Dear Fellow Shareholders,

I am pleased to address you again on behalf of the Seafarer Overseas Growth and Income Fund. This report addresses the first half of the Fund’s fiscal year (May 1, 2015 to October 31, 2015).

During the semi-annual period, the Fund declined -12.77%, while the Fund’s benchmark, the MSCI Emerging Markets Total Return Index, fell -17.55%.¹ By way of broader comparison, the S&P 500 Index rose 0.77%.

The Fund began the fiscal year with a net asset value of $12.66 per share. In June, the Fund paid a semi-annual distribution of $0.060 per share. That payment brought the cumulative distribution per share, as measured from the Fund’s inception,² to $1.091. The Fund finished the semi-annual period with a value of $10.99 per share.³

Performance Review

Two main events impacted performance during the fiscal half-year: severe weakness among most emerging market currencies, precipitated by the downgrade in Brazil’s sovereign bond rating to “junk” status, and a sharp stock market correction in China.

In a portfolio review published in early 2015, I wrote that I expected weakness in emerging market currencies to continue, but to moderate:

Looking forward, Seafarer’s analysis and my instinct both suggest that most of the currency “pain” is in the past. Certainly, the [negative] conditions [that have caused currencies to decline versus the U.S. dollar] still exist, and consequently the [downward] trend may continue for some time. How long I do not know. Yet it is difficult to underestimate the magnitude of the adjustment that has already taken place.

My prediction was terribly wrong. Rather than moderate, the weakness in most currencies escalated. From May 1^st to October 31^st, the Brazilian Real fell 22% versus the U.S. dollar; the Malaysian Ringgit was off 17%; the Turkish Lira dropped 8%; the Mexican Peso was down 7%; and the Indonesian Rupiah declined 5%.⁴ Even the Renminbi, China’s currency – notoriously stable, and occasionally strong over the past decade – depreciated about 2% during the semi-annual period as the Chinese government materially altered the mechanism that sets the currency’s value versus the dollar.

The Brazilian Real’s decline was spurred by the downgrade of the country’s sovereign debt to a level equivalent to “junk.” For the past four years, the country has been saddled with poor economic and fiscal policy under the Rousseff administration. President Rousseff has signaled her willingness to revise policies and introduce greater fiscal discipline. However, her political support has deteriorated to such an extent that she can find no allies in the Brazilian legislature. The resulting gridlock, combined with the fiscal shortfall, led at least one major rating agency to move Brazil’s bonds into “junk status.”

While the Real suffered the most acute loss, many currencies were weak during the period. The overall impact on the Fund was pronounced: I estimate that just under half of the Fund’s drop during the six-month period was due to currency depreciation. The benchmark suffered as well, as over one third of the index’s losses were due to currency effects.

Apart from currencies, the other major source of weakness was China. The country’s stock markets collapsed from June to August, undermining both the index and the Fund. In the spring of 2015, I had some sense that China’s stock market might experience a correction (see China’s Emergence, In Context from June 2015). I did not have definitive knowledge as to when the correction might occur – the aforementioned video was recorded only a week before the sell-off began in earnest – yet I had recognized conditions that appeared sufficiently extreme as to warrant caution.

I thought the best precaution was to ensure that the Fund’s China-related holdings had “defensive valuations.” By “defensive,” I mean security valuations low enough as to be reasonably confident that such securities might avoid full participation in a market-wide sell-off; and also valuations that feature current yields that could prove attractive in the event of a decline (and thereby offer a second line of “defense” against a potential correction). At the same time, I believed it paramount to avoid Chinese stocks that had been caught up in the chaotic surge that characterized the second quarter. I thought such stock gains would prove unsustainable, as they appeared to be financed by retail investors reliant on excessive amounts of margin finance.

