The fourth quarter was a tough one for the fund, amid a precipitous drop in the price of oil, major currency devaluations (especially the Russian Ruble), and political instability in Brazil, Argentina and other EM nations. With its overweight position in both Russia and Brazil, the fund was hit particularly hard, dropping 9.3% in Canadian dollar terms. It was even worse in U.S. dollar terms, with the fund dropping 12.6%. In a recent commentary, the managers stated they remain commit-ted to their thesis on Russia. They believe “…it can offer some of the most potentially undervalued businesses in the world right now. On a macro level, valuations in that nation are about half those of the next closest country, China.”
At the end of December, the fund had 8.4% invested in Russia. It also had 18% in Brazil. It is important to note that the portfolio is constructed using a bottom up process, meaning the country allocations are a byproduct of their stock selection process. Emerging markets have historically been more volatile than more developed markets, and that has certainly been the case of late. I don’t see anything near term that will change that. If you are uncomfortable with high levels of volatility, you should not be invested in an emerging market fund. Over the long term, I believe Brandes will reward investors with solid gains. However, you need to be comfortable with potential underperformance. If not, you should look elsewhere. I am monitoring both the fund and sector closely.