IIM International Portfolios – Investor Letter for Q3 2016

By Retz Reeves, CFA

Investing internationally this year has been like being nudged to shore by a friendly dolphin after falling off a boat into ten foot, shark-infested seas. From the west, we can see the Coast Guard approaching – from the east, a Category 5 hurricane is swirling.

Still, higher oil prices, improving emerging markets and accommodative monetary policy overcame investors’ concerns over terroristic acts, exploding phones, Brexit (the UK’s decision to leave the European Union) and the solvency of Deutsche Bank – one of Europe’s largest banks.

The gross return* of the S&P ADR index was a positive 5.8% through September this year**, versus the net return of the comparable Frigate portfolio of 5.13%. Swiss Bank Credit Suisse, which we sold, detracted from performance as did the generic manufacturer Teva and U.K. satellite television operator Sky. On the other hand, athletic manufacturer Adidas performed so well it reached full valuation and exited Frigate. Emerging market stocks Banco Bradesco and Taiwan Semiconductor Manufacturing were also strong contributors. Other major changes in Frigate included the initiation of a position in Danish Novo Nordisk, a healthcare firm specializing in diabetes care, and the repurchase of Luxottica, the world’s largest eyewear manufacturer. Since inception on June 30, 2013, through September 30, 3016, the Frigate folio has returned a net 9.5% versus the gross return of 8.0% for the benchmark.

Treasure Harbor (TH), our international income portfolio, fared better on an absolute basis during this period, returning almost 8%.0 net. As expected, however, higher energy prices and emerging markets drove the custom benchmark*** even higher, as it produced a 15% return. Credit Suisse was a major detractor from TH performance as were two French companies – pharmaceutical manufacturer Sanofi and telecommunications company Orange. Significant positive contributors were Canadian companies Pembina Pipeline Corp, Scotiabank and Brazilian beverage company Ambev. Major changes in Treasure Harbor included the elimination of the Credit Suisse position and the initiation of a position in Diageo PLC, a global leader in beverage alcohol. Since inception on September 30, 2013, Treasure Harbor has outperformed its benchmark, turning in a negative net return of 5.6% versus a negative 10.60% for the benchmark.

Yellowtail, our small/mid-cap portfolio, performed the best of all of our international portfolios – up this year 9.4% through September versus approximately 6.25% from its VSS benchmark****. In general, our aggregate Japanese exposure and our positions in Italian financial company Banca Generali and French animal health company Virbac were detractors, while French research firm Ipsos and small appliance manufacturer Groupe SEB and Spanish security firm Prosegur were strong positive contributors. During the year, German flavor and nutrition company Symrise reached full valuation and was sold, while a position in Spanish Distribuidora Internacional de Alimentacion SA (DIA) was initiated. Since inception on November 11, 2014, through the end of September 2016, Yellowtail has returned approximately 21.25% versus its benchmark VSS, which has returned approximately 1.0%.

Although our international portfolios turned in a positive performance, as expected, they lagged our U.S. portfolios, which have a higher gearing towards energy prices. Cale’s latest update on our U.S. portfolios is available on our website.

As Brexit unfolds and U.S. elections proceed, I expect both international and U.S. markets will be volatile and investing will remain challenging in the near-term. Nonetheless, my recent attendance at the Burroughs Wellcome Fund New Awardees Network Meeting gives me hope for the future. There scientists detailed research in such areas as reproductive science, antimicrobial surfaces, neural recovery, viral immunology and genetic editing. I am confident that work in these labs, as well other research done all over the world in fields such engineering, technology, marine science and agriculture, will eventually translate into new products and treatments, some of which will be commercialized and available for investment into our portfolios.

Thank you for investing alongside of us, and please call or write with any questions you may have.

– Retz Reeves, CFA

Notes:

* Gross returns do not include fees or taxes on dividends, and assume gross dividends are reinvested.
** All returns for benchmarks, indices and Folios are estimated and unaudited.
*** 15% SPDR S&P Emerging Market Dividend ETF; 35% S&P International Dividend ETF
**** Vanguard FTSE All-World ex-US Small-Cap ETF

Disclaimer: This post nor any of the material linked to herein in any way constitutes investment advice. Historical performance data above represents performance results as reported by the portfolio identified. Performance results are for illustration purposes only. Historical results are not indicative of future performance. Positive returns are not guaranteed. Individual results will vary depending on market conditions and timing of initial investment. Investing may cause capital loss. The publication of this performance data is in no way a solicitation or offer to sell securities or investment advisory services.

About Retz Reeves

Portfolio Manager of the Frigate and Treasure Harbor Folios.
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