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SICAV

Emerging Markets Discovery Equity Fund

Formerly Emerging Markets Value Equity Fund

Utilises a contrarian approach to invest in undervalued emerging markets companies positioned to benefit from a re-rating thesis for change.

ISIN LU1244138340 WKN A14XYX

3YR Return Annualised
(View Total Returns)

Total Assets
(USD)

8.04%
$101.6m

1YR Return
(View Total Returns)

Manager Tenure

-1.11%
4yrs

Information Ratio
(3 Years)

Tracking Error
(3 Years)

0.49
4.24%

Inception Date 14-Sep-2015

Performance figures calculated in USD

Other Literature

30-Sep-2019 - Ernest Yeung, Portfolio Manager,
We continue to find pockets of opportunities in Emerging Markets (EM) despite the disparity between growth and value stocks in the third quarter, driven by the compression of the U.S. 10-year yield curve. For instance, we remain invested in Chinese H-shares; while they have weakened on the back of protests in Hong Kong, we see no deterioration in their company fundamentals.
Ernest C.  Yeung
Ernest C. Yeung, Portfolio Manager

Ernest Yeung is a portfolio manager for the Emerging Markets Discovery Equity Strategy at T. Rowe Price. He was the co-portfolio manager for the International Small-Cap Equity Strategies from 2009 to 2014. Mr. Yeung is a vice president of T. Rowe Price Group, Inc. and T. Rowe Price Hong Kong Limited.

 

Strategy

Investment Objective

To increase the value of its shares, over the long term, through growth in the value of its investments. The fund invests mainly in a widely diversified portfolio of stocks of emerging market companies.

Investment Approach

  • Aim to exploit the valuation anomalies that arise across the diverse and inefficient emerging market opportunity set.
  • Employ a contrarian approach using fundamental research, quantitative screen and industry contacts to identify companies that are out of favour, undervalued and that offer an attractive risk and reward profile.
  • Minimize the risk of value traps by focusing on companies offering yield or a book value anchor to the valuation, and where we have identified re-rating thesis that can lead to an expansion in valuation over time.
  • Risk management is an integral part of the portfolio construction process.

Portfolio Construction

  • Typically 50-80 stock portfolio
  • Expected 4-8% tracking error
  • Individual position typically 0.5% to 5%, position sized by prospective risks
  • Country ranges +/-10% absolute deviation from the benchmark
  • Sector ranges +/-15% absolute deviation from the benchmark
  • Reserves are normally less than 5%, max 10%

Performance (Class I)

Annualised Performance

  1 YR 3 YR
Annualised
5 YR
Annualised
Since Inception
Annualised
Since Manager Inception
Annualised
Fund % -1.11% 8.04% N/A 9.15% 9.15%
Indicative Benchmark % -2.02% 5.97% N/A 7.98% 7.98%
Excess Return % 0.91% 2.07% N/A 1.17% 1.17%

Inception Date 14-Sep-2015

Manager Inception Date 14-Sep-2015

Indicative Benchmark: MSCI Emerging Markets Index Net

Data as of  30-Sep-2019

  1 YR 3 YR
Annualised
5 YR
Annualised
Since Inception
Annualised
Fund % -1.11% 8.04% N/A 9.15%
Indicative Benchmark % -2.02% 5.97% N/A 7.98%
Excess Return % 0.91% 2.07% N/A 1.17%

Inception Date 14-Sep-2015

Indicative Benchmark: MSCI Emerging Markets Index Net

Data as of  30-Sep-2019

Performance figures calculated in USD

Recent Performance

  Month to DateData as of 18-Oct-2019 Quarter to DateData as of 18-Oct-2019 Year to DateData as of 18-Oct-2019 1 MonthData as of 30-Sep-2019 3 MonthsData as of 30-Sep-2019
Fund % 2.53% 2.53% 7.11% 0.92% -8.77%
Indicative Benchmark % 2.40% 2.40% 8.43% 1.91% -4.25%
Excess Return % 0.13% 0.13% -1.32% -0.99% -4.52%

Inception Date 14-Sep-2015

Indicative Benchmark: MSCI Emerging Markets Index Net

Indicative Benchmark: MSCI Emerging Markets Index Net

Performance figures calculated in USD

Past performance is not a reliable indicator of future performance.  Source for fund performance: T. Rowe Price. Fund performance is calculated using the official NAV with dividends reinvested, if any. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested. It will be affected by changes in the exchange rate between the base currency of the fund and the subscription currency, if different. Sales charges (up to a maximum of 5% for the A Class), taxes and other locally applied costs have not been deducted and if applicable, they will reduce the performance figures. 

