Morningstar - Q2 2022 - 66

Investors
Pzena Emerging Markets Value PZIEX
Growth of $10K
$14K
PZIEX
12.21
11.00
12
MSCI Emerging
Markets Value NR
04/2019
04/2020
Morningstar Category
Morningstar Rating
Expense Ratio (%)
04/2021
Diversified
Emerging Markets
QQQ
1.08
Source: Morningstar Direct. Data as of 03/31/2022.
10
8
6
price soared, they added Russian bank Sberbank
SBER:RU to the portfolio on a moderate dip
in the fourth quarter of 2021. Just a few months
later, Sberbank's value cratered after Russia
invaded and broad-based sanctions were imposed.
On Feb. 24, the day of the invasion, the managers
released a statement saying that they always
factored political risk into their calculations, and
though they recognized the serious nature
of the situation, they had decided to hold on to
Sberbank as well as their other Russian stock,
Lukoil LKOH:RU. A follow-up issued on March 10
confirmed that they still held both stocks,
partly because they thought both companies still
had strong business fundamentals but also
because their severe price declines meant that
they were negligible amounts of the portfolio
(0.01% and 0.02%, respectively).
institutional shares lost a painful 41.8%, much
worse than either index or the category
average. In that downturn, investors turned toward
growth stocks, thinking they could weather an
economic collapse better than the more cyclical
fare typically included in value-leaning portfolios.
In mid-February 2022, when Russia seemed
poised to invade Ukraine but had not yet done so,
the managers said they were overweight
Russian stocks versus the MSCI Emerging Markets
Index. They noted that this probably wouldn't
surprise anyone, given their deep-value,
contrarian approach. That said, the overweight
was slight: The portfolio had about 4% of assets in
Russian stocks compared with the index's
3%. This example shows how the managers
try to strike a balance between their deep-value
conviction, which leads them to areas being
trimmed or shunned by most investors,
and their risk-awareness, which reins in their
tendencies in that direction.
That doesn't mean they always get the timing right.
After not owning it for many years as its share
66
Morningstar Q2 2022
Team Decisions
Such decisions are made collectively, for Pzena
Emerging Markets does not have a designated
lead manager. Rather, the three managers
work as equals, the typical arrangement at Pzena.
" Decisions have to be unanimous, " says Bordia.
" That includes the analyst " who covers the
company, he adds.
Although speaking with company managements
forms an important component of their research,
Cai emphasizes that this comes at the end of
their process, after they have identified companies
that look cheap on the surface, have worked
with the analyst or analysts to investigate and
evaluate the company's financials, and have talked
with suppliers, competitors, and customers.
" By then, we've formed a hypothesis on what
makes the company successful, " Cai says. The
purpose of the management visit thus becomes to
determine whether company executives
see their business the same way the portfolio
managers do, and if not, how they differ.
For this reason, they concede that not being able
to meet in person with company leaders for the
past two years made evaluating them a challenge.
They point out, as many other fund managers
have done, that although company executives-
barred from traveling-were actually more
accessible during the pandemic than they had
been before, there's nothing like being in
the same room. " We're eager to get on the road, "
says Cai.
Pzena Emerging Markets Value has not been
evaluated for an Analyst Rating by Morningstar's
manager research analysts, but the fund was
added to the list of strategies in Morningstar
Prospects in the first quarter of 2022. That
publication takes note of funds not covered by
Morningstar analysts but that have traits that
make them worth keeping an eye on.
Fees are a headwind here, ranking average for
the fund's institutional share class and above
average for the investor shares. Like all
emerging-markets strategies, this one takes on
risks beyond those that face developed-markets
offerings-and its overall Morningstar Risk
Rating is Above Average within the diversified
emerging-markets Morningstar Category.
That said, in his description of the fund,
Morningstar associate director of equity strategies
Christopher Franz says the managers' approach
" isn't for the faint of heart but has plenty
of merit. " In particular, he points to their deep
research team-it's now 28-strong-and
its " time-tested approach. "
As recent events have demonstrated, emergingmarkets
investing can be perilous and highly
unpredictable. Backed by the knowledge from
their varied backgrounds and decades of
investment experience, these managers stand
ready for whatever comes their way. K
Gregg Wolper, Ph.D., is a senior manager research analyst
at Morningstar Research Services LLC.
Photography by Christopher Lane.
https://www.morningstar.com/stocks/misx/sber/quote https://www.morningstar.com/stocks/misx/sber/quote https://www.morningstar.com/stocks/pinx/lukoy/quote https://www.morningstar.com/authors/13/gregg-wolper
Morningstar - Q2 2022

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