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Island Investing

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


IIM International Portfolios: Q1 2023

No Beautiful Balloons

I don’t think The Fifth Dimension was thinking of Chines spy instruments when they asked if we wanted “to fly in my beautiful balloon,” but white balloons, which China claimed were rogue weather monitors, came traveling over the US and South America in February. The US shot down one off the East Coast, but not before it gathered intelligence. This incident aggravated the tensions already building between the US and China, and certainly didn’t help investor sentiment.

A bigger ballooning problem was the mismatch in the duration of deposits, loans and assets for some US regional banks such as SVB (Silicon Financial Bank) Financial Group. SVB was forced to sell US government securities, intended to be held to maturity, at discounts as interest rates rose and panicked depositors demanded their underinsured funds. The panic spread to other regional banks leading the FDIC and other relevant agencies to step in and guarantee deposits, even if they weren’t federally insured. This scenario led to a reversal of the 2022 preference for value versus growth stocks as investors this year fled away from banks, especially small ones, and embraced US large cap consumer and tech stocks.

Internationally, investors began peeling back the curtain on the riskier practices of large banks such as Credit Suisse. Even government promises couldn’t assuage investor fears which led to a forced marriage between Credit Suisse and UCB. Fear rippled through the European Banking system impacting the share prices of many financial companies during the quarter. The preference for growth versus value stocks spilled into international markets, although the gap in relevant indices was not as severe as in the US.

Although none of Frigate’s holdings fell significantly during the first quarter of 2023, healthcare stocks were among the major detractors. Roche experienced setbacks in its Alzheimer’s trials, blood plasma company Grifols gave disappointing 2023 guidance and Japanese Astellas announced third quarter earnings below expectations and the detention of a local executive in China. Singapore DBS Group Holdings performed better that many Europe financial companies, but its share price did fall slightly. Many of the outperformers in the Frigate benefitted from the rotation into growth stocks and/or the reopening of China and included luxury fashion provider Burberry, hotel operator Accor, chipmaker Infineon and ball bear supplier SKF. Since inception, Folio estimates that Frigate’s cumulative, gross return as 73%.

Even with rising interest rates, international stocks with good dividend yields remained attractive investments for Q1 2023. Having no holdings in Credit Suisse or Deutsche Bank, Treasure Harbor didn’t experience any major disasters, but the banking crisis did take a toll on Barclays Bank of the UK. Moderating prices negatively impacted some commodity stocks prices resulting in negative performance of Rio Tinto and Total. Other minor detractors include UK packaging company Amcor and New Zealand utility Spark. The prices of luxury companies, which tend to pass on inflation, such as Richemont and LVMH did very well, as did ASE Technology and Deutsche Telekom. Since inception, Folio estimates that Treasure Harbor’s cumulative, gross, time-weighted return as 45.94%.

Sector rotation is generally healthy, it provides fundamental investors opportunities to buy great companies that happen to be in industries temporarily out-of-favor. The reasons for the rotation this year, however; stubborn inflation, rising interest rates and lapsing global financial oversight is troubling. (For why, however, this isn’t like the last financial crisis, please see Cale Smith’s recent email posted on our blog here.) This is a time for investors to be cautious: factor in slow economic growth, discount unreasonable earnings expectations and regardless of how you feel about ES&G, consider the G; because certainly there has been a lack of governance in the financial sector on many levels.

In the meantime, as you start to plan your next vacation, consider a ride in a hot air balloon – just make sure it’s not made in China.

– 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.

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.