Polen Emerging Markets Growth Q2 2025 Commentary (Mutual Fund:PGEIX)

All company-specific information has been sourced from company financials as of the relevant period discussed. Emerging market equity returns, as measured by the Index, were positive over the period, mainly driven by stronger performance in Taiwan, South Korea, and China. At a country level, Saudi Arabia and emerging markets businesses listed in Ireland and Singapore were the largest detractors from the Index return. Taiwan emerged as the Index's top contributor during the quarter as it recovered from headwinds related to the expectation of hefty tariffs from the U.S. and a swift rebound in semiconductor production capacity after a significant earthquake last quarter. South Korea performed even more strongly on an absolute basis, with the Index rising more than 30% during the quarter. It benefited from robust consumer electronics exports and a recovering automotive sector, both buoyed by attractive global demand. Another significant component behind the outperformance has been market expectation that the new President will pass shareholder-friendly reforms, which may make the country a more attractive destination for capital and reduce the "Korea discount" from which it has suffered for decades. Meanwhile, Saudi Arabia was hit by declining energy prices, which is the key export for financing the country's current account deficit, and heightened geopolitical uncertainty after Israel's military action against Iran over the quarter. Against this backdrop, Consumer Discretionary was the only sector to post negative returns, weighed down by heightened competitive pressures in China's consumer technology ecosystem. Information Technology, Industrials, and Financials posted the strongest returns, driven by Taiwan and South Korea's semiconductor chip exporting behemoths TSMC, SK Hynix (OTCPK:HXSCF), and Samsung Electronics (OTCPK:SSNLF). Over the period, the Portfolio returned 12.74% gross of fees and 12.60% net of fees, outperforming the Index return of 11.99%. Relative outperformance was entirely driven by security selection, with country and sector allocation both negative detractors. Security selection was strongest in the Communication Services and Consumer Discretionary sectors, outweighing weaker selection in Industrials and Information Technology. Sector allocation, an output of our bottom-up process, negatively detracted from relative returns primarily due to the overweight to Consumer Discretionary. At a country level, security selection was strongest in China and Brazil, outweighing weaker selection in Hungary and Taiwan. Country allocation, also an output of our bottom-up process, detracted from relative returns, primarily due to the underweight in South Korea and its position in the Ireland-listed Chinese ecommerce platform PDD Holdings. The top individual contributors to relative returns over the period were Tencent Music Entertainment, Alibaba (not owned), and dLocal. The top absolute contributors were Tencent Music Entertainment, Alibaba (not owned) Taiwan, and dLocal. Tencent Music Entertainment, a music streaming platform in China, again reported better-than-expected quarterly results. While its social entertainment business remained challenged, its online music operations grew 16%, enabling a continued margin expansion. We expect this trend to continue in 2025, particularly as online music accounts for almost 80% of the company's revenue mix. With a paying user ratio significantly lower than Spotify (SPOT)'s, we believe this company has a long runway of sales growth and margin expansion ahead. Alibaba, a large Index position that we do not own, suffered from signals of increased investment and competition in its core ecommerce business as well as its restaurant delivery and quickcommerce segments. Its more attractive Cloud and AI operations are still a small part of its consolidated revenues, with uncertain unit economics. However, a continued acceleration in growth, along with evidence of customer appetite to pay a premium for Al services, could make Alibaba's investment case more attractive. For now, we believe the robust shareholder returns of the last two years are threatened by aggressive Cloud investments and rising competition in its core operations. Thus, we remain on the sidelines. dLocal, a payment processor focused on emerging markets, released a much-improved set of quarterly results. These demonstrated a return to solid double-digit top-line growth and strong cost control, driving healthy margin expansion. During the second quarter, the company also paid out its first-ever dividend, which equated to a yield of almost 5%. As we stated last quarter, we believe dLocal's underlying value proposition is extremely attractive in a massively underpenetrated space, and the company has a multi-year expansionary phase. The largest detractors from relative performance were Wizz Air, PDD Holdings, and E Ink Holdings. The largest absolute detractors were Wizz Air, PDD Holdings, and Meituan. Wizz Air, an Eastern European ultra-low-cost airline, released weak results from a profitability standpoint and signaled to the market that costs would likely remain elevated during its fiscal year 2026. The company is