The Island Investing Blog

  • Brexit or Not to Brexit

    Deal or No Deal

    On September 10th, I headed to Europe with my two-country Eurail Pass and a notebook full of questions for some of IIM’s Swiss and German current and prospective investments. I was especially interested in their perspectives on raw material prices, tariffs and Brexit – unpredictable, but interrelated, issues.

    Tariffs can be an effective method for discouraging predatory dumping and protecting domestic industries, but in the process, they can increase input costs for manufacturers and retail prices for consumers as well as lead to retaliating tariffs. Most of the companies with whom I met are able to match prices with changes in input costs, albeit with a lag, and smooth gross margins over time. Due to elasticity of demand, however, some feared that higher prices would lead to lower volume growth and dampen economic activity. While discussions on metals, dairy and autos are threatening Canada’s participation in NAFTA, Chinese tariffs placed on agricultural commodities are already having a negative impact on US farmers, and new ones have gone into effect on about $60 billion worth of US goods, including more food products, chemical products and aircraft.

    Tariffs on US products could benefit European exporters, but a no-deal Brexit could create billions of dollars of tariffs on items such as food, beverages, cars and clothes on both UK and EU exports. Investors and companies all hope that UK PM Theresa May can put together an acceptable Brexit plan; but wanting to minimize the risk of other country exits, the EU has taken a hard line and rejected the most recent proposal. Exacerbating the process is the prospect of a hard border between Ireland (member of the EU) and Northern Ireland (Part of the UK) and the economic relationship with the EU SHOULD the UK actually Brexit.

    In the personal opinion of some company IRs and UK fellow travelers, the current UK government would like to stall and kick the Brexit can down the road to future parliaments, but there are fears that this wouldn’t be acceptable to the EU.

    We discussed many other macro challenges such as refugees, elections, climate change, emerging markets and currency in our meetings, but we also reviewed lots of positive company specific influences, such as: digitalization, productivity, innovation and opportunity.

    In that context, despite all the macro uncertainties faced by many companies, I still am optimistic regarding the opportunities in careful international investing.

    In my next client letter, I will explore in detail the performance, holdings and outlook for our international Folios, but please feel free to reach out with any questions you may have.

    In the meantime, our hearts and prayers are with our friends and clients who are still recovering from Irma and those who are putting their lives together after Florence.

    – Retz Reeves, CFA

    Posted by: Retz Reeves , For Investors
  • Slides from the 2018 Annual Investor Meeting

    Links to download the following PDFs…
    A transcript of my slide narration
    My slides on Tarpon and oil

    You can watch the videos below, or by following these links to YouTube:

    Video 1: Cale Smith’s Update on Tarpon

    Video 2: Retz Reeves, CFA, on International Investing

    Video 3: U.S. Market Outlook

    Video 4: New IIM Services Coming Soon

    Please let us know of any questions. Thank you!

    – Cale

    Posted by: Cale Smith , Annual Meeting, For Investors
  • IIM International Portfolios: Investor Letter for Q1 ’18

    Fears of trade wars and accelerating inflation unsettled international investors in the first quarter of 2018, impacting local returns in most developed regions. The Morgan Stanley Capital Index (MSCI) benchmark for Europe was down 4.35% and the Pacific benchmark was also down 4.14%. Emerging markets were mixed in general, but the MSCI Emerging Market local index was up 0.72%. U.S. investors abroad received some relief from the movement of the U.S. dollar which weakened versus major currencies such as the British pound, the Japanese yen and the euro.

    Despite a tough March, Frigate, our international ADR portfolio focused on capital appreciation, yielded a positive net return of 6.27% for the first quarter of 2018 versus a negative 2.63% return for the S&P ADR benchmark. In light of pending steel tariffs, Swiss-based ABB, a global supplier of power and automation parts, detracted from performance. German-based Bayer also had a difficult quarter as it strived to acquire crop-science company Monsanto while calming anti-trust objections. On the positive side, Frigate benefited from its holding in Deutsche Boerse, which experienced good growth in trading volumes and U.K. pay-TV provider Sky PLC, which is being bid for by Fox and Comcast. During the quarter, Frigate experienced only small changes. We added to Dublin- headquartered biopharmaceuticals Shire Plc, which is now being eyed by Takeda, a Japanese pharmaceutical company. In addition we trimmed DBS Group, a Singapore financial company, which had become a larger part of the portfolio due its good performance.

    Since inception on July 1, 2013, Frigate has returned a cumulative net 32.2% versus 28.9% for its benchmark through March 31, 2018.

    More staid Treasure Harbor, our international ADR portfolio focused on dividend income, eked out a small gain for the first quarter of 2018 – it was up a 1.15%, whereas its benchmark was -1.07%*. The major detractors to performance were in Canada, whose stock market suffered from a slowing economy and tariff concerns. USD performance of Pembina Pipeline and two telecommunications companies Rogers and BCE were exacerbated by the weakening Canadian versus U.S. dollar. On the other hand, Ambev, the 4th largest beer producer in the world benefitted from a rebound in the Brazilian market and a good earnings report. On the heels of good earnings and optimistic outlooks, China Construction Bank outperformed its market, and U.K. drug company Glaxo did well as investors showed appreciation for their acquisition of Novartis’s stake in their consumer joint venture. At the beginning of the quarter we trimmed commodity maker Rio Tinto, which had become a large part of the portfolio and in February, took advantage of market volatility, to reinitiate a position in Swiss chocolate manufacturer Nestle.

    Since inception on October 1, 2013, Treasure Harbor has a cumulative net return of 5.6% versus its blended benchmark of 6.02% through the first quarter of 2018.

    Yellowtail, our small/medium cap portfolio, was down 2.42% for the quarter and underperformed its benchmark which was up .04%**. Among the detractors were Japanese heavy equipment manufacturer Sumitomo Heavy and German-based Wacker Chemie, both of which gave back some of their 2017 gains. DIA (Distribuidora Internacional de Alimentacion SA) continued its poor performance as sales of its food products improved in emerging markets but did not do as well in its home Iberian markets where it is remodeling its stores. On the other hand, Spanish-based EBRO foods was a positive contributor to performance as was French food catering company Elior. Also in France, dependency care provider Orpea continued to perform well. Certainly, transaction costs were a drag on performance- historically there has been little turnover in Yellowtail, but this year we trimmed 7 positions that grew into large parts of the portfolio. In addition, the entire position of African Food Company Tiger Brands was eliminated following a listeria outbreak, and a position in Minebea Mitsui, a Japanese electronics company, was initiated.

    Although this was not Yellowtail’s best quarter, since inception it on 12/1/2014, it has returned cumulatively 40.16% versus the benchmark VSS ETF of 33.47%.

    Volatility is accompanying us into the second quarter as geopolitical concerns are layered on top of uncertainties in the directions of inflation, interest rates and legislation. We will try to selectively exploit this volatility by purchasing companies that are temporarily out of favor, while selling those that have exceeded their fair value.

    We thank you for your trust in IIM and for taking this journey with us.

    – Retz Reeves, CFA

    *15% SPDR Emerging Markets Dividend ETF & 85% SPDR S&P International Dividend ETF
    **Vanguard FTSE All-World ex-US Small-CAP ETF

    Posted by: Retz Reeves , For Investors