During the third quarter of 2023, the Seafarer Overseas Value Fund returned -0.51%.¹² The Fund’s benchmark indices, the Morningstar Emerging Markets Net Return USD Index and the Bloomberg Emerging Markets Large, Mid, and Small Cap Net Return USD Index, returned -1.66% and -1.97%, respectively. By way of broader comparison, the S&P 500 Index returned -3.27%.

The Fund began the quarter with a net asset value of $13.73 per share. It paid no distributions during the quarter and finished the period with a value of $13.66 per share.³

Performance

The Value Fund’s third quarter performance showcased the importance of investing broadly in the global emerging markets (EM), as opposed to exclusively concentrating in the largest countries. Indeed, the positive contributors to the Fund’s return during the period coalesced around the smaller countries in the EM investment universe: the United Arab Emirates, Georgia, and Vietnam.

In the United Arab Emirates, Emaar Properties (Breakup Value and Segregated Market sources of value; the “source of value” for a Fund holding is hereafter referenced in parentheses), a property developer and investment company, continued to report strong quarterly financial results and is studying the potential for further regional expansion. In the case of Tabreed (Deleveraging and Segregated Market), a supplier of district water cooling services, the market seemingly recognized the company’s low valuation relative to a newly listed peer, thus leading to a strong share price performance.

The common thread across the Fund’s holdings in Georgia as well as those in Vietnam was strong earnings momentum. These names include: Bank of Georgia (Asset Productivity and Segregated Market), one of the largest banks in the country; Georgia Capital (Breakup Value and Segregated Market), a conglomerate; PetroVietnam Technical Services (Management Change and Asset Productivity), a Vietnamese oil services company; and Petrovietnam Fertilizer and Chemicals (Management Change and Asset Productivity), a Vietnamese fertilizer manufacturer. Furthermore, Bank of Georgia and Petrovietnam Fertilizer and Chemicals distinguish themselves through their extraordinarily high dividend yields.

On the negative side of the ledger, Fund holdings in China and Brazil – among the largest countries within the EM investment universe – detracted the most from performance. The stock prices of Ambev (Structural Shift and Asset Productivity), a Brazil-based brewer in the Americas, and Odontoprev (Structural Shift), a Brazilian dental insurance provider, both suffered from concerns over a potential increase in taxes related to the country’s fiscal reform.

In China, the stock prices of Melco International (Asset Productivity and Breakup Value), a casino owner and operator in Macau, and Shangri-La Asia (Breakup Value and Asset Productivity), a hotel owner and operator in Asia, were pressured by negative sentiment related to Chinese consumption and a poor economic growth outlook. For the time being, this stock price action ignores the positive earnings momentum reported by these companies in the most recent quarter compared to losses in the same period last year, when China’s pandemic restrictions were still in place.

Allocation

During the third quarter, the Fund finished establishing a position in Salik Co. PJSC (Segregated Market and Management Change), a Dubai-based toll road operator in the United Arab Emirates, which it began buying at the end of the prior quarter. While Salik has operated the toll road gates in Dubai since 2007, it was carved out of Dubai’s Road and Transport Authority in 2022 and established as a new corporate entity controlled directly by the Dubai Department of Finance. Under its new ownership, it was granted a 49-year monopoly concession to operate Dubai’s existing eight toll gates as well as the exclusive right to operate any future gates in the emirate. Salik sold a 24.9% stake to the public in its initial public offering (IPO) on the Dubai Financial Market in September 2022 as part of a broader privatization program.

Salik is a unique toll road operator as it owns the physical toll gates, but under its concession agreement, the responsibility for upkeep and investment in the physical roads is borne by its former owner, the Road and Transport Authority. Unlike Salik, global toll road companies must typically invest in the maintenance of existing roads as well as the development of new roads. Salik’s low capital expenditure equates to greater free cash flow generation, the majority of which the company seeks to pay out as dividends. Salik offers an above-average dividend yield in a U.S. dollar-pegged currency, while its growth prospects remain underappreciated and undervalued by the market, in Seafarer’s view. Dubai is ascending as a financial hub thanks to its policies to attract foreign talent, lack of personal income tax, and relative quality of life. Seafarer welcomes the gridlock these policies may bring.

The Fund did not exit any positions during the quarter.

Outlook

I pondered long for a salient development during the quarter to comment on that would prove useful to the reader. Ironically, I concluded that the only semi-intelligent insight I could arrive at was to realize how little we all know. As icing on the cake, that realization itself is a useful warning to investors who consciously or subconsciously tend to make investment decisions based on a top-down outlook for the future.