Where the base currency of the fund differs from the share class currency, exchange rate movements may affect returns.

Returns shown with reinvestment of dividends after the deduction of withholding taxes. 

Effective 1 July 2018, the "net" version of the indicative benchmark replaced the "gross" version of the indicative benchmark. The "net" version of the indicative benchmark assumes the reinvestment of dividends after the deduction of withholding taxes applicable to the country where the dividend is paid; as such, the returns of the new benchmark are more representative of the returns experienced by investors in foreign issuers. Historical benchmark performance has been restated accordingly. 

30-Sep-2019 - Ernest Yeung, Portfolio Manager,
EM equities advanced in September, boosted by the resumption of trade talks between the U.S. and China and the more accommodative policies of the U.S. and several EM central banks. South Africa, however, weakened amid disappointment over the progress of reforms and the reduced weighting of index heavyweight Naspers. Our country overweight here was largely responsible for the portfolio’s underperformance. Naspers, which listed in Amsterdam its investment vehicle Prosus that houses Tencent and other assets, weighed on relative returns. Stock selection in Thailand also hurt. For example, our position in Land & Houses fell, but we continue like its attractive dividend yield and solid management. Our relative underweight in Taiwan crimped performance further, largely due to avoidance of Taiwan Semiconductor (TSMC). In contrast, our stock choices in South Korea, notably Samsung Electronics, a TSMC rival, helped performance. We think Samsung is poised to benefit from a recovery in demand for DRAM, driven by cloud gaming, 5G, and multi-camera smartphones. Sector-wise, our stock choices in consumer staples was an area of weakness. Owning Tsingtao Brewery hurt as shares gave back some of their year-to-date gains, but we continue to see the firm’s margin improvement.

Holdings

Total
Holdings
58
Largest Holding Samsung Electronics 6.45% Was (30-Jun-2019) 5.96%
Other View Full Holdings Quarterly data as of 30-Sep-2019
Top 10 Holdings 27.21% View Top 10 Holdings Monthly data as of 30-Sep-2019

Largest Top Contributor^

Samsung Electronics
By 4.22%
% of fund 6.72%

Largest Top Detractor^

Nedbank
By -0.01%
% of fund 2.05%

^Absolute

Quarterly Data as of 30-Sep-2019

Top Purchase

Hon Hai Precision Industry (N)
1.97%
Was (30-Jun-2019) 0.00%

Top Sale

Zhuzhou CRRC Times Electric (E)
0.00%
Was (30-Jun-2019) 1.67%

Quarterly Data as of 30-Sep-2019

30-Jun-2019 - Ernest Yeung, Portfolio Manager,

South Africa remains our largest country relative overweight. As a result of our bottom-up stock selection, we increased our allocation to this market over the quarter. We believe that the country will continue to pursue a path toward reform although initial market expectations of big-bang measures may have been too high. In the near term, the market is waiting for a credible plan from President Cyril Ramaphosa's government to revive the financially troubled state power utility Eskom Holdings. However, we are not solely looking at the implementation of reforms but are also betting on individual companies that are improving. We believe that South African companies are generally well managed with good corporate governance and a high dividend yield. We continue to focus on companies with downside support, such as those with high dividend yield, and with potential upside.

We increased our overweight in Russia. We think the risk of further U.S. sanctions has been priced in while the impact of lingering sanction-related fears has so far been manageable. Moreover, the companies we own are unlikely to be affected by the sanction cloud.

In Latin America, we moved underweight Brazil as we trimmed select stocks on valuation grounds, locking in profits.

China remains our largest absolute position in Asia, and we turned overweight in relative terms during the quarter as a result of our bottom up stock selection. We think China's commitment to its economic transformation remains intact despite the trade conflict with the U.S. Our bias in China is skewed to companies geared toward the domestic market and so-called "old economy'' stocks. We continued to add positions in stocks overlooked by investors but ones with cash on their balance sheets, disciplined capital spending, and management incentives aligned with shareholders or that we believe are poised for recovery.

From a sector perspective, the financials sector remains by far our most significant absolute position, while industrials and business services is our largest relative bet. In contrast, we are most underweight to consumer discretionary, communication services, and IT in relative terms. We remain true to our portfolio's philosophy of seeking "forgotten" stocks and have avoided exposure to big internet companies, which are teeming with investors.

