S C H A F E R C U L L E N C A P I T A L M A N A G E M E N T Emerging Markets High Dividend Q1 2018 Commentary Market Review: The first quarter of 2018 marked a shift from the meteoric rise of 2017, with volatility picking up globally but Emerging Markets (EM) assets proving resilient. After a strong January, the market corrected in February and March, but EM stocks still closed the quarter up 1.28%. This gain compared to declines in both the Developed Markets (MSCI EAFE) and United States (S&P 500) indices, which were down 1.58% and 0.76%, respectively, during the quarter. These moves were in response to a variety of conditions across a quarter characterized by higher volatility, including fears of a US-China trade war, a weaker dollar, an increase in the oil price, and a high-profile selloff in select technology stocks. Inflows to EM equity funds continued to be strong and reached their highest first quarter level since 2001, while EM fixed income flows were also positive. Latin America (+8.11%) outperformed Asia (+0.75) and EMEA (- 0.85%). Within EM, Value narrowly outperformed Growth. Commodities were mixed during the quarter. Brent crude rallied almost seven percent in anticipation of OPEC extending the supply cut and closed at $70.27, the highest level since late 2014. Conversely, the S&P Industrial Metals index traded down 7.15% led by weakness in aluminum, steel and copper as potential tariffs and trade war tensions were headwinds. The US dollar weakened in the quarter, with the Dollar Index (DXY) trading down 2.33%. Other key geopolitical events included ongoing NAFTA renegotiations, Zuma s resignation as South African president, escalating UK-Russia tensions amid a spy poisoning, and one more Fed rate hike in March. The top major EM country performers YTD in 2018 were Brazil, Russia and Thailand. Brazil was supported by improving economic data amidst low interest rates, declining inflation, strengthening external accounts, and the strong oil price. Several more business-friendly candidates announced their entrance into the presidential race, with the election slated for October 2018. The energy and financials sectors were the biggest winners in Brazil and together with Russian energy, these were the top three major market sector performers in the quarter. Russia also rallied on account of the continued strength in oil, which is the country s largest export, as well as the political status quo as Putin was re-elected with expectedly high margin and participation rates. In Thailand, strength in tourism and exports has led to growth in manufacturing and economic expansion is ahead of expectations. The bottom country performers were the Philippines, Poland and Indonesia. The Philippines saw a weakening currency on inflation concerns and heavy foreign selling. Poland continued its tussle with the European Union over proposed anti-democratic justice reform. In Indonesia, where every sector saw losses, bond yields rose as the central bank reiterated that the country faces risks from Fed Funds hikes, consumer confidence decelerated, and the market saw equity outflows. The top EM sectors for the quarter were Energy, Health Care and Financials. The bottom performers were Consumer Discretionary, Telecommunications and Real Estate. Performance: In the first quarter of 2018, the Emerging Markets High Dividend composite returned 3.4%, net of fees, versus 1.4% for the MSCI EM Index. The strategy outperformed the benchmark in the first quarter. As is consistent with its historical performance pattern, the strategy participated meaningfully in January s strong surge, while outperforming in the down months of February and March. 1 of 7
Emerging Markets High Dividend Returns vs. Benchmark YTD 1 Yr 3 Yr 5 Yr 10 Yr Since Incept* EM High Dividend (gross) 3.6 20.4 6.6 4.1 5.5 9.8 EM High Dividend (net) 3.4 19.2 5.5 2.9 4.2 8.4 MSCI Emerging Markets Index 1.4 24.9 8.8 5.0 3.0 6.7 *December 31, 2005. Performance for periods greater than 1 year is annualized. Portfolio Attribution: Sector Attribution Source: Research, 3/31/2018. On a sector basis, the strategy s top contributors included Real Estate and Energy, with both stock selection and overweight allocation contributing. The strategy s positioning within the Information Technology sector was another top contributor. Conversely, sector weighting to Financials and Telecommunications sectors, where the strategy is under- and overweight, respectively, were detractors from relative performance. Unlike during the 2017 EM rally, the internet subsector was not a meaningful performance factor in the first quarter, as it performed broadly in line with the market overall. 2 of 7
Country Attribution Source: Research, 3/31/2018. On a country basis, the strategy s overweight positioning in Russia was a contributor. In China, where the strategy is modestly underweight, stock selection was also a large contributor to performance. An underweight allocation to South Africa, which was an underperformer, was also a contributor. The top country detractors were South Korea and Brazil. In Brazil, which was the top-performing country in the quarter, the strategy is slightly overweight, but has most exposure through the lower-beta Telecommunications, Utilities and Materials sectors, which didn t participate fully in the rally. In South Korea, which underperformed the broader EM market during the quarter, the strategy s stock selection detracted. Top contributors in the quarter were Times Property (China/ HK, Real Estate), ITMG (Indonesia, Materials), Xinyi Glass (China/HK, Materials), and Sinopec (China/ HK, Energy). Top detractors were SK Telecom (South Korea, Telecommunications), ICICI Bank (Financials, India), and PT Telecom (Indonesia, Telecommunications). 3 of 7
