The Island Investing Blog

  • IIM International Portfolios: 2019 Letter to Investors

    What A Year It Was

    What a difference a year makes! Overshadowed by Brexit, trade wars and fears of a recession equities dropped precipitously the last quarter of 2018 and created a bit of trepidation entering last year.

    Indeed, these forces still played a part in investor sentiment during 2019, but as the year progressed, some stressors were alleviated. Although not overly robust, the economy kept churning forward.    In December UK Prime Minister Boris Johnson retained his position almost ensuring that an “orderly” Brexit will  go forward. Also in December,  both China and US took steps toward decelerating the trade war with the US offering to reduce some tariffs and China offering to better protect US intellectual property. In the fourth quarter, the MSCI All Country World Index jumped 8.95% leading to a net return in 2019 of 26.6% and the ACWI ex-US had a net return of 21.51%.   

    For 2019, Frigate our international ADR Folio focused on capital appreciation had a net return of 19.47% versus the gross return of its benchmark the S&P 500 ADR index of 16.68%.   Taiwan Semiconductor Manufacturing Company was a very strong contributor as it reported earnings ahead of expectations and raised capital expenditure plans due to strong demand. Additional drivers were French Schneider Electric, a provider of energy and automation digital solutions, and Swiss-based Adecco, which is one of the world’s largest staffing companies. The share price of IT Indian company Wipro fell slightly amidst a slowing services industry as did that of China Petroleum and Chemical Corp (also known as Sinopec)  amid the uncertainty associated with China’s new National Pipeline Company. Neither of these circumstances warranted a change in their positions. Since inception on July 1, 2013 Frigate has returned a cumulative 35.28% versus its benchmark of 30.01%.

    For 2019, Treasure Harbor our international ADR Folio focused on dividend income, was up 14.47% versus its blended benchmark  (15% SPDR  S&P Emerging Market Dividend  ETF and 85% SPDR S&P 500 International Dividend ETF) of  18.97%.  Luxury goods manufacturer LVMH was a very strong contributor to performance especially after announcing its acquisition of Tiffany. Investors also appreciated LVMH’s intent to optimize their portfolio  and use excess cash to buy back shares.  As mentioned in earlier letters,  Rio Tinto performed well along with higher iron ore prices although anticipating an eventual correction, the stock was trimmed.  There were no large negative performers but share prices of telecom companies Orange and Telefonica corrected last quarter, apparently during some sector rotation. Since inception on October 1, 2013, Treasure Harbor has returned 8.7% versus its blended benchmark of 14.47%.

    For 2019, Yellowtail, or international small/mid cap Folio, had a net return of 17.48% versus its benchmark VSS (Vanguard FTSE All-World ex-US small cap ETF) of 21.36%. French animal health company Virbac and electronic components company Minebea Mitsumi had great rebounds consistent with good business performance and improved outlook.  Swiss Life continued to generate good growth and also was a great contributor. On the other hand,  Ireland-based, nutrition provider group Glanbia turned in a very disappointing performance.  Channel shifts and tariffs  weighted on investor sentiment, and the company faced additional challenges in it Performance Nutrition division outside of the US and  increased debt burden from its purchase of Slimfast. French BIC continued to have a disappointing year as it was impacted by a deterioration of the lighters market in the US and softer stationery sales, although they remain confident in their “BIC 2022 Invent the Future” plan. German Wacker Chemie also underperformed as management cut guidance due to week polysilicon prices. Since inception of 12/1/2014, Yellowtail has returned a cumulative 34.29% versus its benchmark of 31.78%.

     It is nice going into 2020 that some trading issues are resolving but there are still plenty of uncertainties and challenges.  For instance, although the UK will formally leave the EU on January 31, 2020, they still will be negotiating during the transition period, which is supposed to end December 31st this year, issues regarding trade, law enforcement, data sharing and security.  In the meantime,  the EU and the US are trading tariffs on digital services, aircrafts and agricultural products. Very worrisome, especially for me,  are prospective tariffs on European wines which will likely have a negative impact on US retailers, distributors and restaurants.*  The uncertainties involving trade and geopolitical tensions are so worrisome that despite noting the cushioning impact of accommodative monetary policies and growth in the service sector, the World Economic Outlook in October of 2019 noted the outlook remains “precarious.” It will be interesting to review the next World Economic Outlook to be published on January 20th.

    Although my research takes into consideration the precarious economic outlook, I am more interested in how individual companies navigate external stressors while still managing to introduce new technologies and products and grow earnings. There are plenty of companies with these characteristics, but with the recent market rise, finding stocks trading at attractive valuations will be a little more challenging. Still, the MSCI US index  is trading at a forward P/E of 18.74x versus the MSCI ex-US index forward P/E of 14.44x so I’m sure if I grab my passport, hop on a plane and keep searching, I will find some good investments.

