Portfolio Positioning and Activity

In general, our investment focus is based on the inclusion of high-quality companies with strong growth potential, proven management, growing franchises, and solid fundamentals.

Adding to Energy

Following the good news from OPEC and the agreed upon oil production cuts, we added exposure to the energy sector, moving from an underweight to an overweight position.

• We topped up our position in the Canada-listed oil and gas company Africa Oil. The company has significant assets in Kenya, Ethiopia, and Somalia and is set to resume exploration and drilling within a major Kenyan basin in which it has four key wells. This should boost production next year, while progress toward field development plans continues. We believe Africa Oil is attractively valued and has a solid cash balance, which should help it to weather any downside risks such as oil price volatility.

• We initiated a position in Tullow Oil, an independent exploration and production company with licenses in more than 20 countries, ahead of an expected sale of some access licenses among its Ugandan assets. The deal should help ease the capital expenditure burden associated with developing its East Africa interests. The UK-domiciled company has operations in Europe, Africa, South Asia, and South America, although its main exploration potential is focused on the rift basins of West and East Africa and South America.

• We also opened a position in the UK-listed but Middle East-domiciled oil services company Lamprell. The company has an international reputation for building complex offshore and onshore modules and platforms and as the price of oil recovers, more exploration projects are likely to be initiated. Lamprell has also taken steps to diversify its involvement in construction projects and undertaken an efficiency drive, which should serve it well in the industry's tough pricing environment.

Preparing for a Brighter Outlook

While growth in frontier markets was relatively sluggish for much of 2016, indicators for future performance have turned up sharply in recent months. As a result, we have trimmed some positions in defensive areas such as utilities (where we have moved from overweight to underweight) and industrials and business services (still overweight but less so) in favor of increased exposure to consumer spending, most notably discretionary spending.

• We eliminated our holdings in the Pakistani utilities K-Electric and Hub Power, taking profits after a period of strong performance. In the case of the latter, the government's unexpected decision to drop some of its investment in the company presents significant risk to our investment case and was another reason why we closed the holding.

• We opened a position in the Saudi Arabian food manufacturer Savola, taking advantage of share price weakness. As well as its own operations, Savola has investment interests in fellow food businesses Herfy Foods and Almarai. The company's management successfully navigated the tough economic conditions of 2016, and we believe this should stand it in good stead during a more prosperous 2017.

• We participated in the IPO of Romania's largest health care provider, Med Life. We believe the business is well positioned to benefit from the growth and consolidation in private health car, due to its economies of scale and competitive advantages. Med Life is led by an entrepreneurial management team with a proven track record of shrewd capital allocation, and we expect cash flow and sales growth to accelerate over the next few years.

Taking Some Profits

As 2016 drew to a close, we took the opportunity to take some profits in a wide range of stocks that had performed well in our bottom-up investment strategy.

• We trimmed our holding in Morocco's largest bank, Attijariwafa Bank, after its shares made a significant recovery in 2016. We retain a small overweight to the stock, nevertheless, as we expect further gains given the bank's high-quality proposition and a supportive, steadily improving, macroeconomic backdrop underpinned by structural reforms.

• We took profits in Vietnam Dairy Products, the country's leading dairy producer, deepening our underweight position versus the benchmark. While the stock has been a top contributor for our portfolio over time, valuations have now reached very high levels, in our view, and the shares appear expensive relative to dairy peers. Furthermore, we see growing pressures on the horizon, including a hike in raw milk prices.

• A strong contributor to performance again this quarter, we took some more profits in Sri Lanka's Ceylon Cold Stores. The stock price of the food and drinks manufacturer and retailer rallied substantially over 2016, and we sold some shares on this strength.

Country Allocations

As a bottom-up fund manager, the stocks in the portfolio are selected on the basis of their individual investment case rather than their country of listing. Therefore, most changes to country weights are driven by stock selection rather than top-down macroeconomic matters. However:

• Over the quarter, we have moved further underweight Kuwait and Morocco, which are already our two biggest below-benchmark positions. We are finding better investment opportunities outside of Kuwait, and Morocco is becoming increasing expensive in terms of valuations.

• We remain positive on Asia given the diversity of interesting and well-managed companies we are able to find there, so we remain overweight Sri Lanka, Vietnam, Pakistan, and Bangladesh.