Emerging Markets update

By Edward Lam, Lead Fund Manager

 

Money and currency are very strange things.

They keep on going up and down and no-one knows why;

If you want to win, you lose, however hard you try.

–             Gilles Li Muisis, Abbott of Tourna (c.1349)

 

Emerging markets continue their upward drift despite what the skeptics guess about Trump’s policies and impact. We wrote about this in December.

In the meantime, we continue our policy of selective buying. We repeat what we wrote last month and we continue to think the market has an upward long-term bias. However, we must also now raise the issue that we are back within range of the 2010 euphoria levels. We are therefore at a critical junction, which will likely determine the gradient, volatility and longevity of this bull market.

Within the fund, we have had a mixed set of results from companies we are invested in. Cia Cervercerias Unidas (CCU), a Chilean Beer and fast moving consumer goods (“FMCG”) company, reported stronger-than-expected results, with consolidated volumes up 8.6% for the fourth quarter of 2016. This helps to justify our decision to add to the stock whilst the share price was weak at the end of 2016.

Unfortunately, results have gone in the opposite direction for Eurocash S.A., one of the more recent additions to the fund and one in which we have built a small position. Sales grew by 5.9% overall in the fourth quarter and 4.5% for 2016, but a core segment of the business, its cash and carry division, saw -5.2% like-for-like results driven by a tight competitive environment and price deflation. The effect of this and higher costs from expansion into the fresh food market caused annual profits to decline by 17.5% for the year. Management remains confident of turning the business back to profit growth this coming year. We are encouraged by the company’s active investment in its new fresh product line, which will add another dimension to the advantage it already has in market share and scale in FMCG, so we still like this as a long-term investment. Meanwhile, the company’s long-term capital management and current cash flow are sound; it is not intending to cut its dividend.

Finally, for the fund, one of the current issues is the imbalance of currencies that the fund has exposure to. Put in stark terms, swings in the more volatile currencies like the Brazilian Real and the South African Rand continue to explain a great portion of relative over- and under-performance. Whilst to do anything solely based on a currency view would be to lose the diversification of stock picking, to ignore the currency in portfolio construction risks missing out on the greater portion of this interest rate cycle driven rally in emerging markets.

 

 

Historical performance, as at February 28, 2017 1 year 3 year 5 year Since inception*
Redwood Emerging Markets Dividend Fund, Series F 16.94% 5.95% 5.80% 4.24%
Redwood Emerging Markets Dividend Fund, Series A 15.89% 4.88% 4.73% 3.22%

*Inception date: November 5, 2010

 

Commissions, trailing commissions, management fees and expenses all may be associated with investment funds. Please read the prospectus before investing. The indicated rates of return are the historical annual compounded total returns including changes in share/unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. Investment fund securities are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the full amount of your investment in the fund will be returned to you. If the securities are purchased or sold on a stock exchange, you may pay more or receive less than the current net asset value.  Investment funds are not guaranteed, their values change frequently and past performance may not be repeated.

Certain statements in this document are forward-looking. Forward-looking statements (“FLS”) are statements that are predictive in nature, depend on or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” intend,” “plan,” “believe,” “estimate” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are by their nature based on numerous assumptions. Although the FLS contained in this document are based upon what Redwood Asset Management [and the portfolio manager] believe to be reasonable assumptions, Redwood Asset Management [and the portfolio manager] cannot assure that actual results will be consistent with these FLS. The reader is cautioned to consider the FLS carefully and not to place undue reliance on the FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed, that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.

Return to Fund Commentaries