The underperformance relative to the benchmark stems from a confluence of factors that worked against the Fund. Most notable among these was an overweight allocation to Indonesian equities as well as our underweight and weak stock selection within China and Hong Kong, which both did well during the quarter.
Indonesia’s capital markets have been weak since May of this year as investors seemed to fret over the prospect of a wide-scale withdrawal of capital from the country. Like India, Indonesia has been the beneficiary of foreign inflows over the past three years. However, in comparison to India, where the flows have been directed at equities, the proportion of inflows into Indonesia has been relatively greater in fixed income securities. As the flows stalled and then reversed, the central bank has been forced to raise interest rates to slow the depreciation in the Indonesian rupiah, thereby raising the cost of capital, which has further translated into lower growth. In such an environment, Indonesian equities suffered a broad-based sell-off. One of the Fund’s biggest holdings, Perusahaan Gas Negara Persero, detracted from Fund performance during the quarter, even though a significant portion of its business is relatively insulated from the gyrations of the rupiah.
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