Seafarer Overseas Growth & Income (SFGIX/SIGIX), May 2015

This fund profile was previously updated on March 1, 2013. You can find an archive of that profile here.

Download a .pdf of this profile here.

Objective and Strategy

Seafarer seeks to provide long-term capital appreciation along with some current income; it also seeks to mitigate volatility. The portfolio has two distinctive features. First, the fund invests a significant amount – 20-50% of its portfolio – in the securities of companies which are domiciled in developed countries but whose earnings are driven by emerging markets. The remainder is invested directly in developing and frontier markets. Second, the fund generally invests in dividend-paying common stocks but the portfolio might contain preferred stocks, convertible bonds, closed-end funds, ADRs and fixed-income securities. The fund typically has much more exposure to small- and mid-cap stocks than does its peers. On average, 80% of the portfolio is invested in common stock but that has ranged from 71% – 86%.

Adviser

Seafarer Capital Partners of San Francisco. Seafarer is a small, employee-owned firm that advises the Seafarer fund in the US and a €45 million French SICAV, Essor Asie Opportunités. The firm has about $190 million in assets under management, as of March 2015.

Managers

Andrew Foster is the manager, as well as Seafarer’s cofounder, CEO and CIO. Mr. Foster formerly was manager or co-manager of Matthews Asia Growth & Income (MACSX), Matthews’ research director and acting chief investment officer. He began his career in emerging markets in 1996, when he worked as a management consultant with A.T. Kearney, based in Singapore, then joined Matthews in 1998. Andrew was named Director of Research in 2003 and served as the firm’s Acting Chief Investment Officer during the height of the global financial crisis, from 2008 through 2009. Andrew is assisted by Kate Jacquet, Paul Espinosa and Sameer Agrawal. Ms. Jacquet has been with Seafarer since 2011; Messrs. Espinosa and Agrawal joined in 2014.

Management’s Stake in the Fund

Mr. Foster has over $1 million in the fund. None of the fund’s trustees have an investment in any of the 32 funds they oversee.

Opening date

February 15, 2012

Minimum investment

$100,000 for institutional share class accounts, $2,500 for regular retail accounts and $1000 for retirement accounts. The minimum subsequent investment is $500. In a spectacularly thoughtful gesture, individuals who invest directly with the fund and who establish an automatic investment plan on their accounts are eligible for a waiver of the institutional share class’s minimum investment requirement. The folks at Seafarer argue that they would like as many shareholders as possible to benefit from lower expenses, so they’re trying to manage an arrangement by which their institutional share class might actually be considered the “universal” share class.

Expense ratio

0.97% for retail shares and 0.87% for institutional shares, on assets of $2.4 Billion (as of July 2023).

Comments

Our contention has always been that Seafarer represents one of the best possible options for investors interested in approaching the emerging markets. It’s not a question of whether we’re right but, rather, of why we are.

Seafarer has three attributes that set it apart:

  1. Its approach is distinctive. Mr. Foster’s hope is to outperform his benchmark (the MSCI EM index) “slowly but steadily over time.” He describes the approach as a “relative return strategy” which pursues growth that’s more sustainable than what’s typical in developing markets while remaining value conscious. It’s grounded in the structural realities of the emerging markets.

    A defining characteristic of emerging markets is that their capital markets (including banks, brokerages and bond and stock exchanges) cannot be counted on to operate. In consequence, you’re best off with firms who won’t need to turn to those markets for capital needs. Seafarer targets (1) firms that can grow their top line steadily in the 7-15% per annum range and (2) those that can finance their growth internally. The focus on the top line means looking for firms that can increase revenues by 7-15% without obsessing about similar growth in the bottom line. It’s almost inevitable that EM firms will have “stumbles” that might diminish earnings for one to three years; while you can’t ignore them, you also can’t let them drive your investing decisions. “If the top line grows,” Mr. Foster argues, “the bottom line will follow.” The focus on internal financing means that the firms will be capable of funding their operations and plans without needing recourse to the unreliable external sources of capital.

    Seafarer tries to marry that focus on sustainable moderate growth “with some current income, which is a key tool to understanding quality and valuation of growth.” His preference is to buy dividend-paying stocks, but he often has 20% or more of the portfolio invested in other sorts of securities. The dividends are not themselves magical, but serve as “crude but useful” tools for identifying firms most likely to preserve value and navigate rough markets.

  2. Its performance is first rate. That judgment was substantiated in early March 2015 when Seafarer received its inaugural five-star rating from Morningstar. They’re also a Great Owl fund (as of May, 2015), a designation which recognizes funds whose risk-adjusted returns have finished in the top 20% of their peers for all trailing periods. Our greater sensitivity to risk, based on the evidence that investors are far less risk-tolerant than they imagine, leads to some divergence between our results and Morningstar’s: five of their five-star EM funds are not Great Owls, for instance, while some one-star funds are.

    Of 219 diversified EM funds currently tracked by Morningstar, 18 have a five-star rating (as of mid-March, 2015). 13 are Great Owls. Seafarer is one of only 10 EM funds (representing less than 5% of the peer group) that are both five-star and Great Owls.