     What a year 2020 will be!

    Thank you for investing along with Cale and I at IIM. Please don’t hesitate to call or write with questions.

    – Lauretta “Retz” Ann Reeves, CFA AWMA

    *Teague, Lettie. “How Tariffs Could Devastate the Wine World,” The Wall Street Journal, Jan. 8, 2020.

    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 , Commentary, For Investors
  • IIM International Portfolios: Thru Q3 2019

    What I Learned During Oktoberfest

                After hearing my travel woes – typhoons, earthquakes, electrical shocks  – Baader Investments invited me to their September conference in Munich where investment opportunities converged at the Sofitel in Munich, Germany during Oktoberfest. Too bad I don’t drink beer, but certainly I enjoyed the pageantry and gaiety that infused the crowds who filled the trains and roamed the streets. Even better, I met with some of our food, auto, industrial and pharmaceuticals companies,  found some  new candidates and heard updates on  economic and geopolitical outlooks. I remain grateful to Baader for this opportunity.

                Unfortunately the issues covered in the half year report carried over into the third quarter, including: Brexit,  trade tensions, emerging market volatility and anemic economic growth. Consumer stocks, in particular autos and their suppliers, and IT companies seemed particular challenged.  This phenomena was reflected in the negative performance of some of our Yellowtail stocks including, Groupe SEB, which manufactures household equipment, and Japanese AGC, which supplies auto glass and semiconductor related products.  In light of the challenging market for industrial trucks,  KION, the world’s second largest forklift manufacturer  also detracted from performance. On the other hand, reporting good second quarter number animal health provider Virbac, generic pharmaceutical provider Hikma and watch and calculator manufacturer Casio contributed positive performance.  For 2019 through the third quarter,  Yellowtail, our small/mid cap international Folio, was up  approximately 6.21% versus the estimated performance of  its benchmark VSS (Vanguard FTSE All World Ex-US Small Cap. ETF) of 7.6% .  Since inception date of December 1, 2014 through September of this year, Yellowtail’s cumulative performance is up  an estimated 25.4% versus VSS of an estimated positive 21.1%.

                For the third quarter of 2019, detractors for Frigate, our International ADR portfolio with a mandate for capital appreciation,  included Ericsson, which quantified a 12 billion SEK provision for non-compliance with FCPA (Foreign Corrupt Practices Act) enacted by a former management regime. Global software vendor SAP gave back some previous gains, although its price jumped after the CEO announced he was stepping down.  A slow down in the IT service sector, negatively impacted Indian provider Wipro. Following reporting of good quarterly results,  luxury goods provider Burberry, contract chip manufacturer Taiwan Semiconductor Manufacturing and financial exchange company Deutsche Boerse were strong performers. For the first nine months of 2019, Frigate’s net performance was 10.03% versus the gross performance of the S&P ADR Index of 9.37%.  Since inception on July 1, 2013 through September of this year, Frigate’s cumulative performance was 24.59% versus that of its benchmark of 21.86%.

                 As expected, when we trimmed positions the first half of the year, miners BHP and Rio Tinto gave back some of their gains in Treasure Harbor, our international ADR yield portfolio, during the third quarter of 2019.  Spanish Banco Santander, which recorded a 700 million euro restructuring charge, was also a detractor.  On the positive side,  Canadian telecommunication provider  BCE and Taiwanese semiconductor assembly and testing firm reported good results and Vodafone rebounded after finally completing the acquisition of Liberty Global assets in Germany, Hungary, Romania and the Czech Republic. For the first nine months of 2019, Treasure Harbor was up 9.64% versus its benchmark (15% SPDR S&P Emerging Market Dividend ETF; 85% SPDR S&P International Dividend ETF) of 13.07%.  Since inception on November 1, 2013, Treasure Harbor’s cumulative return has been 4.18% versus its benchmark of 8.79%.

                After quarter end,  the EU approved the UK’s request for a Brexit extension, China and the US continued trade discussions and central banks remained accommodative. Many equity markets redbounded, although whether the gains made this year are sustained will likely depend on progress on all of these fronts.  I expect we will continue to see fluctuations in the indices.

                Despite the near-term uncertainties, my attendance at the Baader conference reinforced my confidence in long-run investing.  The last day included presentations by smaller companies pioneering in such fields as windfarms, molecular diagnostics and cloud telecommunications. These may not make their way into our international Folios yet, but some day they and other cutting edge companies just may.

                In the meantime, please contact myself or Cale if you have any questions on our Proprietary Portfolios or our Financial Planning Capabilities. Thank you for investing alongside us at Islamorada Investment Management.