Market Outlook: EM equities demonstrated an unusual trading pattern in the first quarter of 2018. Despite the barrage of global news flow, such as the increase in trade tensions, the meltdown in the US tech sector, and the corresponding pickup in market volatility, EM equities outperformed those in the developed markets (DM) and with lower realized volatility. EM performed strongly on both a relative and absolute basis in the first quarter with every EM region outperforming its DM counterpart. While this resilience may be temporary, it raises the question: what may have changed? We believe that a fundamental improvement in the macroeconomic environment in EM countries warrants more predictable and less volatile returns. Furthermore, the accompanying robust operating environment and fundamentals should benefit our portfolio companies. Historically, EM equities have been considered a risky asset class for reasons related to weaknesses in their home countries. These included commodity price dependence, reliance on external funding sources, trade deficits, unstable government regimes and policies, and restrictions on capital flows. While the progression in each country is distinct, the improvements here have been broad. For example, EM carry trade returns have come down materially over the last two years, which is positive for the equity investment environment as an indication that investors are demanding lower EM risk premiums. The Fed has hiked rates, whereas the EM world has seen low inflation and stable current accounts, enabling many EM central banks to cut rates rather than follow the Fed. Over the longer term, it has become increasingly common for EM central banks to target inflation and to allow their exchange rates to float freely. These structural developments suggest that EM central banks have greater discretion to pursue policy objectives. Furthermore, these countries are positioned even better than in past rate hike cycles, in which they actually rallied strongly on average. The chart below indicates that EM stocks returned an average of 38% during the five most recent rate hike cycles, with positive performance across all cycles except the 1994 cycle. In this case, the rate hike followed a long rally in EM equities and the pace of hikes surprised global markets, rising 3% in just one year to reach 6.0% in February 1995. While rates may indeed continue to increase from current levels, the magnitude of the increase is likely to be modest. Hence, if history is a guide, rising rates should not pose a risk to EM stocks. Emerging Market Resilience During Prior Fed Rate Hike Cycles 1 Source: Source: Research, February 2018. 4 of 7
In light of these structural improvements in the health of EM economies, we remain broadly bullish for EM stocks, especially EM value stocks. This is because we anticipate a broadening of the EM rally, which until recently was dominated by large cap growth stocks, particularly technology and internet stocks. Furthermore, while rising interest rates should not be a problem for EM stocks overall, they may impact some stocks more than others and, in general, may be a catalyst for value stocks to outperform. A principal reason for this is that the earnings streams of growth stocks are weighted further out into the future, so that higher interest rates erode the present value of these earnings and warrant multiple compression. Separately, although we haven t yet seen technology stocks sell off in EM to the extent we have observed in DM, the noise around increasing regulation and censorship of internet businesses is another relevant risk to EM growth stocks given that the internet stocks represents over 11% of the benchmark weight. More importantly, the earnings of many value stocks such as Financials benefit from higher interest rates. Value stocks such as those in the industrial sector, which have been overlooked given the frothiness of tech valuations and which have increasing pricing power are also beneficiaries. An increase in protectionist rhetoric, which has the potential to push up prices even if tariff announcements are eventually softened, is broadly inflationary and EM value stocks in the materials and energy sectors are well positioned to benefit from this environment. It would be no surprise to see EM value stocks outperform growth stocks since far more value than growth stocks are relative beneficiaries from the impact of rising interest rates. Beyond the impact of rising rates, powerful policy-related reforms such as the Supply Side reforms emanating out of China are also a long-term catalyst for the earnings growth of more value stocks than growth stocks. The fund delivered on its objectives in the first quarter, and we see the strategy as particularly wellpositioned in what is shaping up to be a year of higher volatility across equities. We believe that fundamentals are the long-term drivers of equities performance and that they are currently quite robust. The MSCI EM index currently trades at just 12.2x forward earnings estimates, with projected earnings growth of over 14% on average over the next three years. With the overall valuation of the MSCI EM index being so favorable, yet dominated in recent years by the outperformance of growth stocks, the EM value stocks offer particularly attractive valuations relative to their history and in light of the aforementioned potential catalysts. Our value