We continue to look for names that have limited impact from the U.S.-China trade strife such as companies that are into the early stages of their self-help and turnaround stories. We look for companies that the market may have misunderstood but have a wide margin of safety in terms of valuations or what we view as a highly visible improving outlook. We prefer stable companies, which may have been overlooked by mainstream investors, those not followed by sell-side research, but have the potential for improvement. Once we have identified these triggers for fundamental change or operational improvement, we have a three-year horizon to allow them to materialize.

We are firm about this three-year incubation period as we seek to avoid value traps and aim to actively get ahead of fundamental changes. We believe that waiting for mean reversion may be a flawed process in EM as it may not always transpire given the reduced efficiency of the markets compared with their developed counterparts.

The "forgotten" stock opportunities we select have asymmetric risk/return profiles where, given the market's diminished expectations of them, they are unlikely to retreat further on disappointing news, but with favorable news, their upside potential could be substantial, in our view. We favor stocks that will likely emerge as beneficiaries of supply consolidation and those that generate high free cash flow.

South Africa Overweight Increased as Faith in Long-Term Prospects Intact

Aside from our belief in South Africa's quest for reform, our long-term case for investing in the country still holds as its domestic economy boasts of a young demographic, rich resources, and it has some of the best-managed companies that have been through cycles in the EM space. We believe President Ramaphosa understands the problems facing the country and the need to clean up the system, which has been tainted by scandals in recent years. In turn, this would help restore consumer and corporate confidence in the country. We think South Africa is at the early stage of its path to economic recovery.

We increased our stake in Barloworld, a diversified multinational industrial services group, which we think will benefit from capital expenditure and mining, one of the industries that will be the key focus of reforms. While material prices have held up, mining equipment related companies have not. As Barloworld is geared into the mining sector, the potential gain in mining equipment share prices may provide us with optional upside.

Overweight to Russia Enhanced

We moved more overweight Russia in the quarter as we started a position in Gazprom, a state-controlled gas company, and added to our existing holdings in the abovementioned Sberbank. Aside from being one of the cheapest stocks in its universe and a sharp increase in its dividend payment, we like Gazprom given that we are seeing a sea change in management, which will hopefully mean better allocation of capital. The commitment from the management to reform was the fundamental change we were looking for to justify investing in the company and, avoiding a potential value trap.

More Underweight to Brazil on Valuations and as our Thesis Unfolds

We became more underweight to Brazil as we took advantage of the October 2018 post-election rally to lock in profits. We found investment opportunities in Brazil when it wasn't very popular with mainstream investors as we saw attractively valued companies and many with self-help stories, which we believed could lead to positive fundamental changes. The October 2018 election result bolstered sentiment in Brazil, and the new administration of President Jair Bolsonaro has been well received by the market. Since then the focus has been on the ambitious plan to reform Brazil's public pension system, but it is facing a lengthy legislative process. Brazil is broadly on track in implementing its reform agenda, but the pace of pension reform is slower than expected and the details of the proposed changes are getting diluted. We believe that our positions in Brazil such as the aforementioned financial names should benefit from the eventual recovery in GDP growth and corporate investments.

In the meantime, however, we have cut our exposure to some of the financial names such as BTG Pactual and we exited Transmissora Alianca de Energia Eletrica (Taesa), the country's largest electricity transmission operator. We eliminated Taesa on valuation grounds and due to its capital expenditure commitment, which may cap its potential to accelerate dividends and/or add new growth projects.

We Turned Overweight to China; Trimmed Underweight to Taiwan

In China, we became more overweight, investing in "forgotten" names with better prospects as a result of new management leadership or self-help measures by management.

We initiated positions in Postal Savings Bank of China (PSBC), swapping it with our position in Agricultural Bank of China, as we saw that the former has better upside potential although both stocks have downside support. PSBC has 8,000 branches and uses the 32,000 branches of China Post to raise deposits. We see it as a very conservative bank with a loan to deposit ratio of 49% (versus the 74% of China's biggest four banks) as it holds a high proportion of its assets in lower risk government securities. It is also working to improve its risk management systems and customer reach by cooperation with technology firms including Tencent, one of its strategic investors. Under PSBC's new leadership, the bank seeks to slowly rollout bank lending products to Chinese retail and small-and-medium enterprises through the postal network in addition to its own branches. If PSBC succeeds, it could further accelerate loan and earnings growth relative to China's big four banks and unlike them, it faces less pressure to manage earnings growth or lend to priority sectors. PSBC is also seeking an A-share listing, which would further boost its capital.

