Realindex Emerging Markets-Class A (FSF1101AU) Report & Performance

Realindex Emerging Markets Value returned -0.46% (net of fees) during May, versus the MSCI Emerging Markets Net Index which returned +0.40% (in AUD). Emerging Markets were down in May, with Chinese equities underperforming (MSCI China -6.5%) following weaker than expected economic data.

Expectations of China’s growth recovery receded as various economic data points missed expectations and further policy measures to steady growth remained absent. The official manufacturing PMI fell to a below-forecast 48.8 in May, marking the second consecutive contraction for the year. Korean (MSCI Korea + 7.0%) and Taiwanese (MSCI Taiwan +9.6%) stocks outperformed, largely driven by the Information Technology sector amid growing expectations of the future potential of AI. Latin America was positive but muted for May (MSCI Latin America: +1.3%).

Within this environment, the strategy underperformed given the relative strength of growth based names during the month; Value stocks underperformed Growth stocks by 0.4% over the month (MSCI Emerging Markets Value +0.2% vs. Growth +0.6%, in AUD). Over the past year, Value has outperformed Growth by 4.8% (AUD), while on a five-year basis Value has outperformed Growth by 0.2% p.a. (AUD).

From a sector perspective, while favourable under-weight positioning in Consumer Discretionary names boosted performance, the fund’s overweight positioning to Financials and, in particular, Insurers was the main detractor to performance. The underweight to Information Technology names, in particular within Semiconductor manufacturers who benefited from renewed investor interest in AI related stocks, was another key detractor. On a country basis, the largest detractor was the underweight to India and Taiwan, while the largest contributor was the overweight to China, though much of this was due to the funds underweight to Chinese Consumer Discretionary names. The largest stock level detractor was the underweight to Taiwan Semiconductor Manufacturing Company Limited and the largest stock level contributor was the overweight to Wistron Corporation.

Driven by the methodology of rebalancing further into cheap value companies, the portfolio continues to sit on deep valuation discounts. At the end of May 2023 the portfolio reflected a 75.9% dividend yield premium to the MSCI EM index, whilst trading at a 33.3% price to book discount, a 52.2% price to cashflow discount and 50.9% price to sales discount, indicating that the portfolio remains well positioned for mean reversion in Value.

Realindex Emerging Markets Value returned +2.61% (net of fees) during April, outperforming the MSCI Emerging Markets Net Index which returned +0.20% (in AUD).

Global equity markets were mixed amidst persistent inflation which continued to pose a challenge to central banks. US stocks made limited gains in April led by large caps, as investor optimism resulting from the Fed’s anticipated moderation of monetary policy was tempered by concerns over economic growth.

Uncertainty in the banking sector also continued with the collapse of First Republic bank. China reaffirmed its supportive policy stance for the economy amidst growing exports and consumer demand. Despite this, China’s equity market continued to underperform in April, leading emerging markets lower as concerns over its political stance on Taiwan, relationship with Russia and ongoing regulations with the private sector still weigh on investors.

Overall, Emerging equity markets were very weak in April, lagging developed markets with the MSCI EM Index posting +0.2% in AUD terms. Value oriented sectors Energy (+7.6%) and Financials (+5.6%) strongly outperformed growth oriented Consumer Discretionary and Communication Services sectors with each posting -5.7% and -4.3% respectively.

In this environment, the portfolio benefitted from its exposure to Value stocks which outperformed Growth stocks by 3.0% over the month (MSCI Emerging Markets Value +1.8% vs. Growth -1.3%, in AUD). Over the past year Value has outperformed Growth by 5.9% (AUD), while on a five year basis Value has outperformed Growth by 0.3% p.a. (AUD).

The portfolio strongly benefitted from its overweight positioning in China; in particular its large overweight to China Financials and underweight to China Consumer Discretionary names were the biggest drivers of the portfolio from a country perspective. The portfolio’s underweight to India and Saudi Arabia were amongst the largest detractors to performance from a country perspective. From a sector perspective, favourable positioning in Financials which the portfolio is significantly overweight helped drive performance, along with the portfolio’s underweight to IT names. The largest detractor from a sector perspective was the overweight to Materials, largely the result of stock selection. The largest stock level contributor was the underweight to Tencent Holdings Ltd. and the largest stock level detractor was the underweight to Reliance Industries Limited.

Driven by the methodology of rebalancing further into cheap value companies, the portfolio continues to sit on deep valuation discounts. At the end of April 2023 the portfolio reflected a 75.7% dividend yield premium to the MSCI EM index, whilst trading at a 33.3% price to book discount, a 53.5% price to cashflow discount and 51.5% price to sales discount, indicating that the portfolio remains well positioned for mean reversion in Value.