Unfortunately, my notion of “defensive” valuations proved faulty. The Fund held eight China-linked securities – seven stocks listed on the Hong Kong Stock Exchange, plus one bond – all denominated in Hong Kong dollars. All the stocks fell in unison with the sell-off in Chinese stocks that took place over the summer. The Fund’s holdings in China marginally outperformed the benchmark’s China holdings during the semi-annual period (17.6% decline for the Fund, versus 22.4% for the index). Nonetheless, that result was bitterly disappointing, particularly as China’s stock markets seemed devoid of any “defensive” haven – or at least I found none. The Fund’s China-related losses accounted for a bit more than one quarter of the Fund’s decline during the period.

The Fund’s outperformance during the fiscal half-year was mainly due to security selection in China, where the Fund owned two small caps that avoided the brunt of the market’s losses (Texwinca, a textile company, and Pico Far East, a media firm); to security selection in Malaysia (Hartalega, a disposable glove maker); and to security selection in South Korea (Samsung Electronics, a technology giant that announced a share buyback).

Death of the Emerging Markets

The Seafarer Overseas Growth and Income Fund launched on February 15, 2012. The intervening 45 months have been very problematic for the developing world. Between the Fund’s inception and October 31^st of this year, the Fund’s benchmark index declined -10.64%, measured cumulatively. The S&P 500 rose 67.42% over the same period.

Over the past four years, the emerging markets have been beset by numerous challenges. Nearly all countries have suffered from decelerating economic growth; most have incurred severe currency weakness; several have experienced some form of credit or financial shock; and some have been shaken by political strife and instability. The poor performance of emerging market stocks in combination with such challenges has led a number of analysts to declare the “death” of the emerging markets as an asset class.⁵ Other analysts have questioned whether the asset class ever made sense in the first place: it seems little more than a haphazard collection of countries with weak governance and which are prone to boom-and-bust cycles. The fleeting gains that these markets produce are nearly always wrecked by episodic currency crises. Even long-term investors struggle to produce gains, and many understandably wonder whether “emerging markets” have any place in their portfolio whatsoever.

To be candid: though I established Seafarer based on the sincere belief that the developing world has much to offer long-term investors, the past four years have given me pause. The going has been rough. While the Fund has produced gains and outperformed its benchmark since inception, its performance has been choppy, well below that of the S&P, and by no means immune to the conditions described above. I still perceive the potential of these markets. However, I acknowledge that it is very fair to question whether these markets are “dead,” and it is necessary that I address this question directly.

An Incoherent Group

Before I provide a view on the future viability of the asset class, I would like to first summarize and respond to the main arguments regarding its demise. One of the most prevalent views today is that the asset class is outdated and nonsensical: it represents an overbroad range of countries that, after three decades of evolution, have little in common. The complaint recognizes that the markets have disparate scale, growth models, economic cycles, and political structures. Proponents of this argument question whether such dissimilar markets can ever perform in tandem, and thereby constitute a coherent asset class.

I agree entirely with this view, with one important caveat: based on the same logic, the asset class never made sense in the first place. Lumping together China with Malaysia, India with South Korea, Poland with Russia was always a questionable proposition. There has never been much to unite these markets in the first place; yet careful observers could see even thirty years ago that some markets were clearly more important in terms of their potential scale and economic heft than others. Personally, I think the “emerging markets” were melded into one class some thirty years ago only because all were alien and small in the eyes of most Western investors. They formed a motley group of castoffs; but Modern Portfolio Theory (or “MPT,” an asset allocation framework developed by Dr. Harry Markowitz) demanded they be slotted somewhere. Thus an ill-formed asset class was born. Today, the economic structure and scale of a few of these markets (especially China) vastly eclipses the rest, making the differences within the class too large to ignore – ironically giving rise to the now prevalent, three-decade-late-dollar-short view that the asset class “doesn’t make sense.”

China-Plus

The recognition that China’s potential is unique among the emerging markets leads to the second common critique: the traditional notion of “emerging markets” is outdated, as it fails to recognize China’s prominence. A modern version would recast the asset class as “China-Plus.”⁶ The underlying idea is that China’s fortunes dominate the rest of the developing world to such great extent that all other countries should be relegated to an adjunct position (denoted as a “plus”) within a China-centric portfolio. Essentially, a long-term investment in the emerging markets must strive to get China “right” with a majority allocation (e.g., perhaps 75% or more of the portfolio); everything else worth owning in the developing world can be safely relegated to the remainder (e.g., 25%).

