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By Jason Stipp | 05-14-2015 02:00 PM

Seeking Sustainable Growth in Emerging Markets

Seafarer manager Andrew Foster has outpaced sluggish developing-world markets over the last three years by seeking stable growers.

Note: This video is part of Morningstar's May 2015 International Investing Week special report.

Jason Stipp: I'm Jason Stipp for Morningstar. Seafarer Overseas Growth and Income Fund (SFGIX) is a three-year-old diversified emerging-markets fund helmed by Andrew Foster, who has spent some time at Matthews Asia funds prior. The 5-star fund is off to a great start, and Andrew is on our fund analyst short list of managers to watch. He is joining me today to give his take on emerging markets and where he is seeing some opportunity.

Andrew, thanks for dialing in today.

Andrew Foster: It's my pleasure.

Stipp: Andrew, your three-year-old fund is having a good start; you are in the top 2% of the diversified emerging-markets category during the trailing three years. You wrote something interesting in a recent manager letter to your investors, and I wanted to start there. You said that everyone at Seafarer is proud of the fund's performance but that you are acutely aware that such performance is unlikely to persist. I thought that was refreshingly candid, but I want to unpack that a little bit. Let's just start with diversified emerging markets, overall, as a category. What have been some of the headwinds for funds and for the stocks in those regions?

Foster: Over the last three years, the index--through the end of March--hadn't moved much. It was basically flat or slightly up during the last three years, and I think that's surprised people. What was underlying that was the very anemic growth of the emerging markets. The macroeconomic models of the emerging world, probably best exemplified by China, were really starting to hit some limits to their growth capacities about three years ago. And most of these economies, because of those limits, were basically bound to decelerate. So, the real question on our minds three years ago when we launched our fund was whether or not some of these economies would retool themselves, reform themselves, because in the absence of that, it meant that growth was going to be very weak and well below people's expectation. And unfortunately, for the most part, that's what unfolded.

The growth was anemic. It wasn't zero and it wasn't negative, but it was much, much lower than what people were forecasting and what people were arguably paying for in fairly high valuations three years ago. And what we've seen is the index sort of tread water, digesting the fact that valuations were high and growth was low. That, in my mind, drives what we saw in the last three years.

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