For the first quarter of the year, the Fund returned -11.44% (Investor Class) and -11.44% (Institutional Class), while its benchmark, the MSCI Emerging Markets Index, returned -6.92% over the same period.

Market Environment:

The first quarter of 2022 saw two defining events. The first was the Russian regime’s tragic decision to pursue a full-scale invasion of Ukraine. The humanitarian consequences of the invasion are horrible and ongoing. The other was the first interest rate-rise by the Federal Reserve since 2018. For economies and markets the main challenge related to these events continues to be supply side inflation, due to higher food and energy prices resulting from sanctions on Russia and the ongoing distribution bottle necks as the world recovers from the pandemic.

In addition, regulatory ambiguity and weak performances by companies with good narratives but little current earnings continued in China. In fact, the negative impact of China’s headwinds on emerging market equity performance was almost three times the impact of the decline and eventual removal of Russia equities from the MSCI Emerging Markets Index.

Performance Contributors and Detractors:

From a regional perspective, our overweight in Russia detracted the most from relative performance after Russian equities fell and were then removed from indexes after the start of the invasion. Prior to the conflict, we consciously lowered our exposure to Russia. We have never held Russian local shares but we did hold London-traded Global Depositary Receipts (GDRs). At the end of the first quarter, our exposure to Russia stood at effectively zero. China/Hong Kong was a large detractor, however, our allocation choice actually made it a small net positive relative to the index. Our overweight allocation to Brazil led to both positive contribution and relative performance in the quarter, as did our overweight and allocation to Vietnam.

At the sector level, our allocation and stock selection in materials, health care and real estate contributed the most to relative performance, while our stock selection in energy and financials detracted the most.

Looking at individual securities, Banco BTG Pactual SA, Vale SA and FPT Corp. were among the top contributors to relative performance. Brazilian equities in general performed well in the first quarter, and FPT, an IT service company in Vietnam, performed well and is still reasonably valued. On the other hand, the Russian GDRs, including Sberbank Russia PJSC, gas producer Novatek JSC, and energy producer Lukoil PJSC, detracted the most from absolute and relative performance.

Notable Portfolio Changes:

Our long-term orientation and investment philosophy had to quickly react to the unprecedented events of the period. Consequently, we undertook more portfolio changes than in a typical quarter. We proactively de-risked prior to Russia’s invasion by exiting two positions, Fix Price Group Ltd., a retail chain, and Polyus PJSC, a gold producer. We also initiated positions that we felt would benefit if tensions rose, including Qatar National Bank and additional exposure to Brazil. After the invasion, we felt it prudent to replace some of the energy exposure we’d exited. For example, we bought Australian Woodside Petroleum Ltd., a leading producer of natural gas, the majority of which goes to Asia.

The second big change–tighter monetary policy–has also impacted the portfolio. Early-stage companies that lack current earnings or cash flow may be disproportionately impacted by higher rates. We trimmed some longstanding positions and exited others, like Sea Ltd., a leading e-commerce company based in Singapore. Overall, we’re focused on understanding how inflation impacts the earnings and prospects of our individual holdings. The portfolio reflects this, with greater exposure to companies that are either direct beneficiaries or who have substantial pricing power combined with the ability to generate near-term cash flow.

Outlook:

A sea change in the first quarter occurred regarding how to think about geographic risk. Many of the companies we’d been involved with in Russia were independent of state ownership and not viewed as particularly close to the Kremlin or Russia’s leadership. Yet, they are no longer investable, and not without good reason. The events of the first quarter have brought to the fore an awareness that even companies seen as independent of their governments can be damaged and destroyed because of the actions of those governments.

Prior to the invasion the dominant mantra in portfolio management was one of engagement–to proactively work with good companies and worry less about geopolitics. This mantra may have unalterably shifted. Companies who are not party to state actions may still be deeply affected by them. We may have entered a protracted era where the concept of geographic risk for equities becomes a more prominent decision factor. What this means for international portfolio investing, particularly in markets like China, is not a settled issue.

That said, we’re quite optimistic that our security selection and portfolio construction is appropriate for the likely market conditions ahead. There are many reasons to be constructive. There are great companies and narratives out there. Sometimes, however, reflection can be more important than trying to foresee. The first quarter was one of those times. We hope the rest of the year will be different.

Top 10 holdings as of March 31, 2022. Current and future holdings are subject to change and risk.

Average Annual Total Returns - MEGMX as of 03/31/2022