IIM International Portfolios – Investor Letter for Q4 2016

Spreading out financial journals and newspapers, I began my literary diet and breakfast in the New Year. Yes, after a topsy-turvy year full of Brexit, terrorism, corruption and elections, I could still read and eat simultaneously; but the sector rotation, currency fluctuations and market volatility late in the year was upsetting my digestion a little bit. Adding insult to injury, I realized that it wasn’t cinnamon I had just sprinkled on my yogurt.

The strengthening dollar eroded the U.S. dollar value of many international stocks in 2016, and their representative indices, generally underperformed U.S. equities but benefitted by a late year rally. The S&P ADR index returned a gross* 6.34% versus the net return of Frigate, our international ADR portfolio, of 4.45%**. Since inception on July 1, 2013 through 2016, the cumulative net return of Frigate has been 8.82% versus a gross return of 8.46% for the S&P 500 ADR index.

In general, investors in pharmaceutical companies were concerned over pricing pressure and competition and this sector detracted from performance. Also some specific stock picks, such as the Swedish telecommunications equipment provider, Ericsson were laggards. On the other hand, energy and commodity companies had a positive influence on performance, as did technology companies Taiwan Semiconductor Manufacturing and SAP and industrial company Siemens.

I made no position changes in Frigate in the midst of the year-end volatility. At the beginning of 2017, I am looking at adding to some of our most undervalued positions, especially pharmaceutical companies, while monitoring all of our holdings and looking for new opportunities. In fact, I have already set up meetings in Europe for March. In the meantime, Frigate has two positions under bid – agricultural company Syngenta and British communications company Sky.

Treasure Harbor, our ADR portfolio focused on yield, also benefited from improving commodity prices and had a net return of 5.49% in 2016. This lagged its volatile specialized benchmark*** which was up 13.74%, although since inception on November 1, 2013 through 2016, Treasure Harbor was down 7.73% versus the benchmark return of a negative 10.95%. In 2016, healthcare had a slightly negative effect on performance, whereas telecommunication stocks had a mixed effect depending upon their location – European stocks underperformed and Canadian and Asian stocks outperformed. Indeed, in the final quarter, I trimmed outperforming New Zealand telecommunications Spark New Zealand, along with China Construction Bank. Taking advantage of post-election fears that seemed to spill over to companies exposed to Emerging Markets, I added to Spanish stocks Santander and Telefonica.

Despite currency headwinds of almost 3%, Yellowtail, our international small- and mid- cap portfolio, outperformed our other International portfolios with a net return of approximately 6% in 2016, handily beating its VSS**** benchmark which was up 0.36% over the same time period. Since inception in November of 2014, Yellowtail has returned a positive 17% versus a negative 5% for its benchmark. Stock selection appeared to drive local currency performance. In Japan, Sawai Pharmaceutical and Casio Computer were detractors while food company Nicherei and Sumitomo Heavy Industries were strong performers. In Europe, poor performance of Hikma and Virbac, human and animal healthcare companies, respectively, were offset by such investments as appliance maker SEB, security firm Prosegur, business service company Ipsos and diagnostic company Biomerieux. Elsewhere in the world, Tiger Brands, an African consumer brands company, also helped performance.

As 2017 starts, I am finding international stocks attractive: in general, they are trading at a discount to U.S. peers and the weaker local currencies enhance the competitiveness of their exports while making their share prices more affordable to the U.S. investor. So for those not invested internationally, I would suggest considering adding this “spice” to your portfolio. And for those wanting diversification beyond equities, we can also offer exposure to bonds, REITS and private equity utilizing Exchange Traded Funds (ETFs).

It’s not the same as selecting specific companies as investments, but in my own case, accidentally adding a different spice – cayenne pepper as it turns out – to my cereal and yogurt had surprisingly good results. I hope that any investments you make this year yield a similar positive experience.

Please write Cale or myself with further questions, and in the meantime, thank you for investing along side of us and Happy New Year.

– Retz Reeves, CFA



Notes:
*Gross returns do not include fees or taxes on international 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; 85% 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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