IIM International Portfolios: Investor Letter for First Half ’19

Mr. Toad’s Wild Ride

When I first moved to Florida, circa 40 years ago, I couldn’t wait to go to the Magic Kingdom at Walt Disney World. I loved the scary rides, the roller coasters and in particular Mr. Toad’s Wild Ride, where guests launched through various scenes from The Wind in the Willows.  Depending upon on what track was chosen, guests crashed into a library, witnessed a shoot- out, escaped an oncoming train, and descended into a tongue-in-cheek Hell. What fun! Having grown older and put away childish things, I no longer like scary rides – or anything scary for that matter – but as an investor sometimes you have no choice but to hold on for the ride – like during the first half of 2019. 

Markets reacted, sometimes violently, to trade tensions,  Brexit fears, lowered GDP estimates and uncertain interest rates.  For instance, the MSCI ACWI (Morgan Stanley All Country World Index) fell over 9% in December of 2018, jumped almost 8% in January, fell around 6%  in May and jumped almost 7% in June. The gross return of this index  for the first half of 2019 was 16.6%.

For the same period, Frigate, our ADR  international  equity capital appreciation Folio, had a net return of 12.39% versus the gross return of the S&P 500 ADR  index of 11.53%. Since inception on July 1, 2013, Frigate’s cumulative performance was +  27.27% versus its benchmark of 24.26%.  The few  negative performers included  Japanese pharmaceutical company Takeda, acquired from its buy -out of our position in Shire Pharmaceuticals, and German semiconductor manufacturer Infineon.    Rio Tinto and BHP share prices benefitted from persistently high iron ore prices, and were trimmed and sold, respectively. Among other significant positive contributors were France- based Schneider Electric, which provides Energy and Automation digital solutions, and Germany-based SAP, which is refocusing its product offerings on the cloud.  

 For the first half of 2019,  Treasure Harbor, our international  equity Folio that focuses on dividend yield,  had a net return of 10.29%  versus  its benchmark’s  (15% SPDR S&P Emerging Market Dividend ETF; 85% SPDR S&P International Dividend ETF) return of 14.27%. Since inception on November 1, 2013. through June 2019, Treasure Harbor’s cumulative performance was  +4.79%  versus its benchmark of +9.95% .  This year, the significant detractor was British-based Vodaphone, which cut its dividend, freeing up cash for its pursuit of  Liberty Global and its execution of transformational  strategy. Similar to Frigate, Rio Tinto and BHP were significant contributors to performance, and their positions were trimmed. Another major contributor was Parisian luxury good manufacture LVMH, a former position in Frigate that was bought back in TH last year. Another repurchase, Swiss-based Nestle, also did well.

Yellowtail, our international smalI/mid- cap equity portfolio was up 10.64% versus its benchmark, VSS (Vanguard FTSE All World Ex-US Small Cap. ETF)  of 12.15%.  Since inception date of December 1, 2014 through June of this year, Yellowtail’s net cumulative total return was 26.48% versus its benchmark of 21.78%. In a tough 2019  trading environment, French consumer product company  BIC weighed on performance, although I am hopeful that the “BIC 2022” transformational plan will lead to improved earnings in the future.  After reporting 2019 earnings,  the share price of Japanese packaged-food supplier, Nichirei, underwent a correction. Reviewing the company’s mid- and long-term plans, however, I am confident that they will be able to return to path of sales growth and margin expansion. On the other hand, I sold, regretfully, Swiss contract manufacturer Lonza as its share appreciated it out of the mid-cap space. On the heels of strong first quarter results, French-based provider of small appliances and cookware Groupe SEB performed very well, as did Swiss-based chocolate manufacturer Barry Callebaut, after reporting nine months numbers.

As we enter the second half of 2019, I expect the volatility to continue and possibly increase.   The contenders for the next British PM are leaning toward a hard exit from the EU, trading issues are arising in all parts of the world and the economic outlook remains uncertain. Volatility isn’t all bad.  When stock prices become stretched, it’s a great opportunity to raise cash for the war chest.  When negative news puts pressure on share prices or creates sector rotation, there is opportunity to buy great stocks at value prices. Both scenarios have occurred over the past 12 months, and I expect will occur again.

So, let’s make the most of the ride! Oh, by the way,  Mr. Toad’s Wild Ride closed in 1988; replaced by The Many Adventures of Winnie the Pooh. I guess that’s more my style.

Please don’t hesitate to contact Cale or myself if you have any questions about any of our Folios or Financial Planning products, and thank you for investing with us at Islamorada Investment Management.

– Lauretta “Retz” Ann Reeves, CFA AWMA

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.

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About Retz Reeves

Portfolio Manager of the Frigate and Treasure Harbor Folios.
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