first was a downward reassessment of the company’s long-term earnings power. While management appears to have correctly identified and addressed the factors impinging on profitability, there is nevertheless reason to expect a permanent impairment to the sustainable margin of the business. The second factor was the improved contribution to earnings from the company’s stake in Nan Shan Life Insurance. Seafarer used Pou Chen’s share price recognition of the latter point to exit its position for reasons related to the long-term profitability of the core business.

The Value Fund reinvested proceeds from the sale of Pou Chen into a new holding: Moneta Money Bank (Management Change and Asset Productivity).

Moneta Money Bank is a bank specializing in lending to small and medium-sized enterprises (SMEs) and consumers in the Czech Republic. A conservatively capitalized bank operating in a stable macroeconomic environment, it aims to resume lending growth and recover pricing power in the consumer lending segment. Management, acutely aware of the scale limitations of the bank and the Czech Republic, is working to transcend those limitations through mergers and acquisitions. Finally, at the current share price, the dividend yield hovers around 7% in an historically stable currency against the U.S. dollar.

Outlook

During these days of convulsion in the national politics of many developed markets – as they attempt to transition to slower rates of debt growth – it is relevant to point out how China is responding differently to the same challenge of high debt levels in the economy.

First, Xi Jinping declared himself President for life during China’s 19th National Congress held in October of 2017. By concentrating power in his persona, Xi Jinping may be sparing China the internal infighting for the monopoly of legislation that developed countries suffer from as expressed in populism, nationalism, yellow vests in France, or any other form.

Second, China’s National People’s Congress held during the first quarter of 2019 placed the emphasis of economic management on 2 trillion renminbi (RMB) worth of tax cuts. This approach, aimed at promoting the private sector, lies in stark contrast to the ever-increasing role of government in developed economies that naturally arises from the competition for legislative power.

The aim of these two observations is not to make value judgements, but simply to point out that China is following a different path than most developed markets in responding to the challenge of high debt levels.

Finally, it is important to draw attention to Andrew Foster’s fourth quarter 2018 portfolio review for the Seafarer Overseas Growth and Income Fund where he characterized the earnings growth outlook for emerging markets as healthy.

Thus, I would argue that the outlook for emerging markets, both in terms of overall earnings growth and policy direction in China – the primary economy within the emerging markets universe – is a positive one. I find China’s newfound interest in stimulating the private sector through tax cuts particularly encouraging.

Within this context, the Value strategy will continue to follow its bottom-up research priorities, driven by differentiated companies of interest, rather than countries or sectors.

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

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 Total Return Index, Standard (Large+Mid Cap) Core, Gross (dividends reinvested), USD is a free float-adjusted market capitalization index designed to measure equity market performance of emerging markets. Index code: GDUEEGF.

The S&P 500 Total Return Index is a stock market index based on the market capitalizations of 500 large companies with common stock listed on the NYSE or NASDAQ.

It is not possible to invest directly in an index.

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 March 31, 2019, Asia Satellite Telecommunications Holdings, Ltd. comprised 4.5% of the Seafarer Overseas Value Fund, Qatar Gas Transport Co., Ltd. comprised 4.8% of the Fund, National Central Cooling Co. PJSC (Tabreed) comprised 3.5% of the Fund, and Moneta Money Bank AS comprised 0.6% of the Fund. The Fund did not own shares in Pou Chen Corp. View the Fund’s Top 10 Holdings. Holdings are subject to change.

1. References to the “Fund” pertain to the Fund’s Institutional share class (ticker: SIVLX). The Investor share class (ticker: SFVLX) returned 11.41% during the quarter.
2. The Fund’s Investor share class began the quarter with a net asset value of $10.08 per share; it finished the quarter with a value of $11.23 per share.