RS Emerging Markets Small Cap Fund C Is Not Off To A Good Start In 2016

| About: Victory Sophus (RSMGX)

Summary

The RS Emerging Markets Small Cap Fund C generated a -7.53% loss and was ranked 99th in the Diversified Emerging Markets category.

The fund is overexposed to the industrial and consumer discretionary sectors. Both sectors have struggled according to global sector ETFs and do not have good outlooks going forward.

The fund's expense ratio is higher than its benchmark, making it less attractive given its below-average performance.

The fund has too many holdings in the poor-performing emerging market country of China. 80% of the fund's holdings in China are in the red.

The inception date of the RS Emerging Markets Small Cap Fund C (MUTF:RSMGX) was 1/31/2014. In 2015, the fund generated a -6.55% loss for the overall year. However, the fund still managed to finish in the top 10 in the Diversified Emerging Markets category in a year that was rough for emerging markets.

This year, the fund is ranked 99th in the Diversified Emerging Markets category with an YTD return of -7.53%. On the other hand, the iShares MSCI ACWI ex-U.S. Index (NASDAQ:ACWX) has a -6.20% YTD return, and the Diversified Emerging Markets category has a 0.75% YTD return.

When one looks at RSMGX's market capitalization statistics, it appears that the fund has tried to differentiate itself from the rest of the pack by not seeking out giant-cap stocks. The benchmark and the Diversified Emerging Markets category average have over 57% of their weightings invested in the giant-cap category.

Meanwhile, RSMGX has invested next to nothing in giant caps. As you can see, the fund has a significant portfolio weight advantage in mid-cap and small-cap stock weightings. The chart can be seen below:

Size

% of Portfolio

Benchmark

Category Avg.

Giant

0.09

57.50

59.22

Large

19.61

31.46

21.34

Medium

47.01

10.65

15.56

Small

28.03

0.40

3.81

Micro

5.25

0.00

0.0

Click to enlarge

A major red flag can be seen in the fund's cash flow growth % as opposed to its benchmark and category average. Given that this metric is a strong detector of future sales and net income, this significant deficit is not the news that investors want to hear. Here are the sobering results below:

Size

% of Portfolio

Benchmark

Category Avg.

Cash Flow Growth %

-26.84

8.05

1.86

Click to enlarge

In terms of sector weightings, the fund has unfavorable sector advantages in the consumer cyclical (discretionary) and industrial sectors. The consumer discretionary sector is the second worst-performing sector in the foreign and global markets. The iShares Global Consumer Discretionary ETF (NYSEARCA:RXI) has a -7.8% YTD return while the SPDR S&P International Consumer Discretionary Sector ETF (NYSEARCA:IPD) has a -10.6% YTD return.

There is reason to believe that the consumer discretionary sector may continue to have trouble moving forward in the emerging markets. According to the MSCI Emerging Markets Consumer Discretionary Index fact sheet for May 2016, the emerging market consumer discretionary sector's forward P/E is expected to decline to 13.23. At the moment, the current P/E is 17.07.

RSMGX has a double-digit advantage in portfolio weight in the industrials sector. This sector has not fared very well globally. It is in the middle of the pack in terms of YTD return in the foreign and global sectors. The iShares Global Industrials ETF (NYSEARCA:EXI) has a -1.6% YTD return while the SPDR S&P International Industrial Sector ETF (NYSEARCA:IPN) has a -3.4% YTD return.

Proof of the struggles of the industrials sector in the emerging market space can be seen in the Dow Jones Emerging Markets Titans Index. As of May 2016, the fund has an anemic 0.05% return as well as a one-month YTD return of -2.57%.

Additionally, further declines for the industrial sector may come. The fund's forward P/E is projected to be 12.35. This is a decline from the firm's trailing P/E of 14.01.

The epicenter of the industrial sector struggles in the emerging markets is China. After all, the Global X China Industrial ETF (NYSEARCA:CHII) has a -12.5% YTD return.

Here are the fund's portfolio weight advantages in these two sectors:

Sector

% Stocks

Benchmark

Category Avg.

Consumer Cyclical

19.53

9.72

12.04

Industrials

18.37

5.21

6.00

Click to enlarge

When one looks at the fund's 25 worst-performing holdings, one can see that there are quite a few consumer discretionary and industrial holdings listed amongst them.

