It's been a difficult six months for emerging markets, but our fund has managed to stay well ahead of its benchmark.

 

Q2 2018​

Year to Date

Since Inception (Annualized)

Inception Date: 11/1/2011

Motley Fool Emerging Markets Fund (TMFEX)

-5.96%

0.56%

6.06%

FTSE Emerging Markets All Cap China A Inclusion Index

-9.09%

-7.37%

3.98%

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

The last three months were not the greatest for emerging markets, and there are plenty of headlines in the news that point to continued fear and uncertainty. Beyond the ongoing tariff battles between the United States and China, there are signs of economic weakness in several economies, rising interest rates that may weaken the balance sheets of overextended borrowers, signs of several countries moving beyond the peak of the business cycle, and plenty of company-specific events that are capturing our attention. Amid these concerns, the Motley Fool Emerging Markets Fund managed to eke out a small gain during the first half of the year, solidly outperforming our benchmark in each of the first two quarters.

One of the reasons for the weakness in emerging markets this year is the decline of several currencies, most notably in Brazil and Turkey. In fact, nearly half of the index’s decline year to date came in the form of currency devaluation. We tend not to hedge currency risk in our portfolio, but we are always aware of the ways in which it can affect our investments. Thankfully, most of the companies we own have minimal operational risk from currency movements -- retailer Mitra Adiperkasa in Indonesia is the most notable exception, but it is executing very well -- and as long as these businesses continue to exhibit the high quality we expect, their performances should prove satisfactory over longer periods.

The tariff discussions between the United States and China have dominated the news cycle recently, leading to a sell-off in the Chinese stock market in June (the same discussion is dominating the headlines as I write this in early July). Even with this recent decline, China is still one of the better-performing countries in the index throughout the first half of 2018, falling -2.2% compared to the -4.6% return of the Asia-Pacific region and the -7.4% return of the entire benchmark. The rest of this year (perhaps longer) will no doubt be affected by the ongoing discussions of trade tariffs with the United States, and we are watching this closely.

While we have no confidence in our ability to predict how this will ultimately play out, we are ready for the opportunity to add to our investments in some great companies if markets are disrupted. Our current investments in China are not reliant on exports; we have instead focused on companies that benefit from the rising consumer class within the country. We believe these companies will do well regardless of any periodic gusts of the trade winds.

Throughout this macroeconomic uncertainty, we have done very little trading within the Fund during the past three months. This is one of the benefits of seeking to identify high-quality growth companies with a long path in front of them -- we can allow our prior decisions to carry us through volatile markets and only act when better opportunities come along. Beyond starting one new position, we made a few trades to adjust our investment allocations during the quarter. We added to our Chinese investments by buying more shares of Alibaba, Baidu, and Yum China. We also bought a bit more of Peruvian financial company Credicorp and Brazilian dental care provider Odontoprev. Our only new investment was in South African telecom operator Vodacom Group.

Our only sale during the quarter was a portion of Turkish airport operator TAV Havalimanlari. We also own an additional company in the Fund by virtue of a spin-out. Bank of Georgia Group spun out its non-banking operations as a new company called Georgia Capital. We think the management groups at the two companies have done excellent work so far, and we continue to own both businesses.

Our best-performing investments during the quarter were Mexican lender Gentera (+24.9%), Malaysian latex purveyor Top Glove Corp. (+20.4%), and Indonesian retailer Mitra Adiperkasa (+11.7%). There were far more laggards than winners during the quarter, most notably Indonesian real-estate developer Lippo Karawaci (-31.4%), Indonesian bakery Nippon Indosari (-24.6%), and the previously mentioned Brazilian dental company, Odontoprev (-24.6%). Fortunately, many of the heaviest losers came from our smaller investments, while the gainers were already large parts of the portfolio and continued to get even bigger -- at quarter’s end, Top Glove is now the largest holding in the Fund, overtaking both NMC Health and Tencent Holdings by a hair.

If you’ve read my prior comments in this space, you can probably guess the message I would like to end with: We are business-focused, long-term investors who have no ability to time the market, and we believe having some exposure to emerging markets is a critical piece of your investment portfolio. That message can be difficult to appreciate -- despite soundly outperforming the emerging markets since inception, our Fund’s annualized return of 6.6% is well short of the gains experienced from a U.S.-focused investment over the same time (the S&P 500 has returned 14.7% annualized since we launched this Fund). I have no idea which market will do better over the next year, or five or 10 years, for that matter, but I believe there are some high-quality growth opportunities as these countries continue to develop over the coming decades. I am excited to see what happens with the businesses we own here.

Note: The Morningstar RatingTM for funds, or 'star rating', is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. As of 6/30/2018, the Motley Fool Emerging Markets Fund (Investor shares) was rated in the Diversified Emerging Markets Funds category, receiving a five-star rating among 688 funds over a three-year period and a four-star rating among 489 funds over a five-year period.

Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10- year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods. Past performance is no guarantee of future results.

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