I have strong sympathies with this argument, too. For the majority of my career, I was an Asia specialist for this very reason. I have long believed that China’s scale and potential for sustainable growth distinguished it from the rest of the developing world. At every opportunity, I have derided the “BRIC” concept, as I believe catchy acronyms are a poor substitute for an investment strategy. However, the BRIC concept has one thing to recommend it: it elevates certain markets – including China – above the rest. BRIC reminds investors that some markets possess greater potential, and therefore should figure more prominently in portfolio construction (even as I question why Brazil and Russia made the list).

Why, then, do I not run a China-centric fund? There are two reasons. First: both my heart and my mind tell me that the 2.9 billion people that live in the developing world outside China cannot be “safely relegated” to the residual 25%. Growth, progress and wealth creation can occur anywhere, against the grain. Second: China’s rise is not a foregone conclusion. I believe that in order for China to reach its full potential – the sort of potential that would validate a “China-Plus” approach – the country must introduce economic reforms that would ultimately unseat the communist party. I do not believe there is any other way. This is the core, unspoken question that gnaws at the heart of any “China-Plus” strategy: will the party let go of China, so that the nation might emerge, and rise above the rest? I do not know, and no one does, except perhaps in the core of the central politburo. I can state sincerely that, at least so far, the party has not shied from such reforms, but the hardest work is yet to come.

Always Emerging, Never Emerged

This leads to a third objection against the asset class: do any of these emerging markets ever emerge, anyway? They seem trapped in a never-ending boom-bust cycle, from which none escape to attain development. There are many versions of this argument. One version is that the developing world is nothing more than a cluster of unstable economies highly dependent on commodity prices for growth. When commodity prices collapse, so too does the developing world.⁷ Another version rests on the idea that the developing world suffers from graft and poor governance, such that “success [leads] to arrogance and complacency – and the next downturn.”⁸ Effectively, the developing world is saddled with weak social and government institutions, and its economies lurch from one political crisis or corruption scandal to the next. A third version (and the most important, in my view) focuses on the currencies: perhaps the countries make some progress, and their securities markets might occasionally rise; but ultimately their currencies collapse versus the U.S. dollar, undermining any notion of wealth creation for the local citizen and the foreign investor alike.

I think the first and second versions of this argument are largely hogwash. I do not disagree with the observation that resource industries are prominent in the developing world, or that most emerging market countries suffer from poor governance. I disagree with the timeframe implicit in such judgments: these views mistake cyclical downturns for structural failure. The analysts that advance such arguments are the impatient denizens of Wall Street, and they lack any sense of the time and effort required to produce progress in the real world. They fail to recognize that living standards have improved considerably (in some cases immensely) across most of the emerging markets during the past thirty years.

I completely concur with the third version of the argument, though. I think the emerging markets’ progress, as measured in U.S. dollar terms, has been interrupted by major currency crises with distressing regularity. During my education and career, I have lived through three such crises. I have come to believe that, unless a government holds absolute power such that it can ignore the will of its people, the very act of socio-economic development obliges a country to adopt fiscal and monetary policies that are inflationary relative to those of the U.S. dollar. This consigns most emerging market currencies to a state of routine “slippage” versus the dollar, sometimes punctuated by sharp crises. So far, the emerging markets appear unable to escape from this cycle, and they may never do so. I will return to this topic below.

Decouple or Bust

A fourth argument follows from the third: even if the developing world “emerges” (i.e., attains wealth and the many other characteristics of the developed world), do these markets ever “decouple?” Investors have declared the asset class as-good-as-dead because it has not performed according to their expectations. Those expectations rested on a tenuous assumption, namely that emerging market stocks would somehow both grow and behave in a counter-cyclical (non-correlated) manner relative to stocks in the developed world.

I think the notion of decoupling was always misplaced, or at least so poorly defined that it was bound to give rise to frustration. The notion of decoupling is too complicated for me to address properly in this letter. However, I can state one idea briefly: the notion of development-driven growth is incompatible with the notion of non-correlated returns. Simply put, the developing world has grown explicitly because it has coupled with the rest of the world, not the opposite.

Thirty years ago, nearly every corner of the developing world was poor, with isolated markets and broken economies. The progress that has followed since has occurred because selected countries adopted policies that promoted openness, competition, deregulation, and trade. The potential of the emerging markets was unlocked via integration; the growth that ensued occurred because the markets coupled with the rest of the world. To expect the emerging markets to offer differentiated performance during an acute crisis is to ignore what made them investable, and growth-oriented in the first place.

“Decoupled” (uncorrelated) markets still exist today – in financial parlance, they are mostly known as “frontier” markets – but they are the same small, poor and isolated economies that were prevalent in the emerging world thirty years ago. Only when they “couple” will they “emerge.” In so doing, their economies and financial markets will assuredly become more correlated with the rest of the world.

U.S. Multinationals Are All You Need

The fifth and final argument is an older one, and it has a chief proponent, the estimable Jack Bogle, founder and former CEO of Vanguard. Bogle believes the emerging market asset class is redundant. He argues that large, U.S.-based multinationals have expanded overseas, and that many derive significant revenues and profits from the developing world. Bogle suggests that indirect exposure is sufficient for most investors, not least because it can be achieved through U.S. companies that exhibit better transparency and governance than their emerging market counterparts.

The last bit of that argument holds some truth, but it mostly smacks of “home market bias.” There is plenty of evidence that North America companies are not immune to accounting and governance scandals. By contrast, the former part of the argument cannot be dismissed. At the outset of my career, very few multinationals had a material presence in Asia (I worked there as a consultant). Companies gave lip service to the idea of international expansion, but few had material revenues or profits derived from the developing world.

Much is different today. U.S. companies have expanded into the emerging markets, and Bogle’s argument deserves attention. Still, my experience suggests that multinationals are present mostly in large, well-established sectors. Few operate in the nascent industries that drive much of the markets’ marginal growth. For example: domestic firms seem to control most service industries, presumably because they are closer to customers, and they know regulatory standards better. Bogle has made the same argument for decades. It now holds more truth than it once did. Yet his U.S.-centric prescription underestimates the breadth and depth of the emerging markets – and I do not believe it renders the asset class redundant, not by a long shot.

The Emerging Markets Are Dead; Long Live The Emerging Markets

Each of the preceding arguments is flawed, but each holds an element of critical truth. Obviously, I do not think the asset class is “dead.” Yet the traditional notion of the asset class is outmoded, and I recognize the need to develop a new definition that accounts for such truths. In my opinion, three criticisms of the asset class carry particular weight:

1. the emerging markets have little in common, except that all suffer from weak domestic institutions and dysfunctional local markets;
2. currencies pose a constant threat to economic development and investors’ returns; and
3. traditional notions of the asset class belie China’s prominence.

I will address each item in turn.

Defined by Dysfunction

It may seem counterintuitive, but I believe the first item is an answer unto itself. Analysts point to little that unites the emerging markets, but nearly everyone decries the prevalence of flawed institutions and faulty local markets. I posit that this complaint is central to the very definition of the asset class. The only thing that unites these markets is their shortcomings, and therefore the definition should rest upon such flaws.

Traditionally, investors have used a wide range of measures to delineate what was, and was not, an “emerging market” (e.g., income per capita, growth rates, technology adoption). I propose that a revised definition concentrate on the status of local markets and social institutions – especially the presence (or absence) of well-formed capital markets. As an investor, I believe the depth, breadth and liquidity of capital markets influences the propensity for liquidity shocks and credit crunches. Liquidity and credit shocks tend to beget economic disruptions. For better or worse, I believe the frequency and severity of such disruptions are central to the very nature of what it means to be an “emerging market.”

