Fund Goal and Approach
The fund seeks long-term capital growth. This objective may be changed by the fund's board, upon 60 days' prior notice to shareholders. To pursue its goal, the fund normally invests at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities of companies: (i) that have their registered office in Brazil; (ii) whose principal trading market is in Brazil; or (iii) that have a majority of their assets, or that derive a significant portion of their revenue or profits from businesses, investments or sales, in Brazil. The fund may invest in the stocks of companies of any size, although it focuses on large and mid-cap companies (generally, with market capitalizations of $2 billion or more at the time of purchase). The fund invests principally in common stocks, but the fund's equity investments also may include preferred stocks, convertible securities and warrants, including those purchased in initial public offerings (IPOs) or shortly thereafter. The fund's equity investments also may include American Depositary Receipts (ADRs), which represent indirect ownership of securities issued by foreign companies.
The fund's sub-investment adviser, ARX, seeks investment opportunities in companies with sustainable earnings, attractive valuations and high dividend yields that indicate the potential for strong sustainable capital growth. ARX constructs the fund's portfolio through a combination of quantitative and fundamental bottom-up research, and an understanding of local/regional macroeconomic trends.
In selecting securities, the fund's portfolio managers use a three-step investment process:
Step 1: Quantitative Analysis
The portfolio managers use a proprietary quantitative model to identify and analyze approximately 180 stocks listed on the Sao Paulo Stock, Mercantile & Futures Exchange (BM&FBOVESPA), based on several factors, including earnings estimates, growth, beta, dividend yield estimates and liquidity. The portfolio managers generally identify approximately 60 of the most attractive securities screened by the quantitative model.
Step 2: Fundamental Analysis
Based on their assessment of certain qualitative factors, the portfolio managers generally select approximately 25 to 40 stocks from the narrowed universe of stocks screened by the quantitative model. As part of this process, the portfolio managers use a discounted cash flow approach to valuing companies. The portfolio managers examine a variety of information sources, including reported company financials and company reports, and, whenever possible, have discussions with company management. ARX uses various valuation measures, including enterprise value (FV/EBITDA), price-to-earnings (P/E), price-to-book (P/BV) and price-to-sales ratios, to assess a company's business as viewed in the context of macroeconomics and sector and industry trends. The fund's portfolio managers then select those stocks that demonstrate high dividend yield, the commitment to distributing future earnings and expected growth in future earnings, taking into consideration factors such as liquidity, governance, sector and risk.
Step 3: Portfolio Construction
In the final step, the portfolio managers define exposure limits to each company and sector and weights to each stock selected in step 2. During this phase of the process, the portfolio managers use a quantitative and multi-factor model to seek to achieve portfolio optimization. The model is designed to provide a framework for risk decomposition and performance attribution. There are also liquidity controls in place with a bias toward large and mid-cap stocks. The portfolio managers regularly evaluate the risk profile of the fund's portfolio and adjust exposure limits as necessary.
ARX does not use benchmark indices as a tool for active portfolio management. Traditional benchmark indices, however, may be helpful in measuring investment returns, and the fund's investment returns generally will be compared to those of the Morgan Stanley Capital International® (MSCI) 10/40 Brazil NR Index, an unmanaged index designed to track the performance of stocks traded primarily on the BM&FBOVESPA.
Although not a principal investment strategy, the fund may, but is not required to, use derivatives, such as options, futures and options on futures (including those relating to stocks, indices, foreign currencies and interest rates), and forward contracts, as a substitute for investing directly in an underlying asset, to increase returns, to manage currency risk, or as part of a hedging strategy. Since the value of the Brazilian currency can fluctuate significantly and potentially result in losses for investors, the portfolio managers may seek to manage currency risk by hedging all or a portion of the fund's currency exposure and, in their discretion, may employ certain techniques designed to alter the fund's exposure to the Brazilian currency. Generally, this involves buying options, futures or forward contracts relating to currencies. The fund also may engage in short-selling, typically for hedging purposes, such as to limit exposure to a possible market decline in the value of its portfolio securities.
An investment in the fund is not a bank deposit. It is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. It is not a complete investment program. The fund's share price fluctuates, sometimes dramatically, which means you could lose money.
* Risks of concentrating investments in Brazil. The fund's performance will be influenced by political, social and economic factors affecting Brazil. Special risks include exposure to currency fluctuations, less liquidity, less developed or efficient trading markets, lack of comprehensive company information, political instability and differing accounting and legal standards. Because the fund's investments are concentrated in Brazil, the fund's performance could be more volatile than that of more geographically diversified funds.
As an emerging market, the Brazilian market tends to be more volatile than the markets of more mature economies, and generally has a less diverse and less mature economic structure and a less stable political system than those of developed countries. Certain political, economic, legal and currency risks have contributed to a high level of price volatility in the Brazilian equity and currency markets and could adversely affect investments in the fund. Brazil has historically experienced high rates of inflation and may continue to do so. Inflationary pressures may slow the rate of growth of the Brazilian economy and may lead to further government intervention in the economy, which could adversely affect the fund's investments. Brazil continues to suffer from chronic structural public sector deficits. Unanticipated political or social developments may result in increased volatility in the fund's share price and sudden and significant investment losses.
* Emerging market risk. The securities of issuers located in emerging markets tend to be more volatile and less liquid than the securities of issuers located in more mature economies, and emerging markets generally have less diverse and less mature economic structures and less stable political systems than those of developed countries. The securities of issuers located or doing substantial business in emerging markets are often subject to rapid and large changes in price.
* Foreign currency risk. Investments in foreign currencies are subject to the risk that those currencies will decline in value relative to the U.S. dollar or, in the case of hedged positions, that the U.S. dollar will decline relative to the currency being hedged. Currency exchange rates may fluctuate significantly over short periods of time. Foreign currencies are also subject to risks caused by inflation, interest rates, budget deficits and low savings rates, political factors and government intervention and controls.
* Risks of stock investing. Stocks generally fluctuate more in value than bonds and may decline significantly over short time periods. There is the chance that stock prices overall will decline because stock markets tend to move in cycles, with periods of rising prices and falling prices. The market value of a stock may decline due to general weakness in the stock market or because of factors that affect the company or its particular industry.
* Liquidity risk. When there is little or no active trading market for specific types of securities, it can become more difficult to sell the securities in a timely manner at or near their perceived value. In such a market, the value of such securities and the fund's share price may fall dramatically. Investments in foreign securities, particularly those of issuers located in emerging markets, tend to have greater exposure to liquidity risk than domestic securities.
* Non-diversification risk. The fund is non-diversified, which means that the fund may invest a relatively high percentage of its assets in a limited number of issuers. Therefore, the fund's performance may be more vulnerable to changes in the market value of a single issuer or group of issuers and more susceptible to risks associated with a single economic, political or regulatory occurrence than a diversified fund.
Please see prospectus for additional Risk Details.
Investors should consider the investment objectives, risks, charges, and expenses of the fund carefully before investing. Download a prospectus, or a summary prospectus, if available, that contains this and other information about the fund, and read it carefully before investing.