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Island Investing

Riffs, rants, and the upside of investing from way off Wall Street


IIM International Portfolios: 2021 Letter

“What’s It All About, ESG?”

It started with an announcement from a friend, a suggestion from an associate and a push, well make that a shove, from a colleague – it was time to pursue the CFA Institute’s certificate in ESG. I took all of the 130 hours recommended studying time, pulled out my pants pockets and lifted my cuffs for examination, shed my jewelry and sat for the exam in December.

For a fundamental investor, most of the information was intuitive. Haven’t we all questioned a company’s capital allocation decisions, supply chain robustness and manufacturing mishaps; and who hasn’t divested stocks whose home country invades another or whose CEO absconds? We all know, too, that ESG scores are like beauty, they are in the eyes of the beholder. Formal collaboration, though – I haven’t done that often; but I certainly would welcome it on some proxy items, like using shareholder funds for political donations. In the meantime, I learned that incorporating ESG doesn’t mean compromising returns; for example, the MSCI World ESG Focus Index performed comparably to the MSCI World with returns in 2021 of 21.55% and 21.82%, respectively; in addition, since 2008, they appear to have performed closely.

Regardless of your ESG, size or fundamental orientation, 2021 was tough on international investors, especially during the last quarter, as rolling lock downs due to COVID and fears of inflation spread around the globe. For the full year, international value indices did better than growth, although there was a little shift back to growth in the last quarter. The MSCI Chinese Index (standard, gross) was down 21.64% in 2021; the comparable Emerging Market Excluding China Index was up 10.53%.

Related to style dispersion, sector and industry performance and exposure impacted the relative returns of IIM’s international Spoke Funds®. Being underweight energy (and Canada), Frigate’s green tilt was one of the reasons it lagged its benchmark. Most of its pharmaceutical stocks , including Merck KgAA and Novo Nordisk, and Indian technology stocks, such as Wipro and Infosys did exceptionally well.

Japanese pharmaceutical company Takeda, however, declined as investors remained less than sanguine with its Shire acquisition. Other healthcare laggards were plasma collector Grifols and dialysis provider Fresenius Medical Care. In the meantime, macroeconomic uncertainty took a toll on the share price of Brazil’s Banco Bradesco. Our custodian Folio estimated cumulative, gross return of 88.83% for Frigate since inception through 2021 versus an estimated 66.46% return of its benchmark.

Treasure Harbor benefitted from the reinstatement of dividends and good revenue growth for many of its holdings. A rebound in consumer demand and strong brands drove earnings for luxury providers Richemont and LVMH and premium spirits producers Diageo. Meanwhile, lower provisioning and anticipation of higher growth propelled Bank of Nova Scotia’s earnings and share price.

Power generator Iberdrola was the only significant negative performing Treasure Harbor stock as it dealt with the threat of windfall taxes in Spain (ameliorated in 2022) on renewable projects and rejection of acquisition attempts in the US. Other stocks that had minor negative total returns were telecommunication companies Vodafone and Orange and Unilever. Folio estimates a cumulative, gross return of 39.96% return for Treasure Harbor since inception through 2021 versus an estimated 19.97% for its benchmark.

Continued outstanding performers in Yellowtail for the full year were Virbac, which manufactures and sells animal pharmaceuticals, and machined components supplier Minebea. French market research firm Ipsos posted 9-month revenue growth higher than pre-pandemic levels and raised expectations for the year, leading to very good performance of its share price.

The relative strength of the dollar was the biggest detractor from Yellowtail’s performance, with translation contributing over a negative 550 basis points to performance. In addition, my ESG lens went missing when I didn’t sell Atos after auditors found accounting errors in the spring at two of its US subsidiaries. The share price fell into 2022 even with the appointment of a new CEO – an appropriate governance action. French long-term care provider Orpea was also a detractor, partially due to announcing an investigation (of the seller) into the tax-treatment of a 2008 hospital transaction; the stock is under review. Since inception, Yellowtail has an estimated cumulative return of 64.27% through 2021 versus an estimated 67.58% for its benchmark.

Certainly, the process of acquiring the ESG certificate was a refresher on the definition and importance of investing in quality companies. It was also a reminder that before we are portfolio managers, citizens and members of the human race, we are denizens of this earth; an important factor for we long-term investors.

In addition to entertaining questions on our Spoke Funds®, I invite you make suggestions on ways we can tailor our investment processes to make them more relevant to you and your clients.

Happy New Year,
Lauretta “Retz” Ann Reeves, CFA AMWA


(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 NAV when available.

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.