The Emerging Markets Fund had a strong 2017, but we weren't satisfied.



2017 Year-to-Date

Since Inception (Annualized)

Inception Date: 11/1/2011

Motley Fool Emerging Markets Fund (TMFEX)




FTSE Emerging Markets All Cap China A Inclusion Index




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

Santa rally, anyone? Markets around the globe put up some pretty impressive numbers in December, and emerging markets were leading the charge, thanks in part to rebounding commodity prices and a continually weakening dollar.

Your Motley Fool Emerging Markets Fund returned 1.06% for the quarter to close the year up over 26%. Normally, those would be numbers to crow about, but we fell short of the benchmark, trailing by 1.62 percentage points in December and over 5 percentage points for the year.

What happened?

Our December underperformance was mostly due to our exposure to certain sectors.

We were underexposed to commodities and energy – the two top-performing sectors for the month, with both posting returns over 4%. At the same time, we were overexposed to consumer-related businesses.

This isn’t overly concerning, however. In fact, it reflects our investing philosophy.

Your Emerging Markets Fund will tend to underperform when commodities carry the day, because we don’t often find companies in these sectors particularly attractive for long-term investing. Most companies pulling stuff out of the ground are price-takers and subject to the boom-bust nature of their industry.

Instead, we prefer to look for companies with strong brands or differentiated products that can increase prices and fend off competition without hurting profitability or cash flow. That means we often invest in companies focused on consumers or technology.

Neither of those sectors was particularly strong in December, but we’re not worried. Over the long run, we believe our collection of high-quality companies will provide our shareholders with market-beating returns. Missing out on a short-term hot streak doesn’t shake our discipline.

Having a particularly high cash position to start the month also affected our returns. It took some time for us to reinvest the proceeds from the sale of Almarai and DuzonBizon in November.

Portfolio moves

We did find new homes for that money, however, establishing a new position in Yum China, the operator of the KFC and Pizza Hut franchises in China, and upping our stake in recently beleaguered Mexican microfinance lender Gentera.

We believe Yum China gives your portfolio a more defensive exposure to the Chinese consumer than do most of our other Chinese holdings, which are heavily skewed toward technology – a sector that’s riding a strong wave of momentum these days. With over 7,700 restaurants in the country, Yum China is no longer a dramatic growth story, but we think its clean balance sheet, strong brand, and financial backing from Alibaba should provide nice returns for investors over the next several years.

Winners and losers

Our top performers in the month literally came from all over the map: Malaysian rubber-glove manufacturer Top Glove was up nearly 19%, Turkish airport operator TAV Havalimanlari climbed 15%, and Latin American e-commerce leader MercadoLibre rose 14%, marking its second month in a row of 14%-plus returns.

At the bottom were two Indonesian companies – property developer Lippo Karawaci, down 15%, and retailer Mitra Adiperkasa, down 10.5%. The Indonesian economy took a blow in December, after a volcanic eruption closed Bali’s airport and severely disrupted year-end tourist traffic. The situation was particularly painful for these consumer-focused companies.

Our other big loser for the month was Latin American merchant bank Bladex, down over 8% after announcing the impending departure of its CEO and CFO. We believe this will be an orderly transition, but since the new management team is an unknown quantity, the change does increase uncertainty for now.

Good, but we want better

We closed the year on a positive note – a 1% monthly return and 26% annual return is nothing to sneeze at. Our performance just wasn’t as positive as we would like. Our goal is to provide you with market-beating returns – that’s what you pay us for, after all – and we came up short in 2017.

We can’t promise 2018 will be better, but we can promise we will continue to implement our disciplined process to fill your portfolio with the highest-quality companies we can find and do our best to earn the trust you put in us.

The Emerging Markets Fund changed its benchmark 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 on February 28, 2017.

The Emerging Markets Fund changed its name from The Epic Voyage Fund on February 28, 2017.

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