Note: Returns in parenthesis show the total return for the month ending 30 April 2023. All returns are given in local currency terms unless otherwise stated.

Realindex Emerging Markets Value returned -1.49% (net of fees) during February, outperforming the MSCI Emerging Markets Net Index which returned – 2.28% (in AUD).

Emerging markets were mixed in February, with China (-6.4%) and Brazil (-5.1%) trading lower and Turkiye (+10.5%) and Eastern Europe trading higher. A warmer European winter along with their ability to diversify energy imports have meant a fully-fledged energy crisis has not materialized. This, along with China’s reopening, has brought a degree of softening or cautious optimism in the global economy. Beijing has begun to support housing demand and restore consumer sentiment, after limiting leverage last year in the wake of the liquidity crisis. Turkiye’s central bank has lowered rates to support the economy in the aftermath of the earthquake. In the MSCI Emerging Markets Index, majority of sectors fell for the month with Consumer Discretionary (-8.6%) and Utilities (- 7.2%) struggling the most, while Consumer Staples (+0.7%) and Information Technology (+0.7%) posted the only positive returns.

Within this environment, Value stocks outperformed Growth stocks by 2.2% over the month (MSCI Emerging Markets Value -1.1% vs. Growth -3.4%, in AUD). Over the past year Value has outperformed Growth by 5.7% (AUD), while on a five year basis Growth has outperformed Value by 0.2% p.a. (AUD).

The fund outperformed the benchmark due to strong stock selection within China (+137bps) while the largest detractor was the overweight to Hong Kong. The biggest wins for the fund were the underweights to Chinese Consumer Discretionary and Information Technology names such as Meituan (+22bps) and Alibaba (+18bps). Overall, the largest detractors were stock selection in Financials such as the overweight to Ping An Insurance (Group) Company of China, Ltd.

Driven by the methodology of rebalancing further into cheap value companies, the portfolio continues to sit on deep valuation discounts. At the end of February 2023 the portfolio reflected a 81.0% dividend yield premium to the MSCI EM index, whilst trading at a 36.1% price to book discount, a 50.3% price to cashflow discount and 52.5% price to sales discount, indicating that the portfolio remains well positioned for mean reversion in Value.

Note: Returns in parenthesis show the total return for the month ending 28 February 2023. All returns are given in local currency terms unless otherwise stated.

Realindex Emerging Markets Value returned +4.00% (net of fees) during January, outperforming the MSCI Emerging Markets Net Index which returned +3.84% (in AUD).

Global markets were off to a solid start in January as falling inflation, relatively robust economic data, and China’s COVID policy change drove investor hopes of a “soft landing” for the global economy. Equities, bonds and alternatives generally rose on the back of this renewed optimism while bond yields declined and equity market volatility fell to its lowest level in almost a year. In Emerging Markets, the positive gains observed were in part driven by China; improved economic momentum and confidence was reflected by the outperformance of the Chinese market, both onshore (CSI 300 Index +7.3%) and offshore (Hang Seng Index +10.4%). Growth oriented sectors outperformed with Information Technology (+9.4%) as well as Communication Services and Discretionary sectors leading the way. Utilities (-6.7%) and Energy (-1.5%) were the main underperforming sectors.

Within this risk on market environment, Value stocks underperformed Growth stocks by 1.3% over the month (MSCI Emerging Markets Value +3.2% vs. Growth +4.5%, in AUD). Over the past year Value has outperformed Growth by 5.8% (AUD), while on a five year basis Value has underperformed Growth by 0.7% p.a. (AUD).

Despite Growth’s strength during the month, the fund managed to outperform owing to good positioning to India, which the fund was underweight; in particular within Indian Financials. Poor stock selection in Chinese names which the fund was overweight was the main detractor in performance from a country perspective, though this was not enough to offset the overall gains observed from the fund’s other country positions. From a sector allocation perspective, whilst the overweight to Financials was a detractor, stock selection within Financials and predominantly banks more than offset those poor allocation effects. This made Financials the most significant contributor to performance from a sector perspective. The underweight to Information Technology names also detracted performance, however stock selection was the most significant detractor from a sector perspective. The largest stock level contributor was the overweight to Ping An Insurance (Group) Company of China, Ltd. and the largest stock level detractor was the underweight to Taiwan Semiconductor Manufacturing Co., Ltd.

Driven by the methodology of rebalancing further into cheap value companies, the portfolio continues to sit on deep valuation discounts. At the end of January 2023 the portfolio reflected a 80.8% dividend yield premium to the MSCI EM index, whilst trading at a 40.1% price to book discount, a 52.3% price to cashflow discount and 55.2% price to sales discount, indicating that the portfolio remains well positioned for mean reversion in Value.

