Thoughts from Recent Meetings With Our European Companies

By Retz Reeves, CFA

I certainly didn’t anticipate that disruption would be the theme of my March European trip, but it was – physical, political and technological disruption. Before going further, I wish to extend my condolences to the victims of the London attacks and Lucerne train derailment and to family of the first responder who gave his life in the former. My thanks to my Lucerne contact who added on a meeting in Zurich to see me.

I thought that the political changes last year were going to cause serious disruption to our European investments, but outside of banks and employment companies, most of the managements with whom I met were not easily fazed. Many of those with sales in the U.S. already have matching production assets in the States, have work forces that have been around for generations and believe they can pass along any duties imposed on import components.

In fact, if infrastructure spending picks up in the U.S. and taxes go down (although neither of these should be simply assumed), earnings power could actually increase in our companies. Most companies without London City exposure were also rather sanguine about Brexit, as they believed the weaker pound would have translational – not transactional – impacts. Concerns In Europe were higher regarding the outcome of the upcoming French elections. Although not expected at the moment, the election of a far-right or far-left candidate could put further strain on the euro.

A Kantar Retail* presentation at the CAGE (Consumer Analyst Group of Europe) Conference I attended highlighted the disruptive forces of eCommerce. For instance, it is expected that 2018 e-commerce sales will reach over $2.24 billion and make up 15% of retail sales in the Americas, but only 1% in Eurasia and Africa. New technologies will impact shopping and search, supply chain replenishment and automation of product sales executed on computers, cell phones and new devices – either by old-fashioned typing, voice or automatically.

At the CAGE Conference I also heard from companies about the evolution of robots, enabling them to work next to humans, as well as how new technologies are allowing storage of renewable energy and enabling its more efficient delivery. Regardless of industry, technology continues to alter the competitive landscape across numerous industries – and companies that adapt will likely thrive.

Regardless of these disruptive forces, our international holdings in total have fared well to date this year.

For the first quarter of 2017 our large cap Frigate Folio had was up 7.2%**, contributing to a return since inception on July 1, 2013 of 16.8%. The gross return*** of the S&P ADR benchmark was 6.4% and 15.4%, respectively, over the same time periods.

Amid competition and concern over changing legislation, healthcare had a mixed but generally negative impact on performance in the first quarter, with generic company Teva being the biggest detractor. Energy company Technip FMC and Japanese auto manufacturer Nissan were also significant detractors. On the other hand, luxury companies, including Burberry and LVMH, were strong contributors to our performance, as were German companies SAP and Siemens and U.K. consumer company Unilever.

Treasure Harbor, our international equity income portfolio, also generated good performance, increasing 8.2% for the first quarter of 2017 and up 1.57% since inception on November 1, 2013. The corresponding specialized benchmark**** was up 7.0% and down 4.7%; respectively, for the same time periods.

Turning in slightly negative performance were Australia telecommunications company Telstra, U.K. utility SSE and the British shares of Royal Dutch Shell. Strong contributors included Brookfield Canadian Office Properties, Spanish companies Telefonica and Banco Santander, and Unilever.

The small/mid-cap Yellow Tail Folio also posted strong performance, up 8.0% for the first quarter this year. This slightly lagged its VSS***** benchmark, which was up 9.2% during the same period. Since inception in November of 2014, however, Yellowtail has yielded a 25.8% return versus 3.64% for the benchmark. Yellowtail’s first quarter had rather eclectic detractors, including animal health provider Virbac, stationer Societe BIC and Spanish Ebro Foods. The equally eclectic outperformers were French long-term care provider Orpea, Swiss travel retailer Dufry and Japanese food manufacturer Nichirei.

I still view both international currencies and stocks as attractive, but It appears that the disruption of all different types is bound to continue – it’s the world we live in, and it’s part of progress.

We will strive to monitor and anticipate these sea changes, and incorporate them into our analysis when selecting our stocks and our portfolios.

Please let Cale and myself know if you have any questions. In the meantime, thank you for investing along side of us.

– Retz

Notes:

* Gildenberg, Bryan, “Ecommerce/Changing the Sales and Marketing Ecosystem,” Kantar Retail (WPP).
** All returns for benchmarks, indices and Folios are estimated and unaudited.
*** Gross returns do not includes fees or taxes on international dividends and assume gross dividends are reinvested.
**** 15% SPDR S&P Emerging Market Dividend ETF & 5% SPDR S&P International Dividend ETF
**** Vanguard FTSE All-World ex-US Small-Cap ETF

About Retz Reeves

Portfolio Manager of the Frigate and Treasure Harbor Folios.
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