With a one year loss of 1.15%, 2014 proved to be a tough year for this fund, lagging both the index and most of its peers. In comparison, the MSCI Emerging Market Index lost 1.8% in U.S. dollar terms, but gained more than 7% in Canadian dollar terms, thanks to a falling loonie.
The fund is managed by Brandes’ investment committee using a bottom up, value driven process that looks for companies that are out of favour with investors and whose share price has been beaten down by the markets. They look for well managed companies that are trading at a significant discount to what they believe it is really worth. As a result, the portfolio has country and sector exposures that look nothing like that of the benchmark.
It is well diversified holding just under 70 names with the top ten making up just over 30% of the fund. Portfolio turnover is relatively modest.
Despite struggling of late, I fully expect that they will remain true to their value, almost contrarian style. The drawback to that is the fund will be prone to periods of underperformance, much like we are seeing now.
In a recent commentary, the managers stated that portfolio positioning was the main reason for its recent underperformance. Specifically, overweight allocations to Russian and Brazil have caused much of the pain.
Despite this, they remain committed to their investment thesis, particularly in Russia. They believe that Russia offers some of the most undervalued businesses in the world. Still, they are aware of the macro environment, and are watching their holdings closely. They believe the risk reward tradeoff is remains attractive over the long term.
Brazil is a different story, but troublesome just the same. Brazilian equities had a big selloff after government deficits ballooned to record highs after the latest budget. Add to that many of their key trading partners, namely China, Europe, and Argentina are struggling, and the macro picture looks grim.
Brandes’ focus remains on finding undervalued companies, and not making buy or sell decisions based on the macro outlook. This strategy has the potential to reap rewards over the long term, however investors need to have the stomach to withstand periods of underperformance, and going against the grain.
Given the disciplined process used in this fund, I believe it is a good choice for those comfortable with the higher volatility. If you are not, you may want to consider an alternate fund or avoiding emerging markets in general. I will continue to monitor this fund.