To say this fund has struggled of late would be a bit of an understatement. Over the past year (to September 30), it has lost more than 20%, significantly underperforming its peers. In the past quarter alone, it was down 14%, again lagging both its peers and its benchmark. Does that mean the fund has lost its mojo? No. The problem the fund is experiencing at the moment has more to do with its deep value style, than the manager’s skill. Brandes has a well-deserved reputation as being a very strong, deep value manager. They also have a reputation of sticking to their style, regardless of what the markets are doing. Unfortunately, at the moment, the value style is significantly underperforming growth and more core styles in the emerging markets. This has no doubt affected the fund. Another factor that has hurt performance is it is more of an all cap fund compared to many of its peers, holding many more small and mid-cap names. While this is a positive over the long term, there are periods when small and mid-caps will lag. We are in one of those periods. However, I don’t expect we will be forever.
If I look at the valuation metrics of this fund compared to its peers and benchmark, it offers a significantly more attractive portfolio. For ex-ample, according to Morningstar, the P/E ratio of the MSCI Emerging Markets Index is 10.6 times. For this fund, it is 6.6 times. For the price to cash flow, the index is 5.2 times, while the fund is 2.5 times. It is even more attractive compared to its peers, with Morningstar reporting the category average P/E is 12.5 times, and the price to cash flow is 8.0 times.
That doesn’t mean the near term will be any easier. With continued worry over China, combined with lower demand for commodities, emerging markets are likely in for more trouble. If you are uncomfortable with this outlook, you may want to avoid this and other emerging market funds. However, if you are comfortable with it, and you have a medium to long time horizon, I believe this is a solid pick.