We also decided to establish a position in Vipshop, a "forgotten" e-commerce name, which operates a website specializing in online discount sales. In the past two years, its category expansion and spending in last-mile logistics and research and development against its small scale weighed on earnings and cash flow. Its management has admitted that its growth strategy failed and is focusing on cost controls in the next two years to turn itself around. We think the market has not considered this self-help process, which may bolster earnings growth in the next few years. We decided to use proceeds from the sale of existing holdings that have done well, such as Naspers and Standard Chartered, to finance the Vipshop purchase.

Turning to Taiwan, we reduced our allocation in our biggest relative underweight. Here, we initiated positions in MediaTek, a fabless semiconductor company, and exited Cathay Financials, which we added to the portfolio at its trough, but which has only performed in line with the index. We replaced it with a higher conviction idea such as MediaTek.

MediaTek has been shunned by market participants as it was seen to be affected by the tapering demand for handset and the slower replacement cycle. MediaTek, however, recognized its smartphone revenue dependence and diversified into segments, which offer more growth. We believe that new product cycles involving the Internet of Things and 5G will drive MediaTek's margin improvement and core profit growth over the next two years. Its first-quarter results with better-than-expected gross margin due to an improving mix and cost structure indicate a turnaround story for MediaTek.

Industrials Remain Top Relative Overweight

Industrials and business services remain our biggest sector overweight in relative terms. We established new positions in CCR, which we previously discussed, and added to existing names which have either strong downside support in the form of healthy dividends and a strong balance sheet or improving prospects and the potential for upside gains such as Barloworld, SINOPEC Engineering, and Fosun International. We also increased exposure to Promotora y Operadora de Infraestructura (PINFRA), one of the largest transport infrastructure operators in Mexico. It has built a well-diversified portfolio of 20 toll roads and two port concessions over the years and has accumulated a significant net cash position that should enable it to withstand a volatile macro environment or capture near-term growth opportunities. Aside from generating positive free cash flow, PINFRA has a track record of compounding the business over the last 10 to 15 years, pays out dividends, and has a secure visible earnings stream. While there may be an overhang on its capital allocation, the company undertook an accretive buyout of a subsidiary.

We exited Lonking, a Chinese maker of construction and machinery equipment with the bulk of its profits coming from forklifts and wheel loaders. We bought the stock amid expectations it will benefit from recovering industrial and construction activity and it is one company that has consistently returned capital. We think, however, that the cycle for earth-moving equipment like wheel loaders is ending and demand is shifting more to concrete pumps and cranes. In our view, the investment thesis on equipment cycle and dividend yield has played out, and hence, we eliminated the position.

We Favor Banks Seen as Beneficiaries of Improving Corporate Spending

We view corporate banks across EM as a pocket of opportunity as we believe that corporate spending is making a comeback. Mainstream EM investors usually favor banks with higher quality retail franchises, but with fundamentals improving and attractive valuation, there is value in owning corporate banks. We increased our position in South Africa's Nedbank, which was mentioned earlier.

Financials remain our biggest sector overweight in absolute terms, but for the quarter we reduced our relative overweight to the sector as we eliminated less liquid smaller capitalized names such as BRD-Group Societe in Romania. BRD has been supported by a good dividend but we do not see any future developments to spur a rerating.

Instead, we initiated a position in PKO Bank Polski, the largest universal bank in Poland, with a strong capital position, which should provide downside support. Poland is one of the most fragmented banking industries in Central Eastern Europe and consolidation can be a powerful multi-year theme that may possibly benefit PKO.

Sectors

Total
Sectors
11
Largest Sector Financials 33.54% Was (31-Aug-2019) 33.92%
Other View complete Sector Diversification

Monthly Data as of 30-Sep-2019

Indicative Benchmark: MSCI Emerging Markets Index

Top Contributor^

Materials
Net Contribution 0.36%
Sector
-0.06%
Selection 0.42%

Top Detractor^

Industrials & Business Services
Net Contribution -1.36%
Sector
-0.16%
Selection
-1.20%

^Relative

Quarterly Data as of 30-Sep-2019

Largest Overweight

Financials
By8.84%
Fund 33.54%
Indicative Benchmark 24.69%

Largest Underweight

Communication Services
By-7.27%
Fund 4.29%
Indicative Benchmark 11.57%

Monthly Data as of 30-Sep-2019

30-Sep-2019 - Ernest Yeung, Portfolio Manager,
We increased our underweight in information technology as we exited Lenovo after our investment thesis played out. The company delivered on cost-cutting measures and returns have significantly improved. However, Lenovo’s focus switched to increasing market share even after it was hit by the U.S.-China trade dispute. While we think that the trade conflict will be resolved, the “technology war” will be an overhang for the stock. In financials, we reduced our overweight position after selling Saudi British Bank. Most of the positive impetus for buying the stock had run their course since we bought the stock two years ago.

