Change is afoot in our international fund. Portfolio Manager Tony Arsta offers some insight on what to expect in the future.

 

February

Since Inception (Annualized) Inception Date: 11/1/2011

Motley Fool Emerging Markets Fund (TMFEX)

0.94%

4.30%

FTSE Emerging Markets All Cap China A Inclusion Index

3.34%

2.72%

FTSE Global All Cap ex-U.S. Index

1.48%

5.81%

For a standardized list of performance for the Emerging Markets Fund, please click here. For fund holdings, please click here.

Hopefully you’ve already seen the news, but the former Motley Fool Epic Voyage Fund is now the Motley Fool Emerging Markets Fund. Effective 2/28/2017, we intend to manage this Fund only slightly differently from how we have in the past, so you may be wondering why we made the change. For more information on our thinknig behind the name change, take a look at this announcement.

We still believe that investing a meaningful amount of one’s portfolio outside the United States -- in both developed and emerging countries -- has great diversifying benefits. Nearly half the value of global equities is in companies outside the United States, but many American investors do not have significant exposure to this asset class. While investing only in the U.S. would have worked out very well since the 2008 financial crisis, these things go in cycles, and we believe it’s prudent to put a portion of your equity investments in foreign stocks. We are choosing to focus on emerging markets because we believe they provide a hunting ground where our style of business-focused analysis can add value. There are some truly great hidden gems out there with decades of growth in front of them.

As with all our investments at MFAM, we invest in individual companies and do not enjoy placing limitations on ourselves. But sometimes limitations can help you understand what to expect from our funds. For example, the Great America Fund invests only in American companies and heavily favors small- and mid-cap stocks.

The Epic Voyage Fund’s original mandate was to invest outside the United States, and while our previous benchmark, the FTSE Global All Cap ex-U.S. Index, was nearly 20% exposed to emerging markets, the Epic Voyage Fund has historically had much closer to 50/50 split between developed and emerging countries. Likewise, Morningstar compared us with a peer group that has an average of 10% invested in emerging markets. Given the lackluster performance that emerging markets have had as an asset class since we started the fund in 2011, this made us look especially bad. However, let me be clear: Our performance has been below our standards no matter how you look at it. And had emerging markets outperformed and made us look like geniuses, that would’ve been just as unfair a comparison.

Over the past few months, as we have made our portfolio more heavily focused on our best ideas, it became clear that the majority were coming from emerging countries. This trend isn’t really a surprise, since the largest markets in the non-U.S. developed world are Western Europe and Japan -- places that are facing some long-term economic and demographic headwinds. We hope that by changing the name of the fund to the Emerging Markets Fund and investing accordingly, we can provide you with a product that better delivers on your expectations.

So, what should you expect from the Emerging Markets Fund? Well, this is where I remind you to read the fund’s prospectus to learn about our risks and objectives. But a few high-level points: The fund will consist of a relatively focused portfolio of companies in emerging-market countries. We are stock pickers focused on finding and holding a collection of great businesses. While our benchmark provides a useful guidepost for how we’re doing, you should not expect our results to track too closely to any index. The index has almost 40% of its weighting in China and Taiwan, so while we like the companies we own, we are likely to outperform or underperform in any given month, or even an entire year, based predominantly on how well the Chinese market is doing.

We understand that many investors buy and sell mutual funds based on performance against an index, so I say this in the most transparent and honest way I can: Your portfolio managers are not concerned with our benchmark or trying to beat it. Frankly, we don’t think a short-term focus is at all useful to your long-term wealth. We’re not going to invest in things we’re not comfortable with -- such as Chinese banks -- simply to track closer to our chosen benchmark. For example, one of the “worst” investment decisions we made during the month was not investing any of your dollars in the China Construction Bank; that is a “mistake” that we will gladly make month after month. We will have months, quarters and even years where we underperform, but our goal is to deliver performance that will build wealth for our shareholders over the long term. (I’m a shareholder in the Fund, too).

Let’s highlight a few performance notes for February. MercadoLibre followed its previous tremendous performance by gaining another 13% in February -- it's now up more than 35% for the year. DP World, the Dubai-based operator of global marine and inland terminals, gained more than 10% for the month, as did Grupo Aeroportuario del Pacifico, the Mexican operator of airports along the country’s Pacific coast. None of our investments lost more than 10% during the month, but Kenyan telecom Safaricom and Brazilian poultry and pork processor BRF were the worst performers. Aluminium Bahrain also continued to drag on performance until we finished selling our shares during the month.

The only new investment we made in February was a purchase of Gentera. This is a financial-services company based in Mexico; we’ve owned it in the past and once again find it attractive. We also allocated more money to DP World, BGEO Group (i.e., the Bank of Georgia), and Ctrip.com. We were able to buy these high-quality businesses by liquidating five of our prior investments. We sold out of Air Arabia, Aluminium Bahrain, CJ O Shopping, Henderson Land Development, and Syngenta. These trades put us in line with our new emerging-markets mandate and leaves us holding a collection of companies that we are very pleased with.

Following these recent changes, the Emerging Markets Fund is left with investments in 32 companies, and our top 10 positions represent 38.6% of the fund’s assets. Holding so few companies in an emerging-market fund will subject us to what the pros call “tracking error,” which basically means that our results will deviate substantially from our benchmark in any given month. In other words, we’ll continue to provide you with these monthly updates in good times and bad, but you should not expect a smooth ride. We’re fine with that, and we appreciate having investors with a clear understanding of the risks and objectives of their funds. (Seriously, read that prospectus; it’s not that painful, and it is your money that we’re talking about.)

(Note: Effective 2/28/2017, The Emerging Markets Fund has changed its benchmark index from the FTSE Global All Cap ex-US (Fair Value 16.00 EST) Net Tax (US RIC) Index to the FTSE Emerging Markets All Cap China A Inclusion (Fair Value 16.00 EST) Net Tax (US RIC) Index. You cannot invest directly into an index.)

 

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