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Portfolio Discussion
Emerging markets (EM) equities advanced in Q2, building on a strong start to the new year. Economic growth was broadly positive for EM countries as attempts to fight rising inflation showed initial signs of success. Despite a more relaxed interest rate environment, the anticipation of critical EM general elections contributed to market volatility. Furthermore, unresolved geopolitical conflict in Ukraine and the Middle East continued to impact millions of lives and affect global value chains. Taiwan and China were the main contributors to the MSCI Emerging Markets Index, while Brazil and Mexico were the primary detractors in Q2. Our portfolio underperformed the benchmark for the quarter.
Our main relative detractors in Q2 included Estun Automation, Gentera and GPS Participacoes e Empreendimentos. Estun is a leading domestic Chinese robot producer. Like industry peers, the company’s earnings were hurt by write-offs to accounts receivable. Despite the stock’s recent underperformance, we believe the write-offs will have a temporary impact. In addition, the Chinese government recently finalized a comprehensive plan to upgrade industrial equipment across its manufacturing sector. The program outlines several objectives to support technological advancement, including increased investment in the country’s industrial sector and the integration of industrial robots. Estun was already successfully increasing its market share in China, and we believe the company is positioned to benefit further from China’s ongoing expansion of its industrial sector.
Gentera is a Mexico-based financial institution with a focus on providing credit to low-income women entrepreneurs. The Mexican economy became more volatile this quarter ahead of the general election held in early June. The country elected Claudia Sheinbaum of the ruling Morena party as the next president in a landslide victory. The electoral outcome dampened investor sentiment, and the company’s stock followed the index lower. In contrast to the stock’s recent weakness, we believe the electoral outcome is favorable for Gentera’s business segments. Volatility is to be expected during times of political uncertainty, and we are confident that market sentiment will rebound as investors move beyond the election.
GPS is Brazil’s top outsourcing provider, with a complete portfolio of services including facilities management, security and industrial logistics. The stock declined this quarter as Brazil also experienced some macroeconomic volatility. After signs of post-pandemic recovery, the country’s economic activity was hurt by catastrophic floods in Rio Grande do Sul, Brazil’s southernmost region. Infrastructure damage and many blocked transport routes interrupted industrial production and export activity, which caused investor confidence to fall. Nonetheless, we have seen resiliency in Brazil’s economy and have high conviction in the company’s ability to succeed in this volatile environment.
Top relative contributors for the quarter included Cosmax, MediaTek (OTCPK:MDTTF) and Havells India. Cosmax is a Korean cosmetics manufacturer and global leader in the original development and design manufacturing (ODM) space, offering design, material sourcing, manufacturing, product management and branding services to independent cosmetic and skincare brands. We believe the company is uniquely positioned for growth as demand for independent brands increases, since they rely on ODM services like those provided by Cosmax. Further, we believe Cosmax will benefit from the strong adoption of Korean beauty brands in the US.
Taiwan-based MediaTek is the largest fabless semiconductor design house outside the US. The company is a dominant provider of semiconductor chips and hardware for various technological products, including smartphones, tablets, smartwatches and televisions. After the company’s stock price slipped early in the quarter, it subsequently rallied for the rest of the period, aided by MediaTek’s potential partnership with Microsoft on existing and future chipsets. In addition, as MediaTek continues developing artificial intelligence smartphone chips, we believe the company will gain market share.
Havells is a fast-moving electrical goods company in India with a diverse portfolio of products. The company’s recent positive performance was driven by Lloyd, a consumer durables business acquired by Havells in 2017. Havells saw sustained earnings growth from robust summer demand, particularly for Lloyd air conditioners and other cooling products. Since its acquisition, Havells has made strides to integrate Lloyd and expand its manufacturing capacity, and it seems the market has started to reward its efforts. We believe Havells has strong potential to benefit from multiple secular trends in India, including housing growth, improving access to electricity, a growing urban middle class and increasing preferences for branded retail products.
Portfolio Activity
During the quarter, we exited our positions in Noah Holdings (NOAH) and OTC:HYBE. Noah Holdings is a wealth management company in China. We sold out of the name for several reasons, the most important being reduced liquidity of the company’s stock. As a crucial part of our investment process, we monitor the liquidity levels of all names in our portfolio to ensure effective trade execution and risk management. In addition, the country’s deaccelerating economic recovery cast uncertainty on growth prospects, limiting what we believed to be Noah’s upside potential.
HYBE is a Korean music-based entertainment company. We sold our position in HYBE due to a dispute between company management and one of its subsidiary labels. We believe the way this dispute was handled exposed structural weakness in the company’s multi-label system, highlighting a need for business model improvements to better protect both its music talent and the company.
By exiting these holdings, we freed up capital to initiate a position in Dabur, one of India’s largest consumer staples companies. Dabur owns a deep portfolio of well-established brands focused on herbal and Ayurvedic products. We believe Dabur has unique access to growth through its exposure to the rural segment, where the company has continued to expand its distribution reach. In general, we are optimistic about a recovery in rural India, supported by easing inflation and a strong monsoon forecast.
Perspective
As we navigate through the second half of 2024, the EM investment landscape presents a dynamic mix of challenges and opportunities. Signs of easing inflationary pressures and the outcomes of recent elections around the world, extending beyond those in EM, are key factors that will shape investment decisions.