  3. Its commitment to its shareholders is unmatched. Mr. Foster has produced consistently first-rate shareholder communications that are equally clear and honest about the fund’s successes and occasional lapses. And he’s been near-evangelical about reducing the fund’s expenses, often posting voluntary mid-year fee reductions as assets permit. Seafarer is one of the least expensive actively-managed EM funds available to retail investors.

In the three years through April 30, 2015, the fund’s annualized return was 10.8% which placed it in the top 2% of all EM equity funds. Rather than trumpet the fund’s success, Mr. Foster warned, both in letters to his shareholders and on the Observer’s conference call that investors should not expect such dominant returns in the future. “Our strategy ideally matches the anemic growth conditions that emerging markets have experienced lately,” he says. As growth returns, other strategies will have their day in the sun. Seafarer, meanwhile, will continue pursuing firms with sustainable rather than maximum growth.

Bottom Line

Mr. Foster is remarkably bright, thoughtful, experienced and concerned about the welfare of his shareholders. He thinks more broadly than most and has more experience than the vast majority of his peers. The fund offers him great flexibility and he’s using it well. There are few more-attractive emerging markets options available.

Fund website

Seafarer Overseas Growth and Income. The website is remarkably rich, both with analyses of the fund’s portfolio and performance, and with commentary on broader issues. One emblem of Mr. Foster’s commitment to having you understand what the fund is up to is a remarkably complete spreadsheet that provides month-by-month and year-by-year data on the portfolio, dating all the way back to the fund’s launch. Whether you’d like to know what percentage of the portfolio was invested in convertible shares in April 2014 or how the fund’s regional exposure affected its performance relative to its benchmark in 2013, the data’s there for you.

Disclosure

The Observer has no financial ties with Seafarer Funds. I do own shares of Seafarer and Matthews Asian Growth & Income (purchased during Andrew’s managership there) in my personal account.

© Mutual Fund Observer, 2015. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact us.

Seafarer Overseas Growth and Income Fund (SFGIX)

The fund:

Seafarer Overseas Growth and Income Fund
(SFGIX and SIGIX)

Manager:

Andrew Foster, Founder, Chief Investment Officer, and Portfolio Manager

The call:

Here are some quick highlights from Thursday night’s conversation with Andrew Foster of Seafarer.

Seafarer’s objective: Andrew’s hope is to outperform his benchmark (the MSCI EM index) “slowly but steadily over time.” He describes the approach as a “relative return strategy” which pursues growth that’s more sustainable than what’s typical in developing markets while remaining value conscious.

Here’s the strategy: you need to start by understanding that the capital markets in many EM nations are somewhere between “poorly developed” and “cruddy.” Both academics and professional investors assume that a country’s capital markets will function smoothly: banks will make loans to credit-worthy borrowers, corporations and governments will be able to access the bond market to finance longer-term projects and stocks will trade regularly, transparently and at rational expense.

None of that may safely be assumed in the case of emerging markets; indeed, that’s what might distinguish an “emerging” market from a developed one. The question becomes: what are the characteristics of companies that might thrive in such conditions.

The answer seems to be (1) firms that can grow their top line steadily in the 7-15% per annum range and (2) those who can finance their growth internally. The focus on the top line means looking for firms that can increase revenues by 7-15% without obsessing about similar growth in the bottom line. It’s almost inevitable that EM firms will have “stumbles” that might diminish earnings for one to three years; while you can’t ignore them, you also can’t let them drive your investing decisions. “If the top line grows,” Andrew argues, “the bottom line will follow.” The focus on internal financing means that the firms will be capable of funding their operations and plans without needing recourse to the unreliable external sources of capital.

Seafarer tries to marry that focus on sustainable moderate growth “with some current income, which is a key tool to understanding quality and valuation of growth.” Dividends are a means to an end; they don’t do anything magical all by themselves. Dividends have three functions. They are:

An essential albeit crude valuation tool – many valuation metrics cannot be meaningfully applied across borders and between regions; there’s simply too much complexity in the way different markets operate. Dividends are a universally applicable measure.
A way of identifying firms that will bounce less in adverse market conditions – firms with stable yields that are just “somewhat higher than average” tend to be resilient. Firms with very high dividend yields are often sending out distress signals.

A key and under-appreciated signal for the liquidity and solvency of a company – EMs are constantly beset by liquidity and credit shocks and unreliable capital markets compound the challenge. Companies don’t survive those shocks as easily as people imagine. The effects of liquidity and credit crunches range from firms that completely miss their revenue and earnings forecasts to those that drown themselves in debt or simply shutter. Against such challenges dividends provide a clear and useful signal of liquidity and solvency.

It’s certainly true that perhaps 70% of the dispersion of returns over a 5-to-10 year period are driven by macro-economic factors (Putin invades-> the EU sanctions-> economies falter-> the price of oil drops-> interest rates fall) but that fact is not useful because such events are unforecastable and their macro-level impacts are incalculably complex (try “what effect will European reaction to Putin’s missile transfer offer have on shadow interest rates in China?”).

Andrew believes he can make sense of the ways in which micro-economic factors, which drive the other 30% of dispersion, might impact individual firms. He tries to insulate his portfolio, and his investors, from excess volatility by diversifying away some of the risk, imagining a “three years to not quite forever” time horizon for his holdings and moving across a firm’s capital structure in pursuit of the best risk-return balance.

While Seafarer is classified as an emerging markets equity fund, common stocks have comprised between 70-85% of the portfolio. “There’s way too much attention given to whether a security is a stock or bond; all are cash flows from an issuer. They’re not completely different animals, they’re cousins. We sometimes find instruments trading with odd valuations, try to exploit that.” As of January 2015, 80% of the fund is invested directly in common stock; the remainder is invested in ADRs, hard- and local-currency convertibles, government bonds and cash. The cash stake is at a historic low of 1%.

Thinking about the fund’s performance: Seafarer is in the top 3% of EM stock funds since launch, returning a bit over 10% annually. With characteristic honesty and modesty, Andrew cautions against assuming that the fund’s top-tier rankings will persist in the next part of the cycle:

We’re proud of performance over the last few years. We have really benefited from the fact that our strategy was well-positioned for anemic growth environments. Three or four years ago a lot of people were buying the story of vibrant growth in the emerging markets, and many were willing to overpay for it. As we know, that growth did not materialize. There are signs that the deceleration of growth is over even if it’s not clear when the acceleration of growth might begin. A major source of return for our fund over 10 years is beta. We’re here to harness beta and hope for a little alpha.

That said, he does believe that flaws in the construction of EM indexes makes it more likely that passive strategies will underperform:

I’m actually a fan of passive investing if costs are low, churn is low, and the benchmark is soundly constructed. The main EM benchmark is disconnected from the market. The MSCI EM index imposes filters for scalability and replicability in pursuit of an index that’s easily tradable by major investors. That leads it to being not a really good benchmark. The emerging markets have $14 trillion in market capitalization; the MSCI Core index captures only $3.8 trillion of that amount and the Total Market index captures just $4.2 trillion. In the US, the Total Stock Market indexes capture 80% of the market. The comparable EM index captures barely 25%.

Highlights from the questions:

While the fund is diversified, many people misunderstand the legal meaning of that term. Being diversified means that no more than 25% of the portfolio can be invested in securities that individually constitute more than 5% of the portfolio. Andrew could, in theory, invest 25% of the fund in a single stock or 15% in one and 10% in another. As a practical matter, a 4-5% position is “huge for us” though he has learned to let his winners run a little longer than he used to, so the occasional 6% position wouldn’t be surprising.

A focus on dividend payers does not imply a focus on large cap stocks. There are a lot of very stable dividend-payers in the mid- to small-cap range; Seafarer ranges about 15-20% small cap amd 35-50% midcap.

The fundamental reason to consider investing in emerging markets is because “they are really in dismal shape, sometimes the horrible things you read about them are true but there’s an incredibly powerful drive to give your kids a better life and to improve your life. People will move mountains to make things better. I followed the story of one family who were able to move from a farmhouse with a dirt floor to a comfortable, modern townhouse in one lifetime. It’s incredibly inspiring, but it’s also incredibly powerful.”

With special reference to holdings in eastern Europe, you need to avoid high-growth, high-expectation companies that are going to get shell-shocked by political turmoil and currency devaluation. It’s important to find companies that have already been hit and that have proved that they can survive the shock.

podcast

The conference call (When you click on the link, the file will load in your browser and will begin playing after it’s partially loaded.)


 

Highlights from our previous call:

We previously spoke to Mr. Foster on February 19,2013. Highlights from that call included:

  • Andrew offered a rich discussion about his decision to launch the fund. The short version: early in his career, he concluded that emergent China was “the world’s most under-rated opportunity” and he really wanted to be there. By late 2009, he noticed that China was structurally slowing.  Reflection and investigation led him to begin focusing on other markets. Given Matthews’ focus on Asia, he concluded that the way to pursue other opportunities was to leave Matthews and launch Seafarer.
  • Andrew concluded that markets were a bit stretched, so he was moving at the margins from smaller names to larger, steadier firms.
  • He was 90% in equities because there were better opportunities there, then in fixed income.
  • Income plays an important role in his portfolio.

The audio from our previous conference call with Seafarer can be found here, February 2013.

The profile:

Andrew has a great track record built around winning by not losing. His funds have posted great relative returns in bad markets and very respectable absolute returns in frothy ones. It’s a pattern that I’ve found compelling.

The Mutual Fund Observer profile of SFGIX, Updated May 2015

The Mutual Fund Observer profile of SFGIX, Updated March 2013.

podcast

 The SFGIX audio profile, March 2013

Web:

Seafarer Overseas Growth and Income Fund website

Quarterly Briefing, 1Q2015

Fund Focus: Resources from other trusted sources

Seafarer Overseas Growth & Income (SFGIX)

The fund:

Seafarer Overseas Growth and Income Fund
(SFGIX and SIGIX)

Manager:

Andrew Foster, Founder, Chief Investment Officer, and Portfolio Manager

The call:

On February 19th, about 50 people phoned-in to listen to our conversation with Andrew Foster, manager of Seafarer Overseas Growth * Income Fund (SFGIX and SIGIX).   The fund has an exceptional first year: it gathered $35 million in asset and returned 18% while the MSCI emerging market index made 3.8%. The fund has about 70% of its assets in Asia, with the rest pretty much evenly split between Latin America and Emerging Europe.   Their growth has allowed them to institute two sets of expense ratio reductions, one formal and one voluntary. 

Among the highlights of the call, for me:

  1. China has changed.   Andrew offered a rich discussion about his decision to launch the fund. The short version: early in his career, he concluded that emergent China was “the world’s most under-rated opportunity” and he really wanted to be there. By late 2009, he noticed that China was structurally slowing. That is, it was slow because of features that had no “easy or obvious” solution, rather than just slowly as part of a cycle. He concluded that “China will never be the same.” Long reflection and investigation led him to begin focusing on other markets, many of which were new to him, that had many of the same characteristics that made China exciting and profitable a decade earlier. Given Matthews’ exclusive and principled focus on Asia, he concluded that the only way to pursue those opportunities was to leave Matthews and launch Seafarer.
  2. It’s time to be a bit cautious. As markets have become a bit stretched – prices are up 30% since the recent trough but fundamentals have not much changed – he’s moved at the margins from smaller names to larger, steadier firms.
  3. There are still better opportunities in equities than fixed income; hence he’s about 90% in equities.
  4. Income has important roles to play in his portfolio.  (1) It serves as a check on the quality of a firm’s business model. At base, you can’t pay dividends if you’re not generating substantial, sustained free cash flow and generating that flow is a sign of a healthy business. (2) It serves as a common metric across various markets, each of which has its own accounting schemes and regimes. (3) It provides as least a bit of a buffer in rough markets. Andrew likened it to a sea anchor, which won’t immediately stop a ship caught in a gale but will slow it, steady it and eventually stop it.

podcastThe conference call (When you click on the link, the file will load in your browser and will begin playing after it’s partially loaded.)

The profile:

The case for Seafarer is straightforward: it’s going to be one of your best options for sustaining exposure to an important but challenging asset class.

The Mutual Fund Observer profile of SFGIX, Updated March 2013.

podcast

 The SFGIX audio profile

Web:

Seafarer Overseas Growth and Income Fund website

Shareholder Conference Call

2013 Q3 Report

Fund Focus: Resources from other trusted sources

Seafarer Overseas Growth & Income (SFGIX)

THIS IS AN UPDATE OF THE FUND PROFILE ORIGINALLY PUBLISHED IN July 2012. YOU CAN FIND THAT PROFILE HERE

Objective and Strategy

Seafarer seeks to provide long-term capital appreciation along with some current income; it also seeks to mitigate volatility. The Fund invests a significant amount – 20-50% of its portfolio – in the securities of companies located in developed countries. The remainder is investing in developing and frontier markets.  The Fund can invest in dividend-paying common stocks, preferred stocks, convertible bonds, and fixed-income securities. 

Adviser

Seafarer Capital Partners of San Francisco.  Seafarer is a small, employee-owned firm whose only focus is the Seafarer fund.

Managers

Andrew Foster is the lead manager.  Mr. Foster is Seafarer’s founder and Chief Investment Officer.  Mr. Foster formerly was manager or co-manager of Matthews Asia Growth & Income (MACSX), Matthews’ research director and acting chief investment officer.  He began his career in emerging markets in 1996, when he worked as a management consultant with A.T. Kearney, based in Singapore, then joined Matthews in 1998.  Andrew was named Director of Research in 2003 and served as the firm’s Acting Chief Investment Officer during the height of the global financial crisis, from 2008 through 2009.  Andrew is assisted by William Maeck and Kate Jaquet.  Mr. Maeck is the associate portfolio manager and head trader for Seafarer.  He’s had a long career as an investment adviser, equity analyst and management consultant.  Ms. Jaquet spent the first part of her career with Credit Suisse First Boston as an investment banking analyst within their Latin America group. In 2000, she joined Seneca Capital Management in San Francisco as a senior research analyst in their high yield group. Her responsibilities included the metals & mining, oil & gas, and utilities industries as well as emerging market sovereigns and select emerging market corporate issuers.

Management’s Stake in the Fund

Mr. Foster has over $1 million in the fund.  Both Maeck and Jaquet have between $100,000 and $500,000 invested.

Opening date

February 15, 2012

Minimum investment

$2,500 for regular accounts and $1000 for retirement accounts. The minimum subsequent investment is $500.

Expense ratio

1.40% after waivers on assets of $35 million (as of February 2013).  The fund has two fee waivers in place, a contractual waiver which is reflected in standard reports (such as those at Morningstar) but also a voluntary one which is not reflected elsewhere. The fund does not charge a 12(b)1 marketing fee but does have a 2% redemption fee on shares held fewer than 90 days.

Comments

Investors have latched on, perhaps too tightly, to the need for emerging markets exposure.  As of March 2013, e.m. funds had seen 21 consecutive weeks of asset inflows after years of languishing.  Any time there is that much enthusiasm for an asset class, prudent investors should pause.  But we also believe that prudent investors who want emerging markets exposure should start at Seafarer.  The case for Seafarer is straightforward: it’s going to be one of your best options for sustaining exposure to an important but challenging asset class.

There are four reasons to believe this is true.

First, Andrew Foster has been getting it right for a long time.  This is the quintessential case of “a seasoned manager at a nimble new fund.”  In addition to managing or co-managing Matthews Asian Growth & Income for eight years (2003-2011), he was a portfolio manager on Asia Dividend for six years and India Fund for five.  His hallmark piece, prior to Seafarer, indisputably was MACSX.  The fund’s careful risk management helped investors control the impulse to panic.  Volatility is the bane of most emerging markets funds (the group’s standard deviation is about 25, while developed markets average 15). The average emerging markets stock investor captured a mere 25 – 35% of their funds’ nominal gains. MACSX’s captured 90% over the decade that ended with Andrew’s departure and virtually 100% over the preceding 15 years.  The great debate surrounding MACSX during his tenure was whether it was the best Asia-centered fund in existence or merely one of the two or three best funds in existence. 

Second, Seafarer is independent.  Based on his earlier research, Mr. Foster believes that perhaps two-thirds of MACSX’s out-performance was driven by having “a more sensible” approach (for example, recognizing the strategic errors embedded in the index benchmarks which drive most “active” managers) and one-third by better security selection (driven by intensive research and over 1500 field visits).  Seafarer and its benchmarks focus on about 24 markets.  In 14 of them, Seafarer has dramatically different weightings than do the indexes (MSCI or FTSE) or his peers.  It’s striking, on a country-by-country level, how closely the average e.m. fund hugs its benchmark.  Seafarer dramatically underweights the BRICs and Korea, which represent 58% of the MSCI index but only 25% of Seafarer’s portfolio.  That’s made up for by substantially greater positions in Chile, Hong Kong, Japan, Poland, Singapore, Thailand and Turkey.  While the average e.m. fund seems to hold 100-250 names and index funds hold 1000, Seafarer focuses on 40.

Third, Seafarer is cautious. Andrew targets firms which are well-managed and capable of sustained growth.  He’s willing to sacrifice dramatic upside potential for the prospect of steady, long-term growth and income.  The stocks in his portfolio receive far high financial health and slightly lower growth scores from Morningstar than either indexed or actively managed e.m. funds as a group. Concern about stretched valuations led him to halve his small cap stake in 2012 and move into larger, steadier firms including those domiciled in developed markets. 

Combined with a greater interest in income in the portfolio, that’s given Seafarer noticeable downside protection.  E.M. funds as a group have posted losses in five of the past 12 months.  In those down months, their average loss is 2.9% per month.  In those same months, Seafarer posted an average loss of 1.3% (about 45% of the market’s).  In three of those five months, Seafarer made money.  That’s consistent with his long-term record.  During the global meltdown (10/07 – 03/09), his previous charge lost 34% but the average Asia fund dropped 58% and the average emerging markets fund dropped 59%.

Fourth Seafarer is rewarding.  In its first year, Seafarer returned 18% versus the MSCI emerging market index’s 3.8%.   It outperformed the only e.m. fund to receive Morningstar’s “Gold” designation, American Funds New World (NEWFX), the offerings from Vanguard, Price, Fidelity and PIMCO, its emerging markets peer group and First Trust/Aberdeen Emerging Opportunities (FEO), the best of the EM balanced funds.

Bottom Line

Mr. Foster is remarkably bright, thoughtful, experienced and concerned about the welfare of his shareholders.  He thinks more broadly than most and has more experience than the vast majority of his peers. The fund offers him more flexibility than he’s ever had and he’s using it well.  There are few more-attractive emerging markets options available.

Fund website

Seafarer Overseas Growth and Income.  The website is remarkably rich, both with analyses of the fund’s portfolio and performance, and with commentary on broader issues.

Disclosure: the Observer has no financial ties with Seafarer Funds.  I do own shares of Seafarer and Matthews Asian Growth & Income (purchased during Andrew’s managership there) in my personal account.

© Mutual Fund Observer, 2013. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact us.

Seafarer Overseas Growth & Income Fund (SFGIX) – July 2012

Objective and Strategy

SFGIX seeks to provide long-term capital appreciation along with some current income; it also seeks to mitigate adverse volatility in returns. The Fund invests a significant amount of its net assets in the securities of companies located in developing countries. The Fund can invest in dividend-paying common stocks, preferred stocks, convertible bonds, and fixed-income securities.  The fund will invest 20-50% in developed markets and 50-80% in developing and frontier markets worldwide.

Adviser

Seafarer Capital Partners of San Francisco.  Seafarer is a small, employee-owned firm whose only focus is the Seafarer fund.

Managers

Andrew Foster is the lead manager and is assisted by William Maeck.  Mr. Foster is Seafarer’s founder and Chief Investment Officer.  Mr. Foster formerly was manager or co-manager of Matthews Asia Growth & Income (MACSX) and Matthews’ research director and acting chief investment officer.  He began his career in emerging markets in 1996, when he worked as a management consultant with A.T. Kearney, based in Singapore, then joined Matthews in 1998.  Andrew was named Director of Research in 2003 and served as the firm’s Acting Chief Investment Officer during the height of the global financial crisis, from 2008 through 2009.  Mr. Maeck is the associate portfolio manager and head trader for Seafarer.  He’s had a long career as an investment adviser, equity analyst and management consultant.  They are assisted by an analyst with deep Latin America experience.

Management’s Stake in the Fund

Mr. Foster has over $1 million in the fund.  Both his associate manager and senior research analyst have substantial investments in the fund.

Opening date

February 15, 2012

Minimum investment

$2,500 for regular accounts and $1000 for retirement accounts. The minimum subsequent investment is $500.

Expense ratio

1.60% after waivers on assets of $5 million (as of June, 2012).  The fund does not charge a 12(b)1 marketing fee but does have a 2% redemption fee on shares held fewer than 90 days.

Comments

The case for Seafarer is straightforward: it’s going to be one of your best options for sustaining exposure to an important but challenging asset class.

The asset class is emerging markets equities, primarily.  The argument for emerging markets exposure is well-known and compelling.  The emerging markets represent the single, sustainable source of earnings growth for investors.  As of 2010, emerging markets represented 30% of the world’s stock market capitalization but only 6% of the average American investor’s portfolio.  During the first (so-called “lost”) decade of the 21st century, the MSCI emerging markets stock index doubled in price. An analysis by Goldman projects that, over the next 20 years, the emerging markets will account for 55% of the global stock market and that China will be the world’s single largest market.  That’s consistent with GMO’s May 2012 7-year asset class return forecast, which projects a 6.7% real (i.e. inflation-adjusted) annual return for emerging equities but less than 1% for the U.S. stock market as a whole.  Real returns on emerging debt were projected at 1.7% while U.S. bonds were projected to lose money over the period.

Sadly, the average investor seems incapable of profiting from the potential of the emerging markets, seemingly because of our hard-wired aversion to loss.  Recent studies by Morningstar and Dalbar substantiate the point.  John Rekenthaler’s “Myth of the Dumb Fund Investor” (June 2012) looks at a decade’s worth of data and concludes that investors tend to pick the better fund within an asset class while simultaneously picking the worst asset classes (buying small caps just before a period of large cap outperformance).  Dalbar’s  Quantitative Analysis of Investor Behavior (2012) looks at 20 years of data and concluded that equity investors’ poor timing decisions cost them 2-6% annually; that is, the average equity investor trails the broad market by about that much.

The situation with emerging markets investing appears far worse.  Morningstar calculates “investor returns” for many, though not all, funds.  Investor returns take into account a fund’s asset size which allows Morningstar to calculate whether the average investor was around during a fund’s strongest years or its weakest.  In general, investors sacrifice 65-75% of their potential returns through bad (fearful or greedy) timing. That’s based on a reading of 10-year investor versus fund returns.  For T Rowe Price E. M. Stock (PRMSX), for example, the fund returned 12% annually over the last decade while the average investor earned 3%.  For the large but low-rated Fidelity E.M. (FEMKX), the fund returned 10.5% while its investors made 3.5%.

Institutional investors were not noticeably more rational.  JPMorgan Emerging Markets Equities Institutional (JMIEX) and Lazard Emerging Markets Equity Institutional (LZEMX) posted similar gaps.  The numbers for DFA, which carefully vets and trains its clients, were wildly inconsistent: DFA Emerging Markets I (DFEMX) showed virtually no gap while DFA Emerging Markets II (DFETX) posted an enormous one.  Rekenthaler also found the same weaknesses in institutional investors as he did in retail ones.

There is, however, one fund that stands in sharp contrast to this dismal general pattern: Matthews Asian Growth & Income (MACSX), which Andrew Foster co-managed or managed for eight years.  Over the past decade, the fund posted entirely reasonable returns: about 11.5% per year (through June 2012).  MACSX’s investors did phenomenally well.  They earned, on average. 10.5% for that decade. That means they captured 91% of the fund’s gains.  Over the past 15 years, the results are even better with investors capturing essentially 100% of the fund’s returns.

The great debate surrounding MACSX was whether it was the best Asia-centered fund in existence or merely one of the two or three best funds in existence.  Here’s the broader truth within their disagreement: Mr. Foster’s fund was, consistently and indisputably one of the best Asian funds in existence.

The fund married an excellent strategy with excellent execution. Based on his earlier research, Mr. Foster believes that perhaps two-thirds of MACSX’s out-performance was driven by having “a more sensible” approach (for example, recognizing the strategic errors embedded in the index benchmarks which drive most “active” managers) and one-third by better security selection (driven by intensive research and over 1500 field visits).  Seafarer will take the MACSX formula global.  It is arguable that that Mr. Foster can create a better fund at Seafarer than he had at Matthews.

One key is geographic diversification.  As of May 31, 2012, Seafarer had an 80/20 split between developing Asia and the rest of the world.  Mr. Foster argues that it makes sense to hold an Asia-centered portfolio.  Asia is one of the world’s most dynamic regions and legal protections for investors are steadily strengthening.  It will drive the world’s economy over decades.  In the shorter term, while the inevitable unraveling of the Eurozone will shake all markets, “Asia may be able to withstand such losses best.”

That said, a purely Asian portfolio is less attractive than an Asia-centered portfolio with selective exposure to other emerging markets.  Other regions are, he argues, undergoing the kind of changes now than Asia underwent a generation ago which might offer the prospect of outsized returns.  Some of the world’s most intriguing markets are just now becoming investable while others are becoming differently investable: while Latin America has long been a “resources play” dependent on Asian customers, it’s now developing new sectors(think “Brazilian dental HMOs”) and new markets whose value is not widely recognized.  In addition, exposure to those markets will buffer the effects of a Chinese slowdown.

Currently the fund invests almost-exclusively in common stock, either directly or through ADRs and ETFs.  That allocation is driven in part by fundamentals and in part by necessity.  Fundamentally, emerging market valuations are “very appealing.”  Mr. Foster believes that there have only been two occasions over the course of his career – during the 1997 Asian financial crisis and the 2008 global crisis – that “valuations were definitively more attractive than at present” (Shareholder Letter, 18 May 2012). That’s consistent with GMO’s projection that emerging equities will be the highest-returning asset class for the next five-to-seven years.  As a matter of necessity, the fund has been too small to participate in the convertible securities market.  With more assets under management, it gains the flexibility to invest in convertibles – an asset class that substantially strengthened MACSX’s performance in the past.  Mr. Foster has authority to add convertibles, preferred shares and fixed income when valuations and market conditions warrant.  He was done so skillfully throughout his career.

Seafarer’s returns over its first two quarters of existence (through 29 June 2012) are encouraging.  Seafarer has substantially outperformed the diversified emerging markets group as a whole, iShares Asia S&P 50 (AIA) ETF, First Trust Aberdeen Emerging Opportunities fund(FEO) which is one of the strongest emerging markets balanced funds, the emerging Asia, Latin America and Europe benchmarks, an 80/20 Asia/non-Asia benchmark, and so on.  It has closely followed the performance of MACSX, though it ended the period trailing by a bit.

Bottom Line

Mr. Foster is remarkably bright, thoughtful, experienced and concerned about the welfare of his shareholders.  He grasps the inefficiencies built into standard emerging markets indexes, and replicated by many of the “active” funds that are benchmarked to them. He’s already navigated the vicissitudes of a region’s evolution from uninvestable to frontier, emerging and near-developed.   He believes that experience will serve his shareholders “when the world’s falling apart but you see how things fit together.” He’s a good manager of risk, which has made him a great manager of returns.  The fund offers him more flexibility than he’s ever had and he’s using it well.  There are few more-attractive emerging markets options available.

Fund website

Seafarer Overseas Growth and Income.  The website is remarkably rich, both with analyses of the fund’s portfolio and performance, and with commentary on broader issues.

Disclosure

In mid-July, about two weeks after this profile is published, I’ll purchase shares of Seafarer for my personal, non-retirement account.  I’ll sell down part of my existing MACSX stake to fund that purchase.

© Mutual Fund Observer, 2012. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact us.

In conversation with Andrew Foster @ Seafarer Funds (SIGIX & SIVLX) : On Emerging Markets

Introduction: Trouble in the Emerging Market Equities asset class

Emerging Market Equities (EM Eq), as tracked by the iShares MSCI Emerging Market ETF, are up almost 10% this year. That would generally be welcome news for the ignored asset class. But the news is not good enough. I have the distinct sense that investors of multiple stripes are “giving up” on EM Eq. There isn’t a wholesale liquidation as much as the flow of money in EM has slowed down. The long-held conviction that EM Eq is an asset class where one has to be involved has now Continue reading →

An Investor’s Journeys, In Body and Mind

Hope your road is a long one.
May there be many summer mornings when,
with what pleasure, what joy,
you enter harbors you’re seeing for the first time;
may you stop at Phoenician trading stations
to buy fine things,
mother of pearl and coral, amber and ebony,
sensual perfume of every kind—
as many sensual perfumes as you can;
and may you visit many Egyptian cities
to learn and go on learning from their scholars.

Continue reading →

Terrific twos: Intriguing funds not yet on your radar

Most funds don’t show up on investors’ radar until they have at least a three-year record, which is also the point at which they receive their inaugural Morningstar rating. That’s a generally sensible, sometimes silly constraint since many funds that have been operating for fewer than three years are actually long-tested strategies managed by highly experienced professionals, which are just coming to market in a new form. Relatively recent examples of such funds include Andrew Foster’s Seafarer Overseas Growth & Income (SFGIX), Rajiv Jain’s GQG Partners Emerging Markets Equity (GQGPX), Abhay Deshpande’s Centerstone Investors (CETAX), and Amit Wadhwaney’s Moerus Worldwide (MOWNX). Collectively, those four managers had overseen more than Continue reading →

Things I think I think, early 2021 version

I’ve been pondering things at year’s end, from elections and intransigence to the possibilities of functional government and transcendence. I’m not at all (not even 1%) sure of what 2021 will bring, and yet I need to plan for it anyway.

So, here’s a sort of think-aloud experiment in which I just share what I’ve learned in the past couple of months and where it might (or might not) lead in the year ahead. I’ll divide the essay into two sections: “stakes in the ground” represent the Continue reading →

Briefly Noted

Updates

Bill Gross must be very sad today. Mr. Gross has been involved in an ugly dispute with a neighbor. As part of that dispute, Mr. Gross played The Gilligan’s Island theme, loudly and continuously, night after night. The neighbor complained. In court. Mr. Gross’s partner, Amy Schwartz, testified to loving the “Gilligan’s Island” theme but denied playing it loud or Continue reading →

Snowball’s Indolent Portfolio

A tradition dating back to the days of FundAlarm was to annually share our portfolios, and reflections on them, with you.

Four rules have governed my portfolio for the past 15 years or so.

  1. I maintain a stock-light asset allocation.

For any goal that’s closer than 10-15 years away, stock investing is speculation. Stocks rise and fall far more dramatically than other investments and, once they’ve fallen, it sometimes feels like they can’t get up. Equity income funds are typically very conservative vehicles, and yet they took four years to regain their October 2007 peaks. International large cap core funds took seven years to reach break-even while domestic large-cap core funds were underwater for five-and-a-half years. The worst-hit categories languished for nine years.

Research conducted by T. Rowe Price and shared here, on several occasions, led me to conclude that I wouldn’t gain much from a portfolio that exceeds 50% stocks. My target allocation is 50% income (half in cash-like investments, half in somewhat riskier ones) and 50% growth (half in firms domiciled in the US and half elsewhere). Based on a review of 70 years of returns (1949-2018), this allocation would typically Continue reading →

Briefly Noted . . .

Updates

GMO is now urging you to get comfortable with being uncomfortable. In a new GMO Insights piece titled “Emerging Market Stocks: Getting Comfortable with the Uncomfortable,” they look at how lackluster emerging market equity returns in recent years have led many to write off the asset class. They note that” value stocks within emerging markets are particularly cheap, trading at their largest discount since December 2001.” Profitably remains solid about EM corporations, despite the obvious headwinds.

Effective October 11, 2019, Inbok Song ceased Continue reading →

Emerging Market Value investing revisited

About a year ago we identified emerging markets value funds as one of the market’s few bright spots, at least if valuations are important. (And they are.) Since we published that story, three things occur to us.

  1. Some emerging markets value funds have, indeed, done well.
  2. The long-term case for emerging market value remains strong.
  3. The options for prospective EM value investors have become clearer

Continue reading →

The Investor’s Guide to the End of the World

Human actions are causing our planet’s climate to become increasingly unstable. We are beyond the point where that fact is open to debate. Most Americans, Republicans and Democrats both, now accept the reality of climate change. That’s based on fascinating data visualizations provided by the Yale Program on Climate Change Communication. Republicans, far more than Democrats and others, are unsure that there’s a human role or that scientists have reached agreement on what is happening.

The short version is that every serious inquiry reaches the same conclusion: the climate Continue reading →

Terrific twos: Intriguing funds not yet on your radar

Most funds don’t show up on investors’ radar until they have at least a three year record, which is also the point at which they receive their inaugural Morningstar rating. That’s a generally sensible, sometimes silly constraint since many funds that have been operating for fewer than three years are actually long-tested strategies managed by highly experienced professionals which are just coming to market in a new form. Relatively recent examples of such funds include Andrew Foster’s Seafarer Overseas Growth & Income (SFGIX), Rajiv Jain’s GQG Partners Emerging Markets Equity (GQGPX), Abhay Deshpande’s Centerstone Investors (CETAX), and Amit Wadhwaney’s Moerus Worldwide (MOWNX). Collectively, those four managers had overseen more than $100 billion using strategies later embodied in their “too new to be on the radar” funds.

As a result, MFO Premium has Continue reading →

Briefly noted

The imminence of Halloween reveals itself in the deadened thud as the walking dead move toward the graveyard. Summer saw a curious lull in fund liquidations and manager changes both, but the end of summer is ending that reprieve. Our mid-September and October issues recount 70 obituaries, the vast majority of which were announced in the past 30 days. A precious few were high-performing funds that couldn’t attract attention. There seems to be a pattern in the remainder: lots of funds designed to Continue reading →

When the facts change, I change my mind. What do you do, sir?

Investors are forever willing to panic themselves at the prospect that their managers have taken Stupid Pillstm. The presumed signs of ingestion: any period of relative underperformance, pretty much without regard to absolute performance, the brevity of the period, its cause or the appropriateness of the peer group.

The automatic urge: running away, either to cash or to an investment with eye-catching recent returns.

Which is, by Continue reading →

August 5, 2018

Dear friends,

Thanks for your patience. The end of July and beginning of August brought a bunch of challenges.

This month’s issue has a lot of interesting content; just not quite so much as we’d planned. With luck, we’ll shift the vast bulk of it to September.

Zoom in to Charles and the MFO Premium walk-through

MFO Premium offers a ridiculous wealth of information for a Continue reading →

Elevator Talk: Paul Espinosa, Seafarer Overseas Value (SFVLX/SIVLX)

Since the number of funds we can cover in-depth is smaller than the number of funds worthy of in-depth coverage, we’ve decided to offer one or two managers each month the opportunity to make a 200 word pitch to you. That’s about the number of words a slightly-manic elevator companion could share in a minute and a half. In each case, I’ve promised to offer a quick capsule of the fund and a link back to the fund’s site. Other than that, they’ve got 200 words and precisely as much of your time and attention as you’re willing to share. These aren’t endorsements; they’re opportunities to learn more.

Paul Espinosa is the Lead Portfolio Manager of the Seafarer Overseas Value Fund and a co-manager of the Seafarer Overseas Growth and Income Fund (SFGIX/SIGIX). Paul joined Seafarer Capital Partners in 2014. Before that, he spent Continue reading →