In fact, consumer discretionary and industrial holdings make up more than half of the list. The following charts show the consumer discretionary and industrial holdings that were listed amongst the worst performers in the fund. The industrial holdings in bold print are holdings from China, the aforementioned epicenter of the industrial sector struggle in emerging markets.

Industrial Holding

YTD Return

Boer Power Holdings Ltd. (OTC:BRWZF)

-74.64

Tsakos Energy Navigation Ltd. (NYSE:TNP)

-42.30

Celebi Hava Servisi AS

-29.39

KEPCO Plant Service & Engineering Co., Ltd.

-28.99

Xinjiang Goldwind Science & Technology Co., Ltd. H (OTC:XJNGF)

-25.91

TAV Havalimanlari Holding AS (OTCPK:TAVHY)

-20.85

EVA Airways Corp.

-20.16

Shenzhen International Holdings Ltd. (OTC:SZIHD)

-19.25

Click to enlarge

Consumer Cyclical (Discretionary)

YTD Return

TUPY SA

-34.39

PT Sri Rejeki Isman Tbk

-32.39

Evergreen Fibreboard Bhd

-30.72

EGL Holdings Co., Ltd.

-23.64

Nexteer Automotive Group, Ltd. (OTCPK:NTXVF)

-20.07

Click to enlarge

Additionally, the fund appears to be overexposed to the poor-performing emerging market of China. This can be seen in the performance of its country ETF. The SPDR S&P China ETF (NYSEARCA:GXC) is the third worst-performing emerging market country ETF with a -9.8% return. The fund has invested nearly 15% in Chinese holdings. Out of the fund's 18 Chinese holdings, 15 of them have a negative YTD return.

Chinese Holdings

Portfolio Weight

YTD Return

Silergy Corp. (OTC:SLRGF)

1.72

8.82

Shenzhen International Holdings, Ltd.

1.67

-19.25

Pou Sheng International (Holdings), Ltd. (OTC:PSHGY)

1.63

13.44

China Maple Leaf Educational Systems, Ltd. Shs Unitary 144A/Reg S

1.42

76.69

Sino-Ocean Land Holdings, Ltd. (OTCPK:SIOLY)

1.26

-32.80

China Resources Cement Holdings, Ltd. (OTCPK:CARCY)

1.17

-1.26

Zhuzhou CRRC Times Electric Co., Ltd. H

1.12

-7.27

Xinjiang Goldwind Science & Technology, Co. Ltd. H

1.08

-25.91

Shenzhou International Group Holdings, Ltd. (OTC:SZHIF)

1.00

-16.12

China BlueChemical, Ltd. H (OTCPK:CBLUY)

0.96

-26.79

China Resources Gas Group, Ltd. (OTCPK:CGASY)

0.93

-2.25

Beijing Capital Land, Ltd. H (OTC:BJCLF)

0.89

-16.37

Lee's Pharmaceutical Holdings, Ltd.

0.79

-43.36

Chinasoft International, Ltd. (OTC:CFTLF)

0.79

-8.10

Tarena International, Inc. ADR (NASDAQ:TEDU)

0.77

-2.39

China Machinery Engineering, Corp. (OTC:CMEGF)

0.68

-14.76

Tianjin Development Holdings, Ltd. (OTC:TJSCF)

0.60

-24.81

Boer Power Holdings, Ltd.

0.30

-74.64

Click to enlarge

It is no secret that the outlook for the Chinese economy is less than stellar. Recently, it was revealed that China's 2016 investment growth has been the slowest in 16 years. The OECD has released a forecast that predicts that China's economic growth will continue to decline into the next year.

In addition to ranking near the bottom of the emerging market category, this fund is not cheap at all. RSMGX's expense ratio is a whopping 2.50% as of the prospectus on 05/01/2016. This expense ratio was head and shoulders above its benchmarks for the past two years.

Click to enlarge

Conclusion

If I were an investor, I would not consider RSMGX at this time. This fund is overexposed to two poor-performing sectors that have performed poorly in both foreign and global sector ETFs. As I have shown, these sectors may be set for further declines moving forward due to their poor outlooks.

Additionally, RSMGX has too many ETFs in the poor-performing emerging market country of China. Over 80% of the fund's Chinese holdings are in the red.

Given the negative outlook for China, this fund finds itself vulnerable here. In addition to the fund's sub-par performance, it is also really expensive. Sub-par performance and above-average expense make this fund a very unattractive one.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.