    – Lauretta “Retz” Ann Reeves, CFA AWMA

    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 , Commentary
  • IIM International Portfolios: Investor Letter for First Half ’19

    Mr. Toad’s Wild Ride

    When I first moved to Florida, circa 40 years ago, I couldn’t wait to go to the Magic Kingdom at Walt Disney World. I loved the scary rides, the roller coasters and in particular Mr. Toad’s Wild Ride, where guests launched through various scenes from The Wind in the Willows.  Depending upon on what track was chosen, guests crashed into a library, witnessed a shoot- out, escaped an oncoming train, and descended into a tongue-in-cheek Hell. What fun! Having grown older and put away childish things, I no longer like scary rides – or anything scary for that matter – but as an investor sometimes you have no choice but to hold on for the ride – like during the first half of 2019. 

    Markets reacted, sometimes violently, to trade tensions,  Brexit fears, lowered GDP estimates and uncertain interest rates.  For instance, the MSCI ACWI (Morgan Stanley All Country World Index) fell over 9% in December of 2018, jumped almost 8% in January, fell around 6%  in May and jumped almost 7% in June. The gross return of this index  for the first half of 2019 was 16.6%.

    For the same period, Frigate, our ADR  international  equity capital appreciation Folio, had a net return of 12.39% versus the gross return of the S&P 500 ADR  index of 11.53%. Since inception on July 1, 2013, Frigate’s cumulative performance was +  27.27% versus its benchmark of 24.26%.  The few  negative performers included  Japanese pharmaceutical company Takeda, acquired from its buy -out of our position in Shire Pharmaceuticals, and German semiconductor manufacturer Infineon.    Rio Tinto and BHP share prices benefitted from persistently high iron ore prices, and were trimmed and sold, respectively. Among other significant positive contributors were France- based Schneider Electric, which provides Energy and Automation digital solutions, and Germany-based SAP, which is refocusing its product offerings on the cloud.  

     For the first half of 2019,  Treasure Harbor, our international  equity Folio that focuses on dividend yield,  had a net return of 10.29%  versus  its benchmark’s  (15% SPDR S&P Emerging Market Dividend ETF; 85% SPDR S&P International Dividend ETF) return of 14.27%. Since inception on November 1, 2013. through June 2019, Treasure Harbor’s cumulative performance was  +4.79%  versus its benchmark of +9.95% .  This year, the significant detractor was British-based Vodaphone, which cut its dividend, freeing up cash for its pursuit of  Liberty Global and its execution of transformational  strategy. Similar to Frigate, Rio Tinto and BHP were significant contributors to performance, and their positions were trimmed. Another major contributor was Parisian luxury good manufacture LVMH, a former position in Frigate that was bought back in TH last year. Another repurchase, Swiss-based Nestle, also did well.

    Yellowtail, our international smalI/mid- cap equity portfolio was up 10.64% versus its benchmark, VSS (Vanguard FTSE All World Ex-US Small Cap. ETF)  of 12.15%.  Since inception date of December 1, 2014 through June of this year, Yellowtail’s net cumulative total return was 26.48% versus its benchmark of 21.78%. In a tough 2019  trading environment, French consumer product company  BIC weighed on performance, although I am hopeful that the “BIC 2022” transformational plan will lead to improved earnings in the future.  After reporting 2019 earnings,  the share price of Japanese packaged-food supplier, Nichirei, underwent a correction. Reviewing the company’s mid- and long-term plans, however, I am confident that they will be able to return to path of sales growth and margin expansion. On the other hand, I sold, regretfully, Swiss contract manufacturer Lonza as its share appreciated it out of the mid-cap space. On the heels of strong first quarter results, French-based provider of small appliances and cookware Groupe SEB performed very well, as did Swiss-based chocolate manufacturer Barry Callebaut, after reporting nine months numbers.

    As we enter the second half of 2019, I expect the volatility to continue and possibly increase.   The contenders for the next British PM are leaning toward a hard exit from the EU, trading issues are arising in all parts of the world and the economic outlook remains uncertain. Volatility isn’t all bad.  When stock prices become stretched, it’s a great opportunity to raise cash for the war chest.  When negative news puts pressure on share prices or creates sector rotation, there is opportunity to buy great stocks at value prices. Both scenarios have occurred over the past 12 months, and I expect will occur again.

    So, let’s make the most of the ride! Oh, by the way,  Mr. Toad’s Wild Ride closed in 1988; replaced by The Many Adventures of Winnie the Pooh. I guess that’s more my style.

    Please don’t hesitate to contact Cale or myself if you have any questions about any of our Folios or Financial Planning products, and thank you for investing with us at Islamorada Investment Management.

    – Lauretta “Retz” Ann Reeves, CFA AWMA

    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