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Island Investing

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


IIM International Portfolios: Q1 2022

Just Another Megalomaniac Monday

Equity markets uncomfortably faced higher inflation and interest rate hikes going in to 2022, but as masks came off and supply chains loosened, there were signs of optimism. Then Vladimir Putin, President of Russia, decided to get the USSR band back together and invaded Ukraine. When Russia annexed Crimea in 2014, Putin gained the equivalent of a flautist and percussionist; with Ukraine, he could have a big enough band to compete in ‘America’s Got Talent’ – not that he’d be welcome here.

The invasion created a humanitarian crisis with cities under siege, citizens killed and refugees fleeing to neighboring countries, while other Ukrainians stayed and fought. As the incursion continued, various sanctions were imposed by the US, G7 and EU, sometimes in concert, on Russian exports, financial institutions and Russian elites. Commodity prices jumped, inflation surged, international companies relinquished Russian assets and the Ruble became rubble, before recovering somewhat.

In aggregate, both US and broad International benchmarks were down about the same with MSCI EM benchmark down a bit more. The big divider of performance regardless of region or size was the great underperformance of growth stocks. This is a typical phenomena when rising interest rates further discount the present value of earnings promised further in the future. Inflation and the war in Ukraine also add uncertainty to future earnings. On the other hand, many value stocks exposed to commodity prices and/or are expected to pay a significant dividend did very well.

On a gross basis, Frigate slightly underperformed international equity indices but outperformed its benchmark. Bayer AG was the strongest performer in Frigate as investors appreciate the waining influence of glyphosate litigation and growing visibility of its pharmaceutical innovation. AstraZeneca’s share price also benefitted from its product and pipeline, especially within oncology. Not surprising, one of the best performing Frigate stocks for the quarter was TechnipFMC, which provides deep-water offshore oil and gas development solutions. Unfortunately, the Ukraine incursions exacerbated earnings downgrades for companies with business and employees in the region and/or whose margins are suffering from inflation such as ball bearing manufacturer SKF and Siemens AG. The latter also suffered from a deteriorating outlook for its majority owned Siemens Energy, whose Siemens Gamesa Renewable Energy subsidiary reported first quarter losses. Chipmaker Infineon, which itself was a spinoff of Siemens, was downgraded by some analysts concerned with the trajectory of the cycle; its stock price fell significantly during the quarter. Since inception, Folio estimates a gross, cumulative return since inception of 77.67% for Frigate versus an estimated 65.44% for its benchmark over the same period.

Heavily value-skewed Treasure Harbor did well versus its benchmark. Inflation, and sanctions on Russia were helpful to Treasure Harbor’s resource heavy stocks, including: BHP Group, Shell PLC and Pembina Pipeline. Higher energy costs, however, worked against projected earnings and the share price of Deutsche Post. Share prices of luxury good providers such as Richemont and LVMH fell as they shuttered stores in Russia, as did the prices of Unilever, which is limiting exports to Russia, and CCEP (Coca-Cola Europacific Partners). Folio estimates a cumulative, gross since inception total return of 42.72% for Treasure Harbor versus a 19.91% return for its benchmark.

Alas, Interactive Brokers has stopped all international trading in models. As such, I will no longer report on Yellowtail in this letter unless/until we find a new platform or I can reconstitute the model as ADRs. There will still be some smaller stocks, like those that manufacture Swiss chocolate and pretzels, scattered among our accounts – so although you may find Yellowtail on the menu in your favorite Keys’ restaurant, you won’t find it here.

We are in an uncomfortable spot in the US as supply chains choke-up again, inflation jumps and the war in Ukraine wages on. Ukrainian citizens and refugees are in a much tougher spot. I have not done due diligence on individual charities, but NBC’s ‘Today Show’ lists 15 charities working to help Ukrainians amid the invasion. That link is here:

Just like investing in stocks or bitcoin, it’s wise to do a bit of due diligence before donating.

Please write or call with any questions, but in the meantime, please be safe.

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. Returns estimated based on NAV.

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.