Dear Fellow Shareholders of the Seafarer Funds,

I am pleased to address you on behalf of Seafarer Capital Partners (“Seafarer”), the adviser to the Seafarer Funds (the "Funds"). This annual report covers the Funds’ 2022-2023 fiscal year (May 1, 2022 to April 30, 2023).

In the past nine months, I have had the opportunity to communicate with some of you as a Lead Portfolio Manager of the Seafarer Overseas Growth and Income Fund. It has been a pleasure to share my approach to growth investing and views on emerging markets with our clients and shareholders of the Seafarer Funds. I am honored to work alongside Andrew Foster and Paul Espinosa to build the long-term track record of the Growth and Income Fund. For those of you who do not know me, I joined Seafarer in May 2022 after 21 years in the asset management industry, during which I have focused on equity research and portfolio management in global equity markets.

Unforgiving Market Environment

Looking back at the Funds’ fiscal year, there was certainly no shortage of market volatility-inducing headlines. China finally exited its zero-Covid policy and re-opened its economy. The U.S. Federal Reserve hiked interest rates ten consecutive times since the tightening cycle began in March 2022, and companies and consumers now see the highest interest rates in more than a decade. The unintended consequences from this rate hike cycle exposed weaknesses in some regional banks, and in extreme cases, contributed to bank failures. Then there was the forced sale of Credit Suisse to UBS in Europe. Meanwhile, the Russia-Ukraine war continues with no obvious resolution. Inflation stayed stubbornly high in both developed markets and emerging markets. With such a backdrop, investors wonder how emerging markets will fare this year and beyond. And can China’s re-opening be a growth driver that the world needs at this juncture?

It seems to me that there is a lack of convincing narratives to help market participants paint a picture of where the stock market is headed and gauge whether 2023 global gross domestic product (GDP) growth can pick up in a high interest rate environment. Corporate earnings results have been mixed in many industries. Some companies have enjoyed a revenue recovery as consumer and business activities gradually resumed post-Covid, while others have suffered from negative operating leverage and a margin squeeze. Correspondingly, the Funds’ benchmark, the Morningstar Emerging Markets Index, has experienced large swings during this Annual Report period, generating negative absolute returns. It is a sharp contrast to the height of Covid, when business models that benefitted from lockdowns, work-from-home trends, and stay-at-home consumption were handsomely rewarded by the market.

Scarcity of Growth

From a top-down perspective, the current operating environment for many businesses in emerging markets has become more challenging due to geopolitics, volatility of input costs, and rising costs of capital. Therefore, long-term investors in emerging markets must remain vigilant as the conditions conducive to growth are fragile and easily disrupted.

At Seafarer, we avoid chasing short-term investment themes or allocating tactical weightings to countries based on macroeconomic forecasts. We anchor our research and analysis at the company level in an effort to ensure that the underlying business can generate stable streams of cash flow – which, in most cases, can translate into dividend payments to minority shareholders. I lead Seafarer’s efforts to identify growth stocks, which typically display a lower current yield and higher growth potential than the balanced and value stocks that Andrew and Paul focus on, respectively. Nonetheless, the three of us share the same principle: we use a total return approach to invest in companies that we believe have the potential to compound returns over the next five to ten years.

From my observations throughout my investing career, growth investing has been generally associated with owning stocks with high earnings growth and multiples, with less regard to tangible cash flows and dividends over a longer time horizon. Such a construct might have worked well when interest rates were at historical low levels in developed countries and ample liquidity flowed to global financial markets, chasing returns. Fast forward to 2023, and some of the businesses – whether in developed or emerging markets – that once benefitted from easy money and loose credit, can no longer deliver high earnings growth nor strong cash flows to sustain their business momentum in a downturn. To be clear, it is not at all a bad development to have weaker players fading because of unsustainable growth strategies and poor capital allocation. This presents us opportunities to invest in durable businesses that can consolidate and gain market share at a time when valuations in emerging markets are somewhat dragged down by the lack of short-term catalysts and the prevailing headwinds.

A Balanced Approach

Identifying mispricing opportunities and avoiding overconcentration in a particular type of risk are hallmarks of Seafarer’s approach to investing in a volatile investment universe. In my opinion, market participants underappreciate the long-term durability and growth prospects of some businesses in emerging markets and place heavy emphasis on short-term metrics such as quarterly earnings growth. The aggregate earnings growth for the stocks in the Funds’ benchmark is estimated to be flattish this year.¹ However, it is important to keep in mind that through our bottom-up research work, we seek to tap growth and dividend opportunities deliberately based on their individual merits.

