Carmignac Emergents: Letter from the Fund Managers

Carmignac Emergents¹ gained +1.4% in the fourth quarter, compared with a +0.70% increase for its reference indicator, bringing its annual performance to -15.6% versus -14.9% for its reference indicator.

The year 2022, a year of war, marked a sharp break with the underlying trends that have prevailed in financial assets since the 2008 financial crisis. Growth stocks largely underperformed value stocks in 2022. Oil and mining stocks, on the other hand, have strongly outperformed the stock market indices, despite a fall in global economic activity. The period of central bank balance sheet expansion that allowed financial asset prices to rise excessively gave way to a year in which rigorous attention to corporate valuation methodologies was required, a year in which bubbles burst but analysis was rewarded.

In this perspective, it is worth recalling the outperformance of Carmignac Emergents over a long period and its relative resilience in 2022. Indeed, the fund's performance over five years is +10.6%, compared with +4.9% for its reference indicator.

The year 2022 was one of the worst years in a century for the bond markets. A sudden return of inflation, a new war in Ukraine creating an energy crisis, and a spectacular rise in interest rates surprised the financial markets, used since 2008 to seeing all crises solved by accommodating monetary policies. Added to this was the chaotic management of Covid-19 by the Chinese government, with a significant impact on the country's growth and investor confidence. All these elements combined could only result in a disastrous stock market year, with an even more pronounced underperformance for quality assets, which by nature have a longer duration.

This context also seems unfavorable to the traditional management of Carmignac Emergents, a strategy that does not invest in fossil fuels and is essentially exposed to growth themes. However, the rigor of our investment process enabled us to avoid a dismal year, thanks in particular to the management of the fund's Chinese pocket, despite China's strong underperformance. Thus, even though we were overweight in China during the year (38% on average compared to 31% for our reference indicator), our Chinese stocks made a positive contribution of around 500 bp over the year. This was mainly due to our decision at the end of 2021 to add to Chinese ADRs (Chinese companies listed in New York), as their valuations seemed largely wrong, with some stocks such as the education company New Oriental trading below the cash held by the company. Outside of China, the portfolio also benefited from our discipline, which allowed us to strengthen certain positions after excessive declines rather than capitulate when the market's confidence improved, particularly in the semiconductor sector, where we have significant exposure to three stocks (Samsung Electronics, Taiwan Semiconductor and Tokyo Electron). Finally, we benefited indirectly from the rise in commodities thanks to being overweight in Latin America.

At the beginning of December, we brought back into the portfolio two Chinese positions that we had earlier sold because of geopolitical tensions with the United States. These were the biotech company Wuxi Biologics, which was removed from the US Department of Commerce's watch list in November, and Full Truck Alliance, an internet logistics platform that we had sold because it did not have a dual listing in Hong Kong. However, the risk of delisting of Chinese companies from the US stock market has been postponed to 2025, with a higher probability that delistings will be avoided in view of recent statements by US authorities. We also modified our Brazilian portfolio after our trip to Latin America. Eletrobras, Brazil's largest power generation and distribution company, became our largest position in Latin America (5.4% of the fund ), at the expense of Transmissora Alliance, which was sold in the fourth quarter after four years in the fund. We also sold the Indian company Maruti Suzuki, as we felt its presence in the fund was incompatible with the fund's Article 9 mandate.

We start 2023 with a portfolio refocused on 35 stocks. This concentration is not accompanied by a strong increase in risk, as indicated in the volatility calculations performed by our risk control team. This is partly explained by the fact that among the 10 largest positions in the fund, 7 of them have negative net debt, and most have high margins with often dominant positions. On the other hand, we are starting the year with an increased allocation to the Chinese market (42.4% of the fund), considering that the government's 180-degree turn on zero-Covid should restore consumer and investor confidence in a market whose valuations are particularly attractive after years of decline. This crucial change in China, where the year of the water rabbit is beginning, should boost growth throughout the emerging world, particularly in Asia and Latin America.

Fund positioning as of 30/12/2022²

Since its inception in 1997, Carmignac Emergents has combined what we consider our emerging-market DNA since 1989 with our commitment to strengthening our credentials in socially responsible investment (SRI). In welding together those two areas of expertise, we aim to add value for our investors while having a positive impact on society and the environment.

Classified as an Article 9 fund under the Sustainable Finance Disclosure Regulation (SFDR)³ and was awarded France’s SRI label in 2019 and Belgium’s Towards Sustainability label in 2020⁴.

As an Article 9 Strategy under the SFDR, the Fund will invest mainly in shares of emerging companies that have a positive outcome on environment or society and derive the majority of their revenues or CAPEX from goods and services related to business activities which align positively with UN Sustainable Development Goals (SDGs)⁵. This sustainable objective will be measured and monitored by the percentage of revenues aligned with the SDGs.

Our portfolio is currently structured around 4 major SRI themes that are central to our process:

As a reminder, our socially responsibility approach is based on three pillars:

• Invest selectively and with conviction, giving priority to sustainable growth themes in underpenetrated sectors and countries with sound macroeconomic fundamentals.

• Invest for positive impact, favouring companies that deliver solutions to environmental and social challenges in emerging markets and reducing our carbon intensity by at least 50% relative to the MSCI Emerging Markets Index. Our sustainable objective is: >80% Fund’s AUM invested in companies with >50% revenue or CAPEX derived from goods and services positively aligned with at least 1 of 9 targeted United Nations Sustainable Development Goals.

• Invest sustainably by consistently incorporating environmental, social and governance (ESG) criteria into our analyses and investment decision.