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Island Investing

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


IIM International Portfolios: 2022 Letter

A Year of Geopolitical, Economic and Financial Tectonic shifts.

The earth seemed to tilt on its axis in 2022 more than usual. Russia invaded the Ukraine in February and both sides battled throughout the year. North Korea launched ballistic missiles over Japan. China threatened Taiwan’s independence. The UK lost its monarch of over 70 years and two prime ministers.

After decades of exporting inflation to Asian countries with cheap labor, Western nations experienced a huge jump due to COVID shut downs, increased energy prices and interruptions in supply chains. Interest rate increases followed suit and fears of regional recessions grew.

Neither stock nor bond markets were happy with rising rates. According to Morningstar, US core bond funds lost an average of 12%. The S&P 500 sank almost 20%, its worse year since 2008. Higher imposed discount rates on lower anticipated earnings took a toll on growth stocks, while energy and defensive stocks did well. Market indices (and relevant ETFs) saw major shifts in the ranking of their holdings. The fourth quarter brought some indications that inflation was easing and many public markets posted positive returns; but regardless of size, value greatly outperformed growth for the whole year.

On a gross basis for the year, Frigate underperformed its benchmark by about 160 bp. Many of its holdings experienced a good bounce in the fourth quarter, but that wasn’t enough to offset the retreat in the previous nine months. Adidas was among the worst performers along with Indian IT company Wipro and dialysis company Fresenius Medical. in addition to losing sales in China, Adidas took write downs on its Yeezy apparel line as it terminated its relationship with the performer formerly known as Kanye West. In the meantime, Wipro lowered revenue growth guidance while highlighting higher costs due to wage inflation. Fresenius Medical Care promised improve performance that was disappointing during the height of COVID, but investors were spooked when its relatively new CEO stepped down late in the year. Given the strong energy prices, it was not surprising that offshore oil and gas solutions provider TechnipFMC was on of the best performing stocks. Pharmaceutical companies AstraZeneca and Takeda were also leaders. Since inception, our trading platform Folio estimates that Frigate’s cumulative, gross return was 58.49% as of December 30, 2022.

Although defensive Treasure Harbor turned in negative returns for the year, it did much better than its benchmark and most long-only international strategies. Two of the detractors were persistent throughout much of the year and included Bank of Nova Scotia and Deutsche Post. Investors are wary about the Scotia’s ability to navigate an economic slowdown in Canada, and Deutsche Post was negatively impacted by higher energy costs. Vodafone joined the ranks of underperformers after reporting disappointing results in Germany and Italy. As expected, the strongest performers were energy companies Total and Shell and diversified miner BHP. Folio estimates that since inception Treasure Harbor has generated a cumulative, gross return as of 37.02%.

Financial markets may still be rocky the beginning of 2023. None of geopolitical threats highlighted in the first paragraph have been resolved, and they will likely overhang investor sentiment for some time. It is expected that the Fed will continue to raise rates the beginning of the year; but as some pockets of inflation are retreating, it is likely that the hikes will not be as drastic. Many economists expect that parts of the world will dip into a recession in the first half of the year before improving the second half. Fluctuating macro environments could lead to sector and regional rotation.

The markets maybe unsettled, but they are also trading at attractive valuations. Morningstar estimates that its US composite is trading at a 16% discount to its intrinsic value – a relative level only seen 5% of the time since 2010. Data platform Simply Wall Street estimates Frigate is trading at 27.5% discount to its intrinsic value and Treasure Harbor is trading at a 31.2% discount. Good valuations combined with sector rotation could lead to interesting opportunities for the patient investor.

Please let us know if you have any questions about our investment outlook; but in the meantime, we hope for you a safe and 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. 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.