This sounds awful: an emerging market is defined by its failings rather than its potential. Again, it may seem counterintuitive, but I believe that a developing country’s shortcomings are precisely what give rise to its raw potential for growth. Countries grow in a sustainable manner when they raise their productivity. A developing country that struggles with economic or financial shortcomings ironically has greater room to demonstrate progress, as it has the potential to grow from a low base. Obviously, economic instability and severe cycles are undesirable for everyone, especially for the residents of the developing world. Yet as an investor, one must recognize that the potential for an emerging market is not derived from its present state, flawed and cyclical as it may be. Rather, the potential is derived from the capacity to one day escape that state, address structural flaws, make economic progress, and move onward. The pace of change may seem glacial at times, but institutions do develop; capital markets do deepen, and grow more liquid; and economic shocks lessen in severity and frequency.

All of this represents progress; it is manifest in growth and rising stock prices. Savvy investors can capitalize on the volatility and mispriced securities that inevitably accompany an economic shock – indeed, the exacerbated volatility is what gives long-term investors the chance to capture excess returns. More importantly, though, patient investors must embrace the idea that “emerging markets” are severely flawed by definition. It is precisely those flaws that produce the potential for growth and returns that make the securities worth owning in the first place.

The Currency Conundrum

As discussed above, the threat of currency loss poses a constant threat to the asset class. I do not believe that most economies can successfully “emerge” without adopting monetary and fiscal polices that are generally “looser” than those of the U.S. dollar. This means that most emerging market currencies have an embedded “inflationary” bias and will weaken versus the dollar over time. This condition may manifest itself in ordinary, modest depreciation; or it might manifest itself in extraordinary volatility and loss – a currency crisis.

Unfortunately, I do not know of a productive means to avoid currency risk. Instead, any serious emerging market investor must embrace currency risk and manage it. The cost of hedging all currencies, all the time, exceeds the benefit. Hedging costs are practical only if one can predict which currency will fall next, and to what extent – and such prediction is beyond the reach of most mortals (certainly, it is beyond me). There is one bit of happy news. I have estimated the long-term cost of currency risk (see Currency Risk, in Context). Provided that a long-term investor owns a well-diversified basket of equities, the expected cost of currency risk is a small fraction of the expected benefit from owning emerging market equities.

Still, I do not know how currency risk can ever be resolved. The emerging markets are, by definition, stuck with weak institutions and poorly formed capital markets. However, in order to grow, these countries must invest in physical and social infrastructure at very large scale. Obviously, large-scale investment requires substantial capital, but stunted capital markets mean that the developing world faces a constant deficit. This makes the emerging markets structurally dependent on foreign borrowing, usually from U.S. dollar-based creditors. This sort of borrowing is so well known in academic circles that it has an analytical name: researchers call it “original sin.” As discussed above, the developing world is prone to follow “inflationary” currency policies. Unfortunately, dollar-based borrowing combined with weak currency policies mean that developing countries naturally veer toward currency weakness (or outright collapse). If pressed, I can imagine only one long-shot scenario that might arrest this depressing cycle: the emerging markets must discover a new currency that could act as an alternate source of long-term funding, and thereby move beyond the dollar.

China’s Prominence

This brings me directly to China, and its special role within the developing world. China casts an outsized shadow over the economic cycle of the emerging markets; indeed, China’s economy now impacts the global economic cycle. This is especially evident in markets for resources, commodities, and energy: when China is expanding, prices in these markets are firm; when China’s economy is soft, so too are prices. The vagaries of China’s domestic credit cycle and the ulterior motives of its large, state-owned enterprises create distortions in global markets.

Today, the idea that China dominates the fortunes of the emerging markets is incontrovertible. Yet only four years ago, this was not widely recognized. Certainly, everyone at that time recognized China’s impact on commodity prices. Yet it seemed to me that most analysts were firmly in the thrall of a resource super-cycle, in which China played only a marginal, swing-price role.⁹ Hindsight suggests that China’s role in underpinning the cycle was far greater than most understood; and accordingly, the up-cycle that emerging markets enjoyed between 2005 and 2011 was far more dependent on China than most believed. I would go so far as to say that, without China, much of the rest of the growth would not have happened.

