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Island Investing

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


IIM International Portfolios: First Half of 2023

Rocket Science

The second quarter of 2023 was more bizarre and tragic than the first. Following the incursion of the February Chinese spy balloons, the Pentagon admitted that there are plenty of unexplained anomalous phenomena (UAPs, formerly known as UFOs) floating around. Unrest spread through France as some rioters protested the increase in the retirement age; and others, police brutality. Yevgeny Prigozhin, the former head of the mercenary Wagner group terrorizing Ukraine, turned turncoat and marched towards Moscow, and then changed his mind. The Titan submersible imploded killing its five occupants who had hoped to view the Titanic. One of SpaceX’s Starship rockets exploded in May begging the question, “Do rocket scientists know rocket science?”

Throughout the first half of 2023, equity markets absorbed all the craziness and marched on, but not all strategies were in lock-step. While value indices were still overshadowed by banking crises, large cap growth indices roared back hinged mainly on the outperformance of seven stocks: Nvidia, Tesla, Meta, Apple, Amazon, Microsoft and Alphabet. As of the end of May, these stocks made up over 52% of the MSCI US Large Cap Growth Index; almost 30%, of the MSCI US Large Cap Index and over 25% of the MSCI US index. Of course, they drove the MSCI US index to outperform the ACWI-EX US index; and growth to outperform value, in global indices. Growth outperformed value even in the lesser concentrated small cap and international indices.

Frigate’s performance for the first half of 2023 was competitive. None of Frigate’s holdings were down drastically, but the detractors were eclectic. After historical strong growth for most of its divisions, Merck KGaA is facing margin headwinds in life-sciences post the COVID-19 pandemic; and in electronics, due to weakness in display solutions. The share price of Infosys, another perennial outperformer, weakened on investor fears that growth will be slowing. For National Australia Bank, investors were concerned about a short-term increase in loan losses and the long-term impact of inflation and contracting margins. Extreme outperformers included hospitality provider Accor whose growth should accelerate from the reopening of Asian markets and its migration into higher-end offerings. The easing of the pandemic and a return of dialysis patients contributed to a rebound in the Fresenius Medical share price. The reopening in China contributed to Adidas investor sentiment; that was bolstered by Adidas’s announcement that it would start to release some of its YEEZY product line (halted collaboration with Kanye West aka Ye). Some of this product will be donated to organizations that fight racism and hate. Since inception, Folio estimates Frigate’s cumulative, gross, time-weighted return as 80.7%.

Treasure Harbor trailed its benchmark which has 15% dedicated to an Emerging Market ETF EDIV, that had three top-ten Taiwanese stocks in which Treasure Harbor cannot invest due to their illiquidity. These stocks: Lite-On Technology, Quanta Computer and Wistron Corp yielded total returns over 80%, 118% and 200%, respectively, in the first half of 2023. Treasure Harbor did not experience any “tanking” stocks, but did share with Frigate the lagging National Australia Bank. Packaging manufacturer Amcor adjusted its current year outlook due to volatility in demand and higher costs and was the biggest detractor. Rio Tinto was down slightly and investors anticipate moderating iron ore prices. Luxury companies continued to do well, but a surprising performer was Deutsche Post, which despite normalization of demand, remained consistent with its earnings expectations. Not surprising, Taiwanese semiconductor provider ASX did extremely well. HSBC’s share price rebounded as its restructured focus on Asia and the UK is expected to lead to better return on investment. Since inception, Folio estimates that Treasure Harbor’s cumulative, gross, time-weighted return as 48.31%.

In June, US stock performance broadened beyond the top seven index components, and there are indications that the US market and risky assets have gotten expensive; Morningstar points out that their US composite was trading at a 23% discount to fair valuation in October, 2022 but at the end of June, this dropped to 5%, with growth stocks trading near fair value. James Mackintosh of The Wall Street Journal pointed out that many investors are embracing volatility and chasing heavily indebted companies, both in the US and abroad, that might have difficulty refinancing their balance sheets. He characterized investor behavior as a “dash for trash.”

I have to agree. To augment my last letter’s suggestions – be cautious, do your homework, factor in higher inflation and interest rates for a longer period of time and realize that neither you nor I know exactly what is going to happen. Even policy makers can’t agree on when or how much to raise rates. I guess if rocket scientists don’t know rocket science, it’s possible that economists don’t understand the economy.

While we wait and see, please feel free to contact Cale or myself with questions and enjoy the rest of the summer.

– 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.