Brandes Emerging Markets Value Fund - Bridgehouse Asset Managers
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FIRST QUARTER – MARCH 2019 PAGE 1
Brandes Emerging Markets Value Fund
Fund Commentary
In the first quarter, the Brandes Emerging Markets Value Group and Singapore-based electronics manufacturing positive. As Brandes LP has shared in the past, it views the
Fund underperformed its benchmark, the MSCI Emerging services provider Flextronics. deal favourably as it crystalizes the value of Embraer’s
Markets Index. commercial segment ahead of any need for regional jet
volume recovery, partially mitigating the risks related to the
Performance Detractors capital expenditure cycle of airlines (Embraer’s customers).
Positive Contributors Positive sentiment shift regarding trade negotiations The deal also offsets the competitive threat from
between China and the United States boosted Chinese Airbus/Bombardier and provides a closer relationship with
Holdings in real estate and communication services drove Boeing, which Brandes LP believes creates an upside
stocks in general. Consequently, while the majority of the
performance. potential for both Embraer’s defense and business jet
Fund’s China-based holdings appreciated in the quarter, an
Mexico-based Fideicomiso PLA Administradora Industrial underweight allocation to companies in the country hurt segments.
(known as Terrafina), Fibra Uno and Fibra Macquarie Mexico relative returns.
lifted returns as these income-oriented securities benefited
from the U.S. Federal Reserve’s hints that there may be no
Meanwhile, tightening financial conditions combined with Select Buy & Sell Activity
heightened uncertainty surrounding local elections weighed
further interest rate hikes in 2019. The Emerging Markets Investment Committee initiated a
on the Fund’s holdings in Turkey. The Fund’s allocation there
Among the Fund’s communication services holdings, position in Shanghai Pharmaceuticals (SPH).
remains measured to three companies: banks Akbank and
notable contributors included Indonesian XL Axiata, Chilean Garanti Bankasi, as well as real estate firm Emlak Konut. With the acquisition of Cardinal Health China in 2018, SPH
Empresa Nacional de Telecomunicaciones (Entel) and Greek is the second-largest health care distributor in China by
Other detractors included India-based electric utility
Hellenic Telecommunications. Investors welcomed XL’s market cap and sales. It is also among the top ten largest
Reliance Infrastructure, Mexican cement producer Cemex,
encouraging earnings growth and favourable outlook. pharmaceutical manufacturers in China by market cap. The
and Brazil-based regional jet manufacturer Embraer.
Similarly, Entel’s shares rose on strong 2018 results driven company operates in three main segments: distribution
by improved profitability and margins in Chile and Peru. Embraer has received sign-off for its deal with Boeing from (65% of 2017 earnings before interests and taxes or EBIT),
most of the required stakeholders, including the Brazilian production/manufacturing (about 30% of 2017 EBIT) and
Select financial holdings also aided performance, namely
government and shareholders. The deal is expected to close retail.
Panama-based Banco Latinoamericano, Russian Sberbank
by the end of this year, assuming anti-trust regulators
and Colombia’s Grupo Aval. Other contributors included SPH’s shares did not fare well in 2018, as investors were
approve it. In the quarter, Embraer’s shares declined as the
China-based health insurer Genertec Universal Medical worried about ongoing and potential regulatory changes
company missed revenue and net income forecasts.
that will likely put pressure on drug prices. Negative
Nevertheless, Brandes LP’s valuation thesis remains
The information contained herein is subject to important disclosures and disclaimers contained in the Disclosure
Statement on the last page of this document. This document is not complete without such Disclosure Statement.
All figures shown are in U.S. dollars.FIRST QUARTER – MARCH 2019 PAGE 2
Brandes Emerging Markets Value Fund
sentiment from the U.S.-China trade war and the slowing The investment committee exited the Fund’s positions in
Chinese economy intensified the uncertainty in SPH’s Russian Lukoil and India-based Reliance Infrastructure.
Current Positioning
outlook. Continuing the trend from the second half of 2018, Brandes
A number of recent developments led to a reconsideration of LP trimmed a number of its positions in Brazil given their
Brandes LP believes SPH is well positioned to benefit from Brandes LP’s investment thesis for Reliance Infrastructure strong performance. Brazilian companies still represented
the potential secular growth in Chinese health care and the Fund’s eventual divestment. Most notably, during the Fund’s largest country weighting at quarter end, with
spending. Its strong footing in the distribution segment the second half of 2018, Reliance sold its Mumbai utility to South Korea close behind. The Fund maintained major
should help it gain market share as the industry continues Adani Transmission. The utility had been Reliance’s main underweights in China, Taiwan and India.
to consolidate to drive scale and efficiency gains. Currently, earnings contributor and was sold to pay down debt. Prior
the top five Chinese health care distributors only account to the sale, Brandes LP’s investment case for Reliance Changes to the Global Industry Classification Standards
for 34% of the market, compared to the 90% market share Infrastructure was supported by the valuation of its (GICS) undertaken by MSCI in the fourth quarter of 2018
attributed to the top three players in the United States. electricity assets, including its stake in publicly listed affected the Fund’s relative weightings from a
Furthermore, Brandes LP feels that the market has Reliance Power. Brandes LP also anticipated some upside sector/industry basis. As has been the case for a number of
underappreciated SPH’s manufacturing and retail potential from its significant balance of financial assets. years, the Fund remained underweight the information
operations. Brandes LP likes the opportunity to own the However, the disposal of the Mumbai utility meaningfully technology sector as of March 31, although the underweight
drug-manufacturing segment at what it considers reduced Reliance’s earnings power and led to a was not as significant as before, due to the reclassification
attractive headline valuations. deterioration in the quality of its net asset value (NAV), of large technology companies (e.g., Alibaba, Tencent,
which now consists primarily of financial holdings and Baidu) into the communication services sector. The Fund’s
In addition to the Chinese government’s priority to manage allocations to the consumer discretionary and real estate
contingent assets.
health care costs given that it is the single largest payer, sectors continued to represent notable overweights.
other factors Brandes LP took into consideration when Furthermore, the company went into a technical default on
purchasing SPH’s shares were its state ownership (33.6% a small portion of its debt for a few weeks until it received At quarter end, the Fund’s largest sector weighting was in
stake as of March 31), the pricing pressure in its the proceeds from the utility sale, raising immediate financials, although it was underweight the benchmark
manufacturing and distribution segments, and the concerns about the liquidity and recoverability of its because of the its lower exposure to banks in China, Brazil
financing of receivables from hospitals. Brandes LP believes remaining financial assets. Brandes LP’s loss of confidence and India.
these risks have been more than accounted for in SPH’s in the company, combined with its poor transparency, As a firm, Brandes LP continues to see significant value
share price. triggered the decision to exit the position. potential in emerging markets equities, as it believes
Anther new addition in the quarter was a company that valuations remain appealing from both an absolute and a
Brandes LP knows very well having owned it in the past, relative standpoint. Brandes LP’s enthusiasm for the asset
Austria-domiciled Erste Group Bank, which operates mainly class is highlighted by its allocation to emerging
in emerging European countries. markets businesses in Brandes global funds,
The information contained herein is subject to important disclosures and disclaimers contained in the Disclosure
Statement on the last page of this document. This document is not complete without such Disclosure Statement.
All figures shown are in U.S. dollars.FIRST QUARTER – MARCH 2019 PAGE 3 Brandes Emerging Markets Value Fund which — as of March 31 — was at or near the peak levels achieved over the past decade. About Brandes LP In the 40-plus years since Brandes LP was founded, its goal has remained the same: pursue above-market gains to help investors move closer to their long-term investment objectives. Brandes LP believes that its unwavering commitment to value investing will lead it to attractively priced, fundamentally sound companies worthy of inclusion in the Fund. The information contained herein is subject to important disclosures and disclaimers contained in the Disclosure Statement on the last page of this document. This document is not complete without such Disclosure Statement. All figures shown are in U.S. dollars.
FIRST QUARTER – MARCH 2019 PAGE 4
Brandes Emerging Markets Value Fund
Contribution Analysis (relative to benchmark)
LAST QUARTER LAST 12 MONTHS
INDUSTRY INDUSTRY
Top 5 Contributors % Top 5 Detractors % Top 5 Contributors % Top 5 Detractors %
Equity Real Estate Inv. Trusts (REITs) 1.21 Internet & Direct Marketing Retail -1.71 Elect. Equip., Instr. & Components 1.23 Banks -1.13
Wireless Telecom. Services 1.10 Interactive Media & Svcs. -0.70 Food & Staples Retailing 1.09 Construction Materials -0.85
Banks 0.35 Aerospace & Defense -0.59 Interactive Media & Svcs. 1.05 Equity Real Estate Inv. Trusts (REITs) -0.69
Diversified Consumer Services 0.30 Semicond. & Semicond. Equip. -0.46 Wireless Telecom. Services 0.98 Aerospace & Defense -0.66
Elect. Equip., Instr. & Components 0.29 Real Estate Mgmt & Development -0.37 Textiles, Apparel & Luxury Goods 0.69 IT Services -0.61
COUNTRY COUNTRY
Top 5 Contributors % Top 5 Detractors % Top 5 Contributors % Top 5 Detractors %
Mexico 0.92 China -3.88 China 3.14 Turkey -2.87
Indonesia 0.72 Taiwan -0.54 South Korea 1.68 India -1.10
Russia 0.53 India -0.53 Indonesia 0.83 Argentina -0.93
Singapore 0.37 South Africa -0.28 Russia 0.64 United Kingdom -0.64
Colombia 0.32 South Korea -0.25 South Africa 0.61 Mexico -0.49
COMPANY COMPANY
Top 5 Contributors % Top 5 Detractors % Top 5 Contributors % Top 5 Detractors %
Fibra Uno Admin. SA ORD 0.59 Embraer S.A. -0.60 Bosideng Intl. Hldgs. Ltd. 1.01 Turkiye Vakiflar Bank -1.18
XL Axiata Tbk PT ORD 0.50 Reliance Infrastructure Ltd. -0.24 PT Bank Rakyat Indonesia (Persero) T 0.91 Emlak Konut Gayrimenkul Yati -1.06
Fideicomiso PLA Admin. Industrial 0.42 Samsung Electronics Ltd. -0.23 Petroleo Brasileiro SA Pfd 0.68 YPF SA ADR -0.93
Sberbank 0.39 Cemex SA de CV ADR -0.15 China Mobile Ltd. 0.59 Cemex SA de CV ADR -0.89
Flextronics Intl. Ltd. 0.37 Absa Group Limited -0.10 Cia Brasileira De Dis Pref 0.59 Reliance Infrastructure Ltd. -0.73
The information contained herein is subject to important disclosures and disclaimers contained in the Disclosure
Statement on the last page of this document. This document is not complete without such Disclosure Statement.
All figures shown are in U.S. dollars.FIRST QUARTER – MARCH 2019 PAGE 5
Brandes Emerging Markets Value Fund
Quarterly Additions/Deletions
Additions Deletions
Erste Group Bank AG Bosideng Intl. Hldgs. Ltd.
America Movil Lukoil ADR
Shanghai Pharmaceuticals Reliance Infrastructure Ltd.
Yue Yuen Industrial Hldg.
The information contained herein is subject to important disclosures and disclaimers contained in the Disclosure
Statement on the last page of this document. This document is not complete without such Disclosure Statement.
All figures shown are in U.S. dollars.FIRST QUARTER – MARCH 2019 PAGE 6
Brandes Emerging Markets Value Fund
FOR DISTRIBUTION TO INVESTORS BY REGISTERED DEALERS ONLY. The words “may,” “could,” “should,” “would,” “suspect,” “outlook,” “believe,” “plan,”
“anticipate,” “estimate,” “expect,” “intend,” “forecast,” “objective” and similar expressions are
Bridgehouse Asset Managers® is a trade name of Brandes Investment Partners & Co. intended to identify forward-looking statements. Forward-looking statements are not guarantees
(Bridgehouse). Brandes Investment Partners® is a registered trademark of Brandes Investment of future performance. Forward-looking statements involve inherent risks and uncertainties about
Partners, L.P. (Brandes LP), which is an affiliate of Bridgehouse. Bridgehouse is the manager of general economic factors, so it is possible that predictions, forecasts, projections and other
the Bridgehouse Funds and has hired Brandes LP, Lazard Asset Management (Canada), Inc. forward-looking statements will not be achieved. You are cautioned to not place undue reliance on
(Lazard), Morningstar Associates Inc. (Morningstar) and Sionna Investment Managers Inc. (Sionna) these statements as a number of important factors could cause actual events or results to differ
as portfolio sub-advisors (collectively, the “portfolio sub-advisors”) in respect of the Bridgehouse materially from those expressed or implied in any forward-looking statement. Before making any
Funds. The foregoing reflects the thoughts, opinions and investment strategies of Bridgehouse investment decisions, you are encouraged to consider these and other factors carefully. Where
and/or the portfolio sub-advisors and is subject to change at their discretion, based on changing applicable, please note that MSCI has not approved, reviewed or produced this report, makes no
market dynamics or other considerations. Bridgehouse and the portfolio sub-advisors have taken express or implied warranties or representations and is not liable whatsoever for any data in the
reasonable steps to provide accurate and current data. The data has been gathered from sources report. You may not redistribute the MSCI data or use it as a basis for other indices or investment
believed to be reliable, however Bridgehouse and/or the portfolio sub-advisors are not responsible products.
for any errors or omissions contained herein. Indices are unmanaged and cannot be directly
invested into. Securities mentioned herein are not to be construed as a recommendation to buy or Published May 9, 2019
sell. Past performance is not a reliable indicator of future results. This material has been provided
by Bridgehouse and is for informational purposes only. It is not intended to provide legal,
accounting, tax, investment, financial or other advice and is not to be construed as a
recommendation to buy or sell. Commissions, trailing commissions, management fees and
expenses all may be associated with mutual fund investments. Please read the prospectus before
investing. Mutual funds are not guaranteed, their values change frequently and past performance
may not be repeated. This report may contain forward-looking statements about the economy, and
markets; their future performance, strategies or prospects. Units and shares of the Bridgehouse
Funds are available through registered dealers only and are not available through Bridgehouse.
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