China's economic heft gives it great power, and the ability to influence the economic cycles of other nations.  Whether China will use its power in an ethical fashion is open to serious debate.   For now, I only wish to note that China’s power is tangible, the leadership is aware of it, and China will likely employ its power more directly in the future.  

One likely ramification is that China will promote use of its currency by encouraging its trading partners within the developing world to use the currency extensively for trade and capital investment.  Within the next decade, I would not be surprised if China pushes its trading partners to pay for their imports from China exclusively in Renminbi. Likewise, China might offer discounted prices on its capital equipment (e.g., industrial machinery) and other exports, provided the trading partners pay in Renminbi. I expect that China’s banks would be happy to extend long-term Renminbi loans, or arrange “Panda” bond issues, in order to fund purchases of capital goods.¹⁰

Lastly, I would not be surprised if China made a firm request that commodity producers – oil, iron ore, copper, and perhaps gold – quote their output in Renminbi, not just U.S. dollars. I imagine that in order to foster a new double-quote standard, China will offer a Renminbi quote that stands at a reasonable premium over the dollar quote. Given the depressed state of most commodity markets, I imagine that the price premium will quickly overcome any concerns that producers have regarding the adoption of the Renminbi.

The Future of the Asset Class

So, what do I think of the future of the emerging markets asset class? In order for it to remain relevant, it must be redefined. I believe the new definition must encompass the following four characteristics:

1. Global investors will define the emerging markets by their dysfunctions, rather than thematic overlays or spurious growth narratives. Investors will recognize that the formative and haphazard state of emerging markets may be what induces their volatility, but it also gives rise to their growth potential, and therefore it is the source of their return. The growth that draws investors to the asset class derives from the fact that these markets are emerging from a low base – they have much room to grow, but only because they are doing so from humble (and often problematic) beginnings. Personally, I believe the scope for such growth is still very compelling. In addition, investors drawn to active management will recognize that the markets’ heightened volatility induces mis-pricings with greater frequency, and therefore may generate the opportunity to produce excess returns.
2. Currency risk will remain a central feature of the asset class. Investors will recognize that the very act of development, combined with the emerging markets’ structural capital deficit, naturally begets currency weakness versus the U.S dollar. Savvy investors will recognize that currency risk does not “come out in the wash,” but rather imposes a structural drag on returns. However, thoughtful investors will recognize that the expected cost of this drag does not outweigh the expected benefit from investing in the growth potential of the developing world. Accordingly, long-term investors will seek to actively manage currency risk – by hedging, if it ever becomes cost-effective (it is not so at present) – or by careful diversification otherwise.
3. Short of a catastrophic event,¹¹ China will gain further prominence as a political and economic force within the developing world. Accordingly, China will comprise a much larger portion of all international benchmark indices in the next decade. I do not know whether China will occupy 75% or more of the emerging market asset class (today, the MSCI Emerging Market Index has a 28% weighting in China); but I am thoroughly convinced that China’s allocation will be a great deal larger than it is now. Critics question whether, in the interim, the economy will face a depression or outright collapse. Their concerns are relevant, and I do not dismiss the risk that China faces a financial or economic shock. At the same time, this concern ignores two simple truths: that China’s economy is already very large, and its underlying markets are making steady progress toward liberalization and deregulation. There is only one way I can interpret those two basic facts over the long term: in the coming decades, China’s economy will be much larger than it is today, regardless of whether or not it experiences a “hard landing” along the way. Investors that concur must seek means to gain greater exposure to China over the long-term.
4. As China continues to liberalize its economy, the country will simultaneously push for the internationalization of the Renminbi, first and foremost within the developing world. In so doing, China may inadvertently provide a means by which the emerging markets can avoid U.S. dollar-driven “original sin.” Emerging market companies are likely to discover that the rate cycles that govern the Renminbi are naturally synchronized with their own domestic cycles. Borrowers are likely to prefer the Renminbi as a funding currency if they perceive lower “slippage” costs versus the dollar. If China makes the Renminbi freely and easily traded around the world, there is an outside chance that the emerging markets will move beyond the dollar, and escape the currency risk that has shackled their progress in the past.