In our research process, we study the sources of value and pricing power of companies. We identify levers that companies can pull to generate recurring revenue streams, margin improvements, and growth of free cash flow. The key is to stay selective and balanced, which has been the approach of Seafarer Capital Partners since its inception. While we do grapple with the prospects of a lower-growth regime in China, I would argue that the combination of modest valuations in emerging markets and reasonable corporate fundamentals (attractive dividend yields, gradual margin recovery post-Covid and stable return on assets) is not a bad set-up for long-term investors to incorporate productive income generation as part of the total return framework.

Expense Ratios and Economies of Scale

As described in the Letter to Shareholders as of April 30, 2017, Seafarer has committed to reduce expenses for the Funds, particularly as time and scale afford greater efficiency.

We are pleased to announce that, consistent with that commitment, the Institutional class of the Growth and Income Fund experienced a reduction in its operating expense ratio during the fiscal year ended April 30, 2023. The ratios were 0.90% and 1.00% for the Institutional and Investor classes, respectively. For reference, the expense ratios were 0.91% and 1.00% for the respective classes during the preceding fiscal year.²

Compared to the Growth and Income Fund, the Value Fund’s smaller scale does not yield an equivalent degree of cost efficiency. However, Seafarer has established the same underlying expense structure for both Funds. Should the Value Fund’s assets grow over time, it is expected to achieve similar economies of scale. In the meantime, Seafarer continues to limit the Fund’s operating expenses via a contractual commitment, such that its net expense ratios remain 1.05% and 1.15% for the Institutional and Investor classes, respectively.³

As the Funds enter a new fiscal year, Seafarer’s goal remains the same: to offer shareholders positive economies, over time and with scale.

Update on Seafarer Capital Partners

Seafarer continues to invest in its investment research capacities, particularly through additions to the team. I am pleased to report that Seafarer recently hired an individual to join our investment team, bringing our firm’s total headcount to 17.

Rohan Dalal joined Seafarer as a Senior Analyst in February 2023. Prior to joining Seafarer, he served as a research analyst at Grandeur Peak Global Advisors, specializing in Central Asian equities. Rohan is responsible for research on growth-oriented securities across sectors and countries. Rohan and I share the same appreciation for steady growers with enduring qualities. The Seafarer team is delighted to have Rohan onboard to further enhance the breadth and depth of our stock research for growth holdings and contribute to the Growth and Income Fund.

While Rohan and I are relatively new to Seafarer, we have integrated well with the team. I am proud to be part of a high-performing organization that values intellectual honesty and collaboration. To that end, Seafarer returned to in-person investment team meetings over a year and a half ago. In these meetings, which typically take place twice a week, the team undertakes a critical review of each prospective holding in a group presentation and discussion, before a security is admitted by a Lead Portfolio Manager to a portfolio. We learn from one another through debates and benefit from gaining new perspectives on a particular company or industry. It had been wonderful to connect with colleagues in the office again on a regular basis after enduring the disruptions from Covid-19. Our investment team has also resumed work travel and in-person visits with portfolio companies. In the past six months, we have traveled to Mexico, China, India, and the United Arab Emirates. We look forward to conducting on-site visits and uncovering compelling long-term investment opportunities in emerging markets.

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

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 April 30, 2023, the Seafarer Funds did not own shares in Credit Suisse or UBS.

1. Source: J.P. Morgan, “Emerging Markets Equity Strategy Steering Board,” March 30, 2023.
2. The Growth and Income Fund’s Prospectus dated August 31, 2022 states that the Fund’s expenses are 0.87% and 0.97% for the Institutional and Investor classes, respectively.
3. Seafarer Capital Partners, LLC has agreed contractually to waive and/or reimburse fees or expenses in order to limit Total Annual Fund Operating Expenses After Fee Waiver / Expense Reimbursements (inclusive of acquired fund fees and expenses, and exclusive of brokerage expenses, interest expenses, taxes and extraordinary expenses) to 1.15% and 1.05% of each Fund’s average daily net assets for the Investor and Institutional share classes, respectively. This agreement shall continue at least through August 31, 2023.