Realindex Emerging Markets Value returned +7.30% (net of fees) during the December quarter, outperforming the MSCI Emerging Markets Net Index which returned +4.01% (in AUD).

Emerging markets faced several challenges in 2022, including Russia’s invasion of Ukraine, tighter financial conditions to address higher inflation, a stronger US dollar, and China’s economic decline due to its zero-COVID policy and problems in the property sector. Despite a nearly 15% decline in the MSCI EM Index over the year, the asset class showed signs of recovery in Q4, due to China’s focus on reopening and support for the property sector, as well as signs that inflation may have peaked across several emerging economies. In Q4, many emerging markets delivered positive returns, with Asian and EMEA markets leading the way while LATAM performance was flat; a result of uncertainty in Brazil in the lead up to its presidential elections.

In terms of sectors, positive performance in MSCI Emerging Markets was driven by Communication Services (+7.9%) followed by Health Care (+7.3%), while Energy (-1.2%) and Utilities (-0.9%) lagged behind the index. With this backdrop, the fund benefitted from Value stocks generally outperforming Growth stocks by 0.1% over the quarter (MSCI Emerging Markets Value +4.1% vs. Growth +4.0%, in AUD). Over the past year, Value has outperformed Growth by 8.7% (AUD), while on a five year basis Value has outperformed Growth by 0.3% p.a. (AUD) which has provided further tailwinds for the fund.

From a country perspective, the fund strongly benefitted from its underweight to India, with both allocation and stock selection delivering performance. The overweight to Turkey and Korean Financials also significantly added to performance. The fund’s overweight to South Africa and Brazil were small detractors.

From a sector perspective, stock selection within Financials, the fund’s largest sector overweight, was the most significant contributor to performance. Whilst the underweight to Communication Services was the largest sector detractor, however small in comparison. The largest stock level contributor was the overweight to Ping An Insurance (Group) Company of China, Ltd. and the largest stock level detractor was the underweight to Tencent Holdings Ltd.

Driven by the methodology of rebalancing further into cheap value companies, the portfolio continues to sit on deep valuation discounts. At the end of December 2022 the portfolio reflected a 80.5% dividend yield premium to the MSCI EM index, whilst trading at a 39.7% price to book discount, a 53.1% price to cashflow discount and 56.7% price to sales discount, indicating that the portfolio remains well positioned for mean reversion in Value.

Realindex Emerging Markets Value returned +10.47% (net of fees) during November, outperforming the MSCI Emerging Markets Net Index which returned +9.64% (in AUD).

With signs that global inflation may be easing in November, global equity markets were boosted by speculation that interest rates in key regions may not need to be raised significantly. The MSCI World Index rose 5.7%, although the gain was lower in AUD terms due to the strength of the Australian dollar. In the United States and Europe, major indices such as the S&P 500 (+5.4%), NASDAQ (+4.4%) and Euro Stoxx 50 (+9.6%) registered solid gains. However, Asian markets took the lead with strong returns from the CSI 300 (+9.8%) and Hang Seng (+26.6%) due to optimism around potential relaxation of China’s COVID restrictions. Latin America underperformed for the month (MSCI Latin America: -4.1%). off the back of weakening oil prices. The strength in Emerging Markets was most seen in Real Estate (+29.6%) and Consumer Discretionary (+20.1%) while the weakest sector was Utilities (+2.3%); overall, growth sectors such as Technology (+12.8%) in Emerging Markets outperformed.

As a result, Value stocks underperformed Growth stocks by 2.6% over the month (MSCI Emerging Markets Value +8.3% vs. Growth +10.9%, in AUD) which in turn impacted the fund’s performance. Over the past year Value has outperformed Growth by 11.8% (AUD), while on a five year basis Value and Growth have been on par.

On a country basis, the fund benefitted from the underweight to Saudi Arabia and the largest detractor was the underweight to Taiwan. From a sector perspective, the largest contributor was the overweight to Financials largely due to stock selection rather than sector positioning and the largest detractor was the underweight to Communication Services, which again was due to stock selection effects. The largest stock level contributor was the overweight to Ping An Insurance (Group) Company of China, Ltd. and the largest stock level detractor was the underweight to Tencent Holdings Ltd.

Driven by the methodology of rebalancing further into cheap value companies, the portfolio continues to sit on deep valuation discounts. At the end of November 2022 the portfolio reflected a 79.8% dividend yield premium to the MSCI EM index, whilst trading at a 37.3% price to book discount, a 51.7% price to cashflow discount and 56.3% price to sales discount, indicating that the portfolio remains well positioned for mean reversion in Value.