What do I mean by “how little we all know”? For starters, war and geopolitics do not conform to the forecasts of macro prognosticators. Few predicted Russia’s invasion of Ukraine, or that it would continue into a second winter season. Yet another eruption of violence in the Middle East compounds uncertainty in global geopolitics and energy markets.

Similarly, who could have predicted that strength in the U.S. dollar, as tracked by the U.S. Dollar Index, would be compatible with an exponentially rising cost (approaching $1 trillion for 2023) of servicing U.S. federal government debt?⁴ This phenomenon is further perplexing considering that it is taking place at a time when the U.S. fiscal deficit is at a historical peak and shows no sign of restraint.

Based on the foregoing, could an investor predict that corporate profitability pressures from inflation, higher energy costs, and higher future taxes (stemming from the fiscal imbalance and unprecedented debt servicing cost) would be compatible with the S&P 500 Index delivering positive performance thus far in 2023, while hovering not far from its all-time high level?

I will end by pointing out that it is also unusual for the emerging markets to deliver positive equity returns (3.50% year-to-date, as of September 30, for the Morningstar Emerging Markets Net Return USD Index) during a period of global turmoil and U.S. dollar strength. Equally, for all the doom and gloom dominating the discourse around China, stock prices there appear to be finding some tentative stability, albeit after having underperformed since early 2021.

Every action has an underlying motivation. Every outcome has a cause. Attempting to explain the foregoing observations would be relatively easy with the benefit of hindsight, but it would undermine the point I made at the beginning of this commentary. The point is precisely to realize that on an ex-ante basis, the observations above appear counterintuitive, and very few investors could have envisioned our present financial reality, much less on a repeatable basis, and fewer still could have reliably capitalized on it.

The take-away from these observations is that historical economic and financial relationships are in flux. In my humble opinion, it stands to reason that the pursuit of future investment returns is better served by pursuing stock-specific insight over macro views based on historical, and not always relevant, relationships. The Outlook sections of the Value Fund's first quarter 2023 and second quarter 2023 portfolio reviews explained how the Fund navigates macro volatility by focusing on stock fundamentals.

As of September 30, 2023, the Value Fund’s gross portfolio yield⁵ was 4.8% and its price to book value⁵ ratio was 1.2x (please refer to the Value Fund’s Overview page for more information).⁶ These statistics and the associated stock fundamentals of the Fund’s holdings – not any presumed global macro insights – give us confidence in the future.

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 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 September 30, 2023, securities mentioned in the portfolio review comprised the following weights in the Seafarer Overseas Value Fund: Emaar Properties PJSC (3.2%), National Central Cooling Co. PJSC (Tabreed) (2.7%), Bank of Georgia Group PLC (2.3%), Georgia Capital PLC (2.7%), PetroVietnam Technical Services Corp. (3.3%), Ambev SA (2.0%), Odontoprev SA (2.4%), Melco International Development, Ltd. (2.5%), Shangri-La Asia, Ltd. (2.6%), Salik Co. PJSC (3.0%). View the Fund’s Top 10 Holdings. Holdings are subject to change.

Source: ALPS Fund Services, Inc.

The Seafarer Funds are not sponsored, endorsed, sold, or promoted by Morningstar, Inc. Morningstar, Inc. makes no representation or warranty, express or implied, to the shareholders of the Funds or any member of the public regarding the advisability of investing in the Funds or the ability of the Morningstar Emerging Markets Net Return U.S. Dollar Index to track general equity market performance of emerging markets.

Source: Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). Bloomberg or Bloomberg’s licensors own all proprietary rights in the Bloomberg Indices. Neither Bloomberg nor Bloomberg’s licensors approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.

1. References to the “Fund” pertain to the Fund’s Institutional share class (ticker: SIVLX). The Investor share class (ticker: SFVLX) returned -0.44% during the quarter. All returns are measured inclusive of Fund distributions paid (in relation to Fund performance) or dividends paid (in relation to index performance), reinvested in full (exclusive of any U.S. taxation) on the pertinent ex-date.
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 Investor share class began the quarter with a net asset value of $13.68 per share; and it finished the quarter with a value of $13.62 per share.
4. Federal Government Current Expenditures: Interest Payments. FRED, Federal Reserve Bank of St. Louis. Data accessed October 16, 2023.
5. Calculated as a harmonic average of the underlying portfolio holdings.
6. Sources: ALPS Fund Services, Inc., Bloomberg, Seafarer.