IIM International Portfolios: Q1 2021

History is Rhyming

The provenance of “History doesn’t repeat itself, but it often rhymes,” is questionable but sure seems to apply today to pandemics and stock scandals.  Although the current pandemic has not run the course, vaccines and therapeutics to counter secondary infections should keep the death rate below the 50 million experienced during the 1918-1919 pandemic, when  hygiene, disinfectants, quarantine and social distancing were the main weapons applied unevenly against the spread. In the meantime, I can’t help but shake my head at the meltdown of the overly leveraged family office Archegos Capital, which was run by Sung Kook “Bill” Hwang, who was convicted of insider trading when he was founder and manager of Tiger Asia Management.  Banks such as Credit Suisse and Nomura took billions of write downs when they liquidated positions to cover margins calls that Arechegos couldn’t.  If history rhymes, why don’t we listen? 

Still, despite distribution hiccups, as more vaccines were administered, especially in the US, global equity markets continued their appreciation in the first quarter of 2021.  In general, US stocks did better than international stocks, international developed markets did better than emerging markets,  value stocks,  whether big or small/US or international,  did better than international growth stocks.

Some strong 2020 performing Frigate stocks such as banks BNP and Bank of Nova Scotia and  Asia linked   DBS and Prudential continued to outperform in the first quarter of 2021.  Some Healthcare stocks suffered from COVID-19 lockdowns and lower patient visits including pharmaceutical company Novartis, Dialysis provider Fresenius, plasma collector Grifols and orthopedics developer Smith and Nephew.  After performing well in 2020, Adidas was also a detractor. Frigate’s net performance lagged that of the S&P500 index,  which benefitted from its high weights in Canada (over 20% at quarter end), Financials (over 23%) and Energy (over 10%).  According to Morningstar, their Global Markets ex U.S. Index gained 5.5% in the first quarter.  

Treasure Harbor benefitted this year as more companies reinstituted dividends, although not always the same as previous levels.   Banks such as Bank of Nova Scotia and National Australia Bank did well, but Taiwanese semiconductor assembly and testing firm ASE Technology was the strongest performer. Pembina Pipeline offered up a positive earnings surprise and also did very well. Detractors were down less than 10% and included defensive stocks that did well during the height of the pandemic including Nestle, Iberdrola, Unilever and Spark New Zealand.  Still struggling with currency headwinds and COVID’s impact on the beer market, AMBEV continues to be an underperformer.

As usual, Yellowtail swam in its own current, with Japanese stocks among the best performers. These included glass provider AGC Inc. and electronic components supplier Minebea Mitsumi both of whose products are linked to automobile demand; a third was Sumitomo Heavy Industries which manufactures a wide range of industrial machinery. Swiss EFG International, an asset management and private banking group, was also a very strong performer. On the other hand, the performance of IT service company ATOS SE was very disappointing after failing to takeover DXC Technology and announcing a review of its US accounting. Other detractors were in the healthcare space, including: generics manufacturer Hikma and long-term care operator Orpea. The stronger US  dollar, especially versus the Swiss franc and euro, eroded over half the local currency gains for Yellowtail. Its benchmark, however, benefitted from its high exposure to Canada, whose currency appreciated versus the dollar.

With my recent location to Raleigh, I have been fortunate to “attend” asset outlook  Zoom meetings hosted by the North Carolina CFA Society. Consensus seems to be that the US economy, on the heels of rising vaccination rates and reopening businesses, will continue to grow well; but with excess capacity of funds and labor, inflation is expected to be tame until 2022 or 2023. Under this scenario,  underpinned by low interest rates and bond yields,  US equities remain attractive.

In it’s April 2021 World Economic Outlook, entitled Managing Divergent Recoveries, the IMF lifted its projections for Global Growth to 6 percent in 2021 and 4.4 percent in 2022. The report highlights that certain economies and certain populations such as youth, women and workers with lower education have been hit hard and income inequality is likely to increase due to the pandemic. Although risks appear to be balanced for now, high uncertainty about the global outlook, which will be influenced by the “the path of the health crisis…;the effectiveness of policy action….; the evolution of financial conditions and commodity prices and the adjustment capacity of the economy”  exits. The report suggests that strong international cooperation is vital for achieving objectives that will evolve over time from escaping the pandemic, maintaining fiscal support, limiting long-term economic scarring boosting productivity to efficiently allocating productive resources.

Strong international cooperation has always been needed after disasters, whether they are economic, environmental or humanitarian. History is rhyming – let’s listen.

– 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.

Footnotes:

[i] Performance figures are estimated and unaudited. Estimated Benchmark Returns are in the column to the right of its respective Folio. Net Returns are after international taxes on dividends,  management fees and trading fees, when necessary.  Historical returns are available on request and at Callan and Investment Metrics.

[ii] Gross Return

[iii] Benchmark is 15% SPDR S&P Emerging Markets Dividend ETF + 85% SPDR S&P International Dividend ETF. Total return estimated after taxes on distribution.

[iv] Benchmark is Vanguard FTSE All-World ex-US Small-Cap ETF. Total return based on price.

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About Retz Reeves

Portfolio Manager of the Frigate and Treasure Harbor Folios.
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