strategy offers excellent exposure to this opportunity as the portfolio trades at a meaningful discount to the overall market at just 11.1x forward earnings, and especially with regard to the dividend yield which is over 5.0%. The attractive valuation and increase in portfolio dividend yield (despite the considerable price appreciation in the portfolio in 2017) has been a result of the continual implementation of our value investment discipline. The high dividend yield is also the result of the strong earnings growth and balance sheet strength that has allowed our portfolio companies to demonstrate their commitment to shareholders by paying higher dividends, including several sizable special dividends. These trends exist across diverse industries and geographies providing ample opportunity for our bottom-up investment approach. As the market moves forward, we will continue to adhere to our long-term, fundamentals-driven value investment discipline which should deliver meaningful outperformance to our investors while taking on less risk. Thank you for your continued support and please do not hesitate to contact us with any questions. Best Regards, Schafer Cullen Capital Management, Inc. 5 of 7
Portfolio Exposure and Characteristics as of 3/31/2018 Sectors MSCI Top 10 Countries MSCI Consumer Discretionary 10.1 9.5 China / Hong Kong 30.3 29.8 Consumer Staples 6.8 6.5 Taiwan 13.1 11.8 Energy 8.1 7.2 South Korea 9.9 15.1 Financials 23.1 24.0 Brazil 8.7 7.5 Health Care 1.5 2.8 Russia 8.7 3.6 Industrials 4.8 5.2 Indonesia 5.5 2.0 Information Technology 15.6 27.8 India 5.2 8.1 Materials 13.0 7.3 South Africa 4.1 6.7 Real Estate 8.0 2.8 Mexico 3.6 2.9 Telecommunication Services 6.7 4.6 Greece 2.3 0.3 Utilities 2.3 2.4 Total 100.0 100.0 Regions MSCI Top 10 Holdings Asia Pacific 65.3 72.8 Taiwan Semiconductor 3.8 EMEA 20.8 14.0 AIA Group 3.6 Latin America 13.8 12.4 Xinyi Glass 3.1 Other 0.1 0.8 Times China Holdings 3.0 Lukoil 3.0 SINOPEC 3.0 Advanced Semiconductor 2.9 Vale 2.7 Nine Dragons Paper 2.7 ICICI Bank 2.6 Portfolio Characteristics Price/Earnings Forward Dividend Yield NTM LT DPS Growth LT EPS Growth Weighted Avg. Market Cap ($B) Emerging Markets High Dividend 10.9 4.9 9.1 11.4 50.9 MSCI EM Index 12.2 2.9 9.5 11.0 101.7 6 of 7
1 Performance numbers shown in the table represent the annualized total return for the period starting with the announcement of the first rate hike and ending with the announcement of the last rate hike during each cycle. These dates include: 08/30/1977-02/15/1980, 09/26/1980-05/05/1981, 09/04/1987-02/24/1989, 02/04/1994-02/01/1995, 06/30/1999-05/16/2000, 06/30/2004-06/29/2006, 12/17/2015-12/14/2017. Disclosure: Schafer Cullen Capital Management ( or the Adviser ) is an independent investment advisor registered under the Investment Advisers Act of 1940. This information should not be used as the primary basis for any investment decision nor should it be considered as advice to meet your particular investment needs. The portfolio securities and sector weights may change at any time at the discretion of the Adviser. It should not be assumed that any security transactions, holdings or sectors discussed were or will be profitable, or that future recommendations or decisions will be profitable or equal the investment performance discussed herein. Investing in equity securities is speculative and involves substantial risk. Past performance is no guarantee of future results. Market conditions can vary widely over time and can result in a loss of portfolio value. Individual account performance results will vary and will not match that of the composite or model. This variance depends on factors such as market conditions at the time of investment, and / or investment restrictions imposed by a client which may cause an account to either outperform or underperform the composite or model s performance. A list of all recommendations made by within the immediately preceding period of not less than one year is available upon request. The strategy depicted in this report has been managed in accordance with the investment objectives of the strategy as determined by the Adviser. The Adviser has selected benchmarks, which in their opinion closely resemble the style of the securities held in the composite or model portfolio of the strategy (e.g. large cap value, small cap value, international, etc.). The securities held in the composite or model are actively managed while the benchmark index is not. Investors should be aware that the Adviser makes no attempt to match the portfolio securities, or the security weightings of the benchmark. The composite or model s performance will be affected greater by the price movements of individual securities as the composite or model is more concentrated, generally less than 100 securities, while a comparative benchmark will generally have between 500 and 2,500 securities where individual security price movements have a lesser affect. An individual cannot invest directly in an index. Schafer Cullen Capital Management, Inc. makes no representation that the use of this material can in and of itself be used to determine which securities to buy or sell, or when to buy or sell them; makes no representation, either directly or indirectly, that any graph, chart, formula or other device being offered herein will assist any person in making their own decisions as to which securities to buy, sell, or when to buy or sell them. All opinions expressed constitute Schafer Cullen Capital Management s judgment as of the date of this report and are subject to change without notice. 7 of 7