Countries

Total
Countries
19
Largest Country China 34.75% Was (31-Aug-2019) 34.37%
Other View complete Country Diversification

Monthly Data as of 30-Sep-2019

Indicative Benchmark: MSCI Emerging Markets Index

Top Contributor^

South Korea
Net Contribution 0.85%
Country
0.10%
Selection 0.74%

Top Detractor^

China
Net Contribution -1.13%
Country
-0.06%
Selection
-1.07%

^Relative

Quarterly Data as of 30-Sep-2019

Largest Overweight

South Africa
By5.07%
Fund 9.78%
Indicative Benchmark 4.72%

Largest Underweight

Taiwan
By-6.65%
Fund 4.83%
Indicative Benchmark 11.48%

Monthly Data as of 30-Sep-2019

30-Sep-2019 - Ernest Yeung, Portfolio Manager,
We started a position in a Chinese automaker, which fits into our search for state-owned enterprises undergoing significant reforms. Its management implemented a share incentive programme last year to align its interests closer to shareholders. The company is also closing idle plants and has a healthy balance sheet and positive free cash flow. Moreover, we see it benefitting from the big disparity between domestic and foreign brands in China. The addition of this new stock to the portfolio increased our relative overweight in China and decreased our relative underweight in consumer discretionary.

Team (As of 31-Aug-2019)

Ernest C.  Yeung

Ernest Yeung is a portfolio manager for the Emerging Markets Discovery Equity Strategy at T. Rowe Price. He was the co-portfolio manager for the International Small-Cap Equity Strategies from 2009 to 2014. Mr. Yeung is a vice president of T. Rowe Price Group, Inc. and T. Rowe Price Hong Kong Limited.

Mr. Yeung has 17 years of investment experience, 15 of which have been with T. Rowe Price. Prior to joining the firm in 2003, he was an analyst with HSBC Asset Management in London.

Mr. Yeung earned an M.A., with honours, in economics from Cambridge University. He also has earned the Chartered Financial Analyst designation and the Investment Management Certificate. 

  • Fund manager
    since
    2015
  • Years at
    T. Rowe Price
    16
  • Years investment
    experience
    18
Nick Beecroft

Nicholas Beecroft is a portfolio specialist in the Equity Division at T. Rowe Price, representing the firm's global equity strategies. He is a vice president of T. Rowe Price Group, Inc. and T. Rowe Price International Ltd.

Mr. Beecroft has 18 years of investment experience, 14 of which have been with T. Rowe Price. He joined the firm in London in 2005 and spent many years working with our emerging markets equity team. Mr. Beecroft has been based in Hong Kong since 2011. Prior to joining T. Rowe Price, he was an investment analyst at Mercer Investment Consulting.

Mr. Beecroft earned a B.A, with honours, in contemporary European studies from the University of Southampton. He also has earned the Chartered Financial Analyst designation.

  • Years at
    T. Rowe Price
    14
  • Years investment
    experience
    18

Fee Schedule

Share Class Minimum Initial Investment and Holding Amount Minimum Subsequent Investment Minimum Redemption Amount Sales Charge (up to) Investment Management Fee (up to) Ongoing Charges
Class A $15,000 $100 $100 5.00% 190 basis points 2.07%
Class I $2,500,000 $100,000 $0 0.00% 100 basis points 1.10%
Class Q $15,000 $100 $100 0.00% 100 basis points 1.17%

Please note that the Ongoing Charges figure is inclusive of the Investment Management Fee and is charged per annum.

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GIPS® Information

T. Rowe Price ("TRP") claims compliance with the Global Investment Performance Standards (GIPS®). TRP has been independently verified for the twenty one- year period ended June 30, 2017 by KPMG LLP. The verification report is available upon request. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm's policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. Verification does not ensure the accuracy of any specific composite presentation.

TRP is a U.S. investment management firm with various investment advisers registered with the U.S. Securities and Exchange Commission, the U.K. Financial Conduct Authority, and other regulatory bodies in various countries and holds itself out as such to potential clients for GIPS purposes. TRP further defines itself under GIPS as a discretionary investment manager providing services primarily to institutional clients with regard to various mandates, which include U.S, international, and global strategies but excluding the services of the Private Asset Management group.

A complete list and description of all of the Firm's composites and/or a presentation that adheres to the GIPS® standards are available upon request. Additional information regarding the firm's policies and procedures for calculating and reporting performance results is available upon request

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