dealing with aircraft groundings due to a mechanical problem that has left it without about 20% of its fleet. This is a problem in an industry with such sizeable operating leverage (and deleverage). However, looking past FY26 into FY27, when we believe these headwinds should start to abate, this structurally advantaged business is attractively valued. Like all major Chinese consumer technology platforms, PDD Holdings suffered from negative investor sentiment relating to the uptick in domestic competitive intensity. Its international ecommerce platform, Temu, was also hit by import tariffs in the U.S. While these impacts on its business are certainly negative, PDD remains the lowest-cost, most advantaged e-commerce platform in the largest e-commerce market in the world. There is still substantial scope for Temu to grow outside of the U.S. Should the company decide to start returning capital to shareholders, the prospects for an attractive return are considerable. Meanwhile, the company trades at what we view to be an extremely favorable multiple. E Ink Holdings, a Taiwanese manufacturer of e-paper film that operates a near-monopoly, also suffered during the quarter from tariff-related sentiment. The Americas are an increasingly relevant part of its business following a large deal with Walmart (WMT). The company also signaled that there may be reduced demand for its consumer electronics products in the second half of the year. However, we believe the real value of the business lies in its electronic signage labels (ESLs), and as the adoption of this novel technology spreads throughout the world, the company will have a bright future ahead. We initiated new positions in six companies, closed positions in six, and made some adjustments to existing holdings. We generally allocated capital away from companies that might be negatively impacted by ongoing weak Chinese discretionary consumption or, its corollary, the ramping up of competitive pressure in the Chinese consumer technology ecosystems. While our erstwhile holdings remain competitively advantaged and, we believe, longterm winners, their economics can nonetheless be impaired for long periods as they defend their moats. We have generally allocated that capital to equally, or arguably more, competitively advantaged businesses in structural growth manufacturing industries where China, as a producing nation, is also competitively advantaged. Increasingly, the high-quality products these companies make are becoming competitive on the global (developed) stage, not just as cheaper alternatives for emerging market consumers. We believe this is a secular trend that will reward investors. Today's backdrop of ever-changing tariffs and geopolitical disruption is challenging for asset prices, investment, and longterm economic planning. However, we remain optimistic about the long-term future of emerging markets. Increased urbanization should drive growth in value-added economic output, raise income levels, and create wealth for the 86% of the world's population that does not live in developed markets.1 In many cases, more orthodox economic policy has left emerging markets' balance sheets much healthier than those of their developed counterparts, which should, among other things, enable greater economic capacity to respond to the aforementioned turmoil. Meanwhile, the Index, and by extension, the markets within it, trade at a steep discount to their developed market counterparts, implying it is attractively valued. Moreover, valuations for quality businesses are at par with the broader index, meaning we no longer have to pay a premium for the types of businesses we invest in. Thus, minor changes to global asset allocations, which have been overweight the U.S. for over a decade, have the potential to meaningfully lift the capital allocated to the emerging markets We continue to apply the same philosophy and process of seeking the highest-quality growth businesses in the emerging markets. In our view, these companies possess structural growth opportunities, deep competitive advantages, self-financed growth, robust balance sheets, and are trustworthy stewards of capital. We seek to own undervalued businesses relative to their long-term compounding potential and expect they will outperform over the long term, enabling our clients to earn above-average returns. Fewer of these types of businesses tend to be found in the large cyclical export markets dominated by economies like Taiwan and South Korea, which is why our Portfolio tends to be underweight these markets. As a result, we may be somewhat less directly exposed to the negative impact of punitive U.S. tariffs, should they proceed. However, as noted, the domestic economies of many emerging markets rely on export-funded cash flows, so anything detrimental to global trade is also harmful for the markets in which our Portfolio invests. Thank you for your interest in Polen Capital and the Emerging Markets Growth strategy. Please feel free to contact us with any questions. Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors. Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

Polen Emerging Markets Growth Q2 2025 Commentary (Mutual Fund:PGEIX)

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