Government elections are pivotal events that have proven to significantly impact market dynamics. These elections often lead to increased volatility as markets react to potential changes in policy and governance. However, this volatility can translate into compelling entry points for well-researched and strategically positioned investments.
For instance, the elections in India present a unique opportunity. While we maintain an underweight position due to high valuations, we are enthusiastic about the structural reforms and positive momentum in the country. The election period, with its inherent volatility, allows us to identify and capitalize on attractive entry points. Our strategy is to be prepared with thorough research and to act when valuations become favorable.
Lower inflation levels across many emerging markets should lead to a more stable economic environment, fostering growth and enhancing investment prospects. Lower interest rates will help stimulate consumer spending and business investments. In such a setting, sectors such as consumer goods, financials and technology stand to benefit. Our team is closely monitoring these trends and identifying companies with robust fundamentals and growth potential.
Our investment approach is grounded in rigorous research and active engagement with companies. Through the rest of the year, the team will continue traveling extensively to gather firsthand insights and better understand shifting nuances of the different regions. We believe on-the-ground research is crucial in identifying opportunities and making informed decisions, leveraging these moments of volatility to our advantage. By staying engaged with companies and understanding the local context, we can better navigate through periods of uncertainty and position our portfolio accordingly. This approach allows us to remain agile and responsive to market developments, ensuring that we are well-prepared to capitalize on emerging opportunities.
| Carefully consider the Fund’s investment objective, risks and charges and expenses. This and other important information is contained in the Fund's prospectus and summary prospectus, which can be obtained by calling 800.344.1770. Read carefully before investing. Current and future portfolio holdings are subject to risk. A portfolio’s environmental, social and governance (“ESG”) considerations may limit the investment opportunities available and, as a result, the portfolio may forgo certain investment opportunities and underperform portfolios that do not consider ESG factors. The value of portfolio securities selected by the investment team may rise or fall in response to company, market, economic, political, regulatory or other news, at times greater than the market or benchmark index. Investments in which the team has determined to have sustainable growth characteristics may underperform other securities and may not achieve their sustainable growth potential. Non-diversified portfolios may invest larger portions of assets in securities of a smaller number of issuers and performance of a single issuer may have a greater impact to the portfolio’s returns. International investments involve special risks, including currency fluctuation, lower liquidity, different accounting methods and economic and political systems, and higher transaction costs. These risks typically are greater in emerging and less developed markets, including frontier markets. Such risks include new and rapidly changing political and economic structures, which may cause instability; underdeveloped securities markets; and higher likelihood of high levels of inflation, deflation or currency devaluations. Securities of small- and medium-sized companies tend to have a shorter history of operations, be more volatile and less liquid and may have underperformed securities of large companies during some periods. MSCI Emerging Markets Index measures the performance of emerging markets. The index(es) are unmanaged; include net reinvested dividends; do not reflect fees or expenses; and are not available for direct investment. This summary represents the views of the portfolio managers as of 30 Jun 2024. Those views may change, and the Fund disclaims any obligation to advise investors of such changes. For the purpose of determining the Fund’s holdings, securities of the same issuer are aggregated to determine the weight in the Fund. The holdings mentioned above comprised the following percentages of the Fund's total net assets as of 30 Jun 2024: Estun Automation Co Ltd 1.8%; Gentera SAB de CV 1.4%; GPS Participacoes e Empreendimentos SA 1.3%; Cosmax Inc 1.6%; MediaTek Inc 3.7%; Havells India Ltd 2.1%; Dabur India Ltd 1.0%. As of 3 Mar 2022, Russian holdings are valued at zero. Securities named in the Commentary, but not listed here are not held in the Fund as of the date of this report. Portfolio holdings are subject to change without notice and are not intended as recommendations of individual securities. All information in this report, unless otherwise indicated, includes all classes of shares (except performance and expense ratio information) and is as of the date shown in the upper right hand corner. This material does not constitute investment advice. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used to create indices or financial products. This report is not approved or produced by MSCI. Attribution is used to evaluate the investment management decisions which affected the portfolio’s performance when compared to a benchmark index. Attribution is not exact, but should be considered an approximation of the relative contribution of each of the factors considered. The Sustainable Industry Classification System (SICS®) is the exclusive intellectual property of Sustainability Accounting Standards Board (SASB). SICS is intended to group companies based on their shared sustainability-related risks and opportunities. This material is provided for informational purposes without regard to your particular investment needs and shall not be construed as investment or tax advice on which you may rely for your investment decisions. Investors should consult their financial and tax adviser before making investments in order to determine the appropriateness of any investment product discussed herein. Return on Equity (ROE) is a profitability ratio that measures the amount of net income returned as a percentage of shareholders' equity. Artisan Partners Funds offered through Artisan Partners Distributors LLC (APDLLC), member FINRA. APDLLC is a wholly owned broker/dealer subsidiary of Artisan Partners Holdings LP. Artisan Partners Limited Partnership, an investment advisory firm and adviser to Artisan Partners Funds, is wholly owned by Artisan Partners Holdings LP. © 2024 Artisan Partners. All rights reserved. |
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