Announcements

I am pleased to report that Seafarer Capital Partners, the Fund’s adviser, continues to invest in its team and resources in order to better serve your Fund. Recently, Kevin Jo joined the Seafarer team as an Operations Analyst. Kevin contributes to the firm’s trading and settlement functions. We welcome Kevin to the firm.

Over the past six months, the Fund’s scale has grown considerably. At the end of the preceding fiscal year, on April 30, 2015, net assets totaled $183 million. Six months later, on October 31, net assets had risen to $700 million, representing approximately 283% growth. In conjunction with this growth in assets, Seafarer is pleased to deliver lower costs to the Fund’s shareholders. As of September 1, 2015, Seafarer reduced the contractual cap on expenses for the Investor share class from 1.25% to 1.15% (the Institutional class remains unchanged, at 1.05%). In addition, Seafarer has extended the contractual cap for twenty-four months (the prior cap was for twelve months), with the intent to renew the same obligation for the foreseeable future.

The Fund’s current scale may afford it additional economic benefits. Seafarer Capital Partners has imposed a contractual cap on expenses since the Fund’s inception. In order to implement the cap, through much of the Fund’s existence Seafarer waived all or part of its management fee, and during certain periods it directly subsidized the Fund. The cap ensured that, even if the Fund’s net assets were small, net expenses would not exceed the contractual commitment – regardless of the actual level of gross expenses, which might have been considerably higher than the limit imposed by the cap.

At the Fund’s current size, we estimate that gross expenses will naturally fall below the current contractual cap. Seafarer has sought to implement an efficient cost structure for the Fund, particularly with respect to administrative and custodial costs. The Fund’s current scale should reveal a portion of those efficiencies. Seafarer’s goal is to reduce costs over time, and with scale. In the future, Seafarer believes that the Fund’s natural economies of scale will do more to lower costs sustainably than would revisions to the existing expense caps.

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

Sincerely,

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. It is not possible to invest directly in this or any index.

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 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.

As of October 31, 2015, Texwinca Holdings, Ltd. comprised 2.9% of the Seafarer Overseas Growth and Income Fund; Pico Far East Holdings Ltd. comprised 1.4% of the Fund; Hartalega Holdings Bhd comprised 0.8% of the Fund; and Samsung Electronics Co. Ltd., Pfd. comprised 4.9% of the Fund. 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: SIGIX). The Investor share class (ticker: SFGIX) declined -12.80% during the semi-annual period.
2. The Fund’s inception date is February 15, 2012.
3. The Fund’s Investor share class began the fiscal year with a net asset value of $12.64 per share; it paid a semi-annual distribution of $0.059 per share in June; and it finished the semi-annual period with a value of $10.97 per share.
4. Sources: Bloomberg and Seafarer.
5. See, for instance, John Paul Smith as quoted in the article by James Kynge and Jonathan Wheatley, “Emerging Markets: Redrawing the World Map,” Financial Times, 3 August 2015.
6. Ajay Kapur, “The GEMs Inquirer – Emerging Markets: A Falling Knife”, Merrill Lynch, 29 July 2015.
7. Ruchir Sharma, “The Emerging Market Comedown,” The Wall Street Journal, 21 January 2014. Mr. Sharma comments that “many emerging markets rely heavily on commodities for the bulk of their exports, and they grow at catch-up speeds—at a rate faster than the world's leading economy—only when commodity prices are rising.”
8. Ruchir Sharma, “The Ever-Emerging Markets,” Foreign Affairs, January / February 2014.
9. See, for instance, Jeremy Grantham, “Time to Wake Up: Days of Abundant Resources and Falling Prices Are Over Forever,” GMO, April 2011.
10. A “Panda bond” is a Renminbi-denominated bond issued by a company of non-Chinese origin, usually sold within China.
11. By “catastrophic event,” I am primarily imagining a scenario in which China went to war with another global power.