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Navigating Volatility with Dividend Payers
Seafarer Overseas Growth and Income Fund
Interview with: Inbok Song

Author: Ticker Magazine
Last Update: Dec 05, 12:50 PM EST
Emerging markets may seem quite attractive for growth-oriented strategies, but this segment also suffers from internal and external volatility at times. Inbok Song, co-portfolio manager of the Seafarer Overseas Growth and Income Fund, explains how companies with a track record of free cash flow and dividend help investors generate more steady returns in addition to tapping into growth opportunities.

ďAlthough most people think of emerging markets simply as growth, our approach uses dividends as current income to mitigate the volatility inherent in emerging markets.Ē
Q: What is the history and mission of the fund? How does it differ from peers?

A: The Seafarer Overseas Growth and Income Fund was launched in February 2012, coinciding with what would become an extremely difficult period for emerging markets. Despite many challenges, the fund has not only survived, but performed well. Current assets under management are approximately $2.9 billion and we have grown into a 15-person company.

The reasons weíve been able to navigate this volatility are rooted in the fundís philosophy and strategy. Although most people associate emerging markets purely with growth investing, our approach uses dividends as current income to mitigate the volatility inherent in the asset class.

Looking at developing markets in Asia, Latin America, Europe and Africa, we identify companies that are not only growing their revenue, but also increasing free cash flow and generating current income in the form of a dividend. As of September 2017, the fundís dividend yield was 3.4% Ė about 1% higher than that of the index.

Two additional factors have helped the fundís performance. First, we take a long-term approach because thatís the way to harvest inefficiencies in emerging markets. Many inefficiencies stem from a lack of liquidity and information asymmetry compared to developed markets. Sometimes these require structural changes in economies, which are difficult to capture with a six-month, one-year, or even two-year view.

Second, as an active manager, we add value through bottom-up research and construct the portfolio in a way that reflects the current and future status of emerging markets. This benchmark agnostic approach is particularly important because most emerging markets benchmarks, fail to represent the full universe of developing market opportunities.

Q: How would you describe your investment process?

A: Because our approach is long-term, we view ourselves as a co-owner of the companies the fund invests in. Using bottom-up research, we find companies that have a good business model, strong balance sheet, the ability to generate free cash flow for a long time, and leadership that is trying to grow the business beyond the current generation.

What really differentiates our investment process, though, is our focus on the control party Ė which could be a companyís management or owner, but may include others that influence strategy and decision-making but are unseen to investors.

In emerging markets, where many companies are family-owned or controlled by government, this is crucial; we consider control-party analysis the most important part of our investment process. So, we donít just look at the companies themselves, but at the larger picture to discover whether and how control party influences capital allocation and other important decisions.

We take collaborative approach in our investment process. During research process, the investment team holds a meeting where questions are welcomed and analysts/portfolio managers are challenged on their ideas. This collaborative approach is important because this can always bring a new perspective or factor that may have been missed on paper.

Q: How do you generate and analyze ideas as part of your research process?

A: We truly believe in bottom-up stock research and use it to find ideas and build on them for the long-term. Screening is used to assess the strength of a companyís balance sheet and cash-flow generation, as well as its dividend. Our focus is never on just a one-time dividend that might be captured in a year, but rather a companyís longer track record.

In emerging markets, what is seen on the ground often differs dramatically from what has been revealed during a screen, so research trips are important to our research. Each of us travels regularly to meet with companies and their competitors and to see their consumers.

When not traveling, we work from the same office in a collaborative environment that fosters discussion rather than focusing on the news or market noise. This makes us better researchers, stock pickers, and long-term investors.

Andrew Foster serves as the fundís lead manager; in addition to three co-managers and analyst support. All of us are generalists, but itís a synergistic type of generalism. By this, I mean that when I look at a consumer company in China, the fact Iíve viewed consumer companies in other countries helps me determine things like whether a strategy will work or if the capital allocation decisions are sound.

Once an idea is generated, itís typically brought to the lead manager for an initial assessment, which includes how it would fit into the portfolio and what merits the company might offer. From there, our process moves to deep-dive research, which can take anywhere from several weeks to many months Ė there arenít time constraints. This allows us to solidify an idea based on the development of both a company and the economy surrounding it.

Final investment decisions are made by the lead manager. However, because of the importance we place on collaboration, the evaluations of analysts and their incentives arenít based on the stocks picked, but rather by the fundís performance. By design, this means we all share a single goal: to serve our clients by preserving and growing their capital.

Q: Could you illustrate your research process with an example?

A: In emerging markets, there are a lot of interesting developments in healthcare. Our allocation to the sector is 12% Ė much higher than the benchmarkís 3% Ė reflective of increasing demand for drugs and at times, the resulting growth of international pharma companies out of emerging market.

When looking at companies in this sector, one of the key factors is finding those with the ability to grow beyond the current generation of drugs. Gedeon Richter Plc., a pharmaceutical company in Hungary, is one such company. Originally an emerging markets story, it slowly became a regional player and now starts to be recognized among global leaders Ė and itís one of the fundís top 10 holdings.

Founded over 100 years ago, the company now has global reach and exports to other European countries, China, and Latin America. Started as a generic producer, because competition was increasing in the generic pharmaceuticals space, in 2010 the company decided to focus on specialty pharma.

Since then, it increased R&D spending, and based off the strength of its hormone technologies, expanded into womenís health and other niche areas, and also began licensing out. Recently, it struck a meaningful deal with a leading pharma company in the U.S.

What impressed me about the companyís financials was that its margins remained steady despite a long and costly transformation. Thatís a difficult accomplishment that gave us comfort and confidence. Also, because the companyís free cash flow and dividend history had also been consistent, its overall financial matrix gives a supporting view of the future.

We also find companies attractive when they provide an interesting exposure to emerging markets, like Singapore Telecommunications Ltd, another of the fundís largest positions. The company owns telecom companies in emerging markets like Thailand, Indonesia, Philippines and India, and brings to them the management skills needed to grow more efficiently.

The investment allows us to capture the growth of emerging markets, but because itís listed in the more stable market of Singapore, we have a more stable dividend stream at attractive valuation.

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Sources: Data collected by 123jump.com and Ticker.com from company press releases, filings and corporate websites. Market data: BATS Exchange. Inc