IIM International Portfolios: 2019 Letter to Investors

What A Year It Was

What a difference a year makes! Overshadowed by Brexit, trade wars and fears of a recession equities dropped precipitously the last quarter of 2018 and created a bit of trepidation entering last year.

Indeed, these forces still played a part in investor sentiment during 2019, but as the year progressed, some stressors were alleviated. Although not overly robust, the economy kept churning forward.    In December UK Prime Minister Boris Johnson retained his position almost ensuring that an “orderly” Brexit will  go forward. Also in December,  both China and US took steps toward decelerating the trade war with the US offering to reduce some tariffs and China offering to better protect US intellectual property. In the fourth quarter, the MSCI All Country World Index jumped 8.95% leading to a net return in 2019 of 26.6% and the ACWI ex-US had a net return of 21.51%.   

For 2019, Frigate our international ADR Folio focused on capital appreciation had a net return of 19.47% versus the gross return of its benchmark the S&P 500 ADR index of 16.68%.   Taiwan Semiconductor Manufacturing Company was a very strong contributor as it reported earnings ahead of expectations and raised capital expenditure plans due to strong demand. Additional drivers were French Schneider Electric, a provider of energy and automation digital solutions, and Swiss-based Adecco, which is one of the world’s largest staffing companies. The share price of IT Indian company Wipro fell slightly amidst a slowing services industry as did that of China Petroleum and Chemical Corp (also known as Sinopec)  amid the uncertainty associated with China’s new National Pipeline Company. Neither of these circumstances warranted a change in their positions. Since inception on July 1, 2013 Frigate has returned a cumulative 35.28% versus its benchmark of 30.01%.

For 2019, Treasure Harbor our international ADR Folio focused on dividend income, was up 14.47% versus its blended benchmark  (15% SPDR  S&P Emerging Market Dividend  ETF and 85% SPDR S&P 500 International Dividend ETF) of  18.97%.  Luxury goods manufacturer LVMH was a very strong contributor to performance especially after announcing its acquisition of Tiffany. Investors also appreciated LVMH’s intent to optimize their portfolio  and use excess cash to buy back shares.  As mentioned in earlier letters,  Rio Tinto performed well along with higher iron ore prices although anticipating an eventual correction, the stock was trimmed.  There were no large negative performers but share prices of telecom companies Orange and Telefonica corrected last quarter, apparently during some sector rotation. Since inception on October 1, 2013, Treasure Harbor has returned 8.7% versus its blended benchmark of 14.47%.

For 2019, Yellowtail, or international small/mid cap Folio, had a net return of 17.48% versus its benchmark VSS (Vanguard FTSE All-World ex-US small cap ETF) of 21.36%. French animal health company Virbac and electronic components company Minebea Mitsumi had great rebounds consistent with good business performance and improved outlook.  Swiss Life continued to generate good growth and also was a great contributor. On the other hand,  Ireland-based, nutrition provider group Glanbia turned in a very disappointing performance.  Channel shifts and tariffs  weighted on investor sentiment, and the company faced additional challenges in it Performance Nutrition division outside of the US and  increased debt burden from its purchase of Slimfast. French BIC continued to have a disappointing year as it was impacted by a deterioration of the lighters market in the US and softer stationery sales, although they remain confident in their “BIC 2022 Invent the Future” plan. German Wacker Chemie also underperformed as management cut guidance due to week polysilicon prices. Since inception of 12/1/2014, Yellowtail has returned a cumulative 34.29% versus its benchmark of 31.78%.

 It is nice going into 2020 that some trading issues are resolving but there are still plenty of uncertainties and challenges.  For instance, although the UK will formally leave the EU on January 31, 2020, they still will be negotiating during the transition period, which is supposed to end December 31st this year, issues regarding trade, law enforcement, data sharing and security.  In the meantime,  the EU and the US are trading tariffs on digital services, aircrafts and agricultural products. Very worrisome, especially for me,  are prospective tariffs on European wines which will likely have a negative impact on US retailers, distributors and restaurants.*  The uncertainties involving trade and geopolitical tensions are so worrisome that despite noting the cushioning impact of accommodative monetary policies and growth in the service sector, the World Economic Outlook in October of 2019 noted the outlook remains “precarious.” It will be interesting to review the next World Economic Outlook to be published on January 20th.

Although my research takes into consideration the precarious economic outlook, I am more interested in how individual companies navigate external stressors while still managing to introduce new technologies and products and grow earnings. There are plenty of companies with these characteristics, but with the recent market rise, finding stocks trading at attractive valuations will be a little more challenging. Still, the MSCI US index  is trading at a forward P/E of 18.74x versus the MSCI ex-US index forward P/E of 14.44x so I’m sure if I grab my passport, hop on a plane and keep searching, I will find some good investments.

 What a year 2020 will be!

Thank you for investing along with Cale and I at IIM. Please don’t hesitate to call or write with questions.

– Lauretta “Retz” Ann Reeves, CFA AWMA

*Teague, Lettie. “How Tariffs Could Devastate the Wine World,” The Wall Street Journal, Jan. 8, 2020.

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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