The Island Investing Blog

  • Finally, International Investors Day in the Sun

    By Retz Reeves, CFA

    Investors in our large cap international Folios were rewarded for their patience in the first half of 2017, while investors in our small-mid cap international Folio continued to enjoy Yellowtail’s performance.

    Our International capital appreciation Folio, Frigate, returned 12.1%* net of fees for the first half versus the gross return** of the S&P 500 ADR Index of 10.3%.

    From inception on July 1, 2013, Frigate has produced a 22.2% return versus its benchmark return of 19.7%.

    Facing competition in proprietary products, both pharmaceutical companies Teva, based in Israel, and Astellas, based in Japan, detracted from performance. Also in Japan, Toyota – facing a stronger yen – reduced 2018 guidance and saw its share price react negatively. Turning in very strong results for us year to date were French luxury goods provider LVMH, the British shares of health and personal care company Unilever and the technology companies Taiwan Semiconductor and German-based SAP.

    Treasure Harbor, our international portfolio focused on dividends, returned 11.7% versus 10.9% for its benchmark*** in the first half of 2017.

    Since inception on October 1, 2014, Treasure Harbor has returned 3.4% versus -1.2% for the benchmark.

    Among the few detractors, it was not surprising that Royal Dutch Shell made the list, but the performance of Australian telecom company Telstra was especially disappointing. Investors are concerned about NBN (National Broadband Network) margins and competition in the mobile market, but for now at least, it appears cost-saving initiates should enable sufficient cash-flow generation to maintain a 7% yield. On the positive side, health and personal care provider Unilever and Spanish Banco Santander were strong performers.

    Yellowtail, our small-mid cap international Folio, had a very strong first half, generating a positive return of 18.9% versus its benchmark, the ETF with symbol VSS****, of 15.0%.

    Since inception in November of 2014, Yellowtail’s cumulative performance has been 38.5% versus 8.6% for the benchmark.

    Detractors from performance included French shares of Societe BIC, the iconic stationary and shaver supplier, and Virbac, an animal health provider. Both of these companies are undergoing some changes in management and we will continue to monitor their progress before making any decisions on our position. London-based generic, injectable and branded pharmaceutical provider Hikma is under a more serious review after the FDA rejected one of their filings and the company downgraded estimates for the year.

    On the positive side, shares in French companies Orpea, a European leader in dependency care, and Groupe SEB, a small domestic equipment manufacturer of such brands as Krups and Moulinex, continued their strong performance. Also based in France, in-vitro diagnostic and microbiology testing solutions manufacturer BioMerieux, as well as Nichirei – one of Japan’s leaders in frozen food production and cold-storage warehousing – were very additive.

    An improving GDP outlook in Europe and receding risks of sovereign defaults are cited as reasons for increased investor interest abroad. Certainly returns to U.S. investors in international stocks were enhanced by the weakening of the U.S. dollar versus other major currencies. This enhancement risks erosion over time if a contra currency’s strengthening erodes the competitiveness of companies domiciled in its host’s country. I don’t believe this is an immediate threat, however, as many currencies are still way below their respective highs.

    Notwithstanding geopolitical concerns, I believe the economic environment, valuations and opportunity set continue to bode well for investing internationally. I intend to keep our international portfolios diversified across industry and country, and I will continue to analyze our current holdings and opportunities with the expectations that stock selection will enhance portfolio returns.

    Please don’t hesitate to write or call Cale or myself if you have any questions. In the meantime, thank you for investing alongside your IIM team.

    – Retz Reeves, CFA

    Notes:
    * All returns for benchmarks, indices and Folios are estimated and unaudited
    ** Gross returns do not include fees or taxes on international dividends and assume gross dividends are reinvested
    *** 15% SPDR Emerging Market Dividend ETF and 85% SPDR S&P International Dividend ETF
    **** 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
  • Thoughts from Recent Meetings With Our European Companies

    By Retz Reeves, CFA

    I certainly didn’t anticipate that disruption would be the theme of my March European trip, but it was – physical, political and technological disruption. Before going further, I wish to extend my condolences to the victims of the London attacks and Lucerne train derailment and to family of the first responder who gave his life in the former. My thanks to my Lucerne contact who added on a meeting in Zurich to see me.

    I thought that the political changes last year were going to cause serious disruption to our European investments, but outside of banks and employment companies, most of the managements with whom I met were not easily fazed. Many of those with sales in the U.S. already have matching production assets in the States, have work forces that have been around for generations and believe they can pass along any duties imposed on import components.

    In fact, if infrastructure spending picks up in the U.S. and taxes go down (although neither of these should be simply assumed), earnings power could actually increase in our companies. Most companies without London City exposure were also rather sanguine about Brexit, as they believed the weaker pound would have translational – not transactional – impacts. Concerns In Europe were higher regarding the outcome of the upcoming French elections. Although not expected at the moment, the election of a far-right or far-left candidate could put further strain on the euro.

    A Kantar Retail* presentation at the CAGE (Consumer Analyst Group of Europe) Conference I attended highlighted the disruptive forces of eCommerce. For instance, it is expected that 2018 e-commerce sales will reach over $2.24 billion and make up 15% of retail sales in the Americas, but only 1% in Eurasia and Africa. New technologies will impact shopping and search, supply chain replenishment and automation of product sales executed on computers, cell phones and new devices – either by old-fashioned typing, voice or automatically.

    At the CAGE Conference I also heard from companies about the evolution of robots, enabling them to work next to humans, as well as how new technologies are allowing storage of renewable energy and enabling its more efficient delivery. Regardless of industry, technology continues to alter the competitive landscape across numerous industries – and companies that adapt will likely thrive.

    Regardless of these disruptive forces, our international holdings in total have fared well to date this year.

    For the first quarter of 2017 our large cap Frigate Folio had was up 7.2%**, contributing to a return since inