The Island Investing Blog

  • IIM International Portfolios: Investor Letter For Q3 ’20

    I’m over it. I’m tired of viruses, Brexit and elections; I’m tired of wearing masks, social distancing and missing my friends and family. I keep hearing “these are short-term problems; focus on the long run.”  When’s the “long run” coming?

    How did my Grandmother, from whose first name my middle name is fashioned, survive all those short-terms like the Influenza pandemic of 1917-1918. World War I and World War II?  She survived the death of an infant and the economic Great Depression. She kept the farm going after her husband died of black lung and watched many of her grandchildren have children, one who is named after her. I’ve lost track of all the great-great grandchildren that are here because she survived a series if short-terms and thrived in the long run.

    International investing the past few years, especially this year, has involved expecting that the long-term will correct short-term imbalances, but when? For instance,  I am optimistic that in 2021 we will have at least a partially effective vaccine for general use, more people will travel and assemble, hard-hit emerging markets will begin to recover,  oil-prices will rise and global GDP will edge up; but in the meantime the waiting is painful. Indeed, most of the underperforming stocks in our international Folios have been stocks tied to energy, including: Royal Dutch Shell (TH1), Total (TH), Technip (F) and Sulzer (YT); to hard hit Latin America, including: Ambev (TH) and Banco Santander (TH);  to Financials  BNP (F) and HSBC (TH & F); and to Business Services, including: Elior, Ipsos, and  Hays  and especially travel retailer,   Dufry (all YT).

    Technology stocks were strong performers year-to-date,  including Frigate’s  Taiwan Semiconductor,  Infosys, Infineon and  especially Yellowtails’s Logitech.  Healthcare  and utility related stocks were mixed but among the former Yellowtail’s Hikma and Gerresheimer and among the latter Ericsson (TH) and  Iberdrola (F) were outstanding performers.

    Stock selection is the primary focus of portfolio construction but aggregate industry and geographic exposure influenced the relative performance, both versus benchmarks and each other, of our proprietary Folio.  For instance, Frigate had few Canadian stocks, whose indices typically have large exposure to energy and financials, and had a healthy exposure to technology and healthcare. Treasure Harbor had a relatively high direct and indirect exposure to Latin America and utilities whose high dividends were/are at risk. Disparity in performance in Yellowtail stocks, as indicated above, were more linked to industry affiliation than region; in general, underperformers were hit hard by lockdowns and outperformers were more defensive.

    In life it’s tempting to hunker down during a crisis and wait for the storm to pass, but the opportunities and risks were too great for investors to be dormant this year.  In Treasure Harbor, I initiated new positions in Singapore Telecom and Deutsche Post, reinitiated a position in Diageo and added to very undervalued National Australia Bank and Telefonica. On the other hand, I trimmed stocks in companies that likely will enjoy good growth during and after a pandemic but that had become too large of the portfolios, including GSK, National Grid, Deutsche Telekom, Nestle and Unilever.

    In Frigate, I initiated positions in L’oreal and Grifols, reinitiated Adidas and added, perhaps early, to Heineken, HSBC, Prudential and Technip. Alcon, a spin-off from Novartis was sold, and Smith and Nephew, Infosys and Ericsson were trimmed due to their size.

    2020 was an excellent time for Yellowtail to put to work its excess cash and, crossing my fingers, I initiated positions in Logitech, Vetropack and Accor and, keeping them crossed, I added to Prosegur and Dufry.  I trimmed Barry Callebaut due to its high relative position in the portfolio.

    No one knows how long the short-term will last and what the long-term impacts of the US elections, Brexit, the virus and all the other challenges we will face will be, but we hope that you and yours will find a way through the short-term and thrive in the long run. In the meantime, please write or call if you have question about our proprietary Folios or wealth management strategies.

    – Lauretta “Retz” Ann Reeves, CFA AWMA

    1 TH – Treasure Harbor: International ADR  Folio focused on prospective dividend  yield

    YT – Yellowtail: International Folio comprised of small and mid-cap stocks

    F – Frigate: International ADR Folio focused on capital appreciation

    2 Performance figures are estimated and unaudited. Estimated Benchmark Returns are in the column to the right of its respective Folio.

    3 Gross Return

    4 Benchmark is 15% SPDR S&P Emerging Markets Dividend ETF + 85% SPDR S&P International Dividend ETF

    5 Benchmark is Vanguard FTSE All-World ex-US Small-Cap 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.

    Posted by: Retz Reeves , For Investors
  • 2020 Annual Investor Meeting: Video One – The Big Picture

    More content soon.

    Posted by: Cale Smith , Annual Meeting, For Investors
  • What the Worst GDP Decline in History Means for Investors

    From an email sent out to IIM investors…

    Good evening, IIM investors.

    The economic recovery continues to send mixed signals in early August. Increased COVID-19 cases in many parts of the country have led to increased restrictions by local governments and businesses. Nonetheless, there are clear signs that the economy is getting back on track. The data suggest that the worst is behind us at a national level, and that jobs will slowly return as businesses find their footing.

    Recent GDP data for the second quarter showed the economy suffered its worst decline in history. On an annualized basis, the economy shrank by 32.9% – worse than any quarter during the Great Depression nearly a century ago.

    However, it’s important to keep a few facts in mind when seeing those headlines.

    First, we often annualize economic numbers in order to understand trends. Normalizing the data helps better compare measurements…by imagining what would have happened had these events been stretched out to a whole year.

    In this case, the magnitude of that GDP decline is not expected to last a full year – since the worst likely occurred during April and May. The actual quarterly decline was 9.5% – compared to the first quarter, and the same quarter a year ago. While that is still awfully ugly, it really shouldn’t be compared to the Great Depression, either – which lasted a decade and technically spanned two economic cycles.

    Second, those GDP numbers are backward-looking – since they are only released quarterly, and with a lag. Many stocks continued to perform well over that same time because those numbers were widely anticipated. In fact, the consensus forecast for a 34.5% decline in GDP was nearly right on point – and we already knew that a new economic cycle began in March, according to the National Bureau of Economic Research.

    Finally, those GDP numbers don’t take into account what we’ve learned since the economy first went into free-fall: that businesses can successfully reopen, and the economic numbers can improve. That’s highly dependent on COVID, of course, but if businesses can continue to run and expand their operations – even at partial capacity – then jobs can return and corporate profits can recover.

    There were clear signs of this in the jobs data during May and June when even weekly jobless claims were improving. As retail sector jobs return, there are also signs that business and industrial activity has picked up. Various manufacturing and non-manufacturing levels are now rising at pre-crisis rates – a positive sign for the rest of this year and into 2021.

    As expected, corporate profits are trending with the economy. It’s estimated that earnings fell between 35% to 40% during the second quarter (they are still being reported) and will likely decline in 2020 overall by a little more than 20%.

    However, estimates also suggest that corporate profits will return to pre-crisis levels by the end of 2021.

    While a two years of lost profit growth is not what anyone wants to see, let’s keep some perspective there, too. Namely, this is occurring after the worst quarterly economic decline in history – and it may be shorter than the four years of flat profits we saw after the 2008 financial crisis.

    Ultimately, it’s important to see through this interim period in order to benefit from the economic recovery. Financial markets are forward-looking…one reason that stocks have performed well over the past few months despite the on-going crisis.

    So, please consider this a reminder that it’s still important to maintain discipline and not over-react to backward-looking data in the coming months.

    Below are three charts that put recent economic trends in perspective.

    1. The economy has experienced its worst decline in history


    The Q2 GDP decline was the worst in history. The economy fell 32.9% at an annualized rate or 9.5% on a quarterly basis. Still, unlike in prior recessions and depressions, this is not expected to continue at this pace. There are already many signs that the economy is rebounding, even if the pace is uncertain due to the on-going COVID-19 crisis.

    2. However, the recovery is still continuing


    Other data show that activity has been returning since the economic bottom. The ISM manufacturing and non-manufacturing indices both show that business activity has returned to a healthier pace. While these numbers will depend on how local governments and businesses deal with COVID-19 outbreaks, the overall trends are positive.

    3. Profits are expected to take two years to recover


    In the end, what matters to investors is how the economic data affect corporate earnings. So far, earnings have trended with the economy. Profits are expected to recover in the second half of the year and into 2021. This trend is one reason that stocks have recovered in recent months.

    The bottom line? While the Q2 GDP report was the worst in history, that was widely expected. There are many signs that the economy has been recovering since then – and will continue to do so, through 2021.

    Please let me know if you have any questions. 

    Thank you and hang in there.

    – Cale

    Posted by: Cale Smith , Commentary