Our fund lagged in October, despite a bounce back in most emerging markets. We explain why.

 

October

2017 Year-to-Date

Since Inception (Annualized)

Inception Date: 11/1/2011

Motley Fool Emerging Markets Fund (TMFEX)

-1.48%

22.24%

6.69%

FTSE Emerging Markets All Cap China A Inclusion Index

2.48%

26.53%

5.10%

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

October was a rebound month for emerging markets, but we’re sorry to say your Motley Fool Emerging Markets Fund didn’t participate. We trailed our benchmark for the second consecutive month and fell behind the benchmark on a year-to-date basis.

Since we don’t try to match the country and currency exposure of the benchmark — one in which China has nearly a 30% weighting — it won’t be uncommon for our performance to diverge. This month we were on the losing end of that divergence.

For the second straight month, the Turkish lira and Mexican peso both weakened meaningfully against the dollar. That meant our relative overexposure to Mexican and Turkish companies hurt us again.

Not surprisingly, then, our most disappointing performance in October came from Mexico. Gentera, a niche bank that makes microloans to the unbanked population in Mexico, Peru, and Guatemala, dropped 36%.

The weak peso was just the start of the bad news for Gentera, as the management team told the market not to expect growth for the next year. The bank is working to improve its customer service in the face of rising competition, which is going to mean rising costs and a focus on quality over quantity.

While that may sound like a smart long-term plan, it’s a change from the double-digit growth the bank has historically delivered. It also highlights threats to the business and the likelihood of rising costs, at least in the near term.

If management can deliver on its plans, Gentera should be a better bank in a couple of years, but the dramatic change to the story has the market looking for returns elsewhere for now.

October wasn’t all bad, though, and your portfolio did have some bright spots. Georgia Healthcare Group turned in a worst-to-first performance, rebounding from September’s decline to return almost 18% in October. Malaysian rubber-glove manufacturer Top Glove posted a 13% gain, and Taiwan Semiconductor Manufacturing Co. rode the continuing buzz around semiconductors to a 10% gain.

It was a quiet month on the trading front, as we stood pat with the companies in the portfolio. You shouldn’t expect us to be completely static from month to month, but our patient investing approach often does lead to minimal activity in any given period.

Two months of losing to our benchmark is disappointing, but two months is a very short part of our investing horizon, and we’re not going to overreact. We believe a measured approach to buying and selling not only reduces costs but also leads to better, less emotion-driven decision-making.

We’re not interested in action for action’s sake, and we want to have confidence in our decisions. We think, over the long term, this is a strategy that can deliver market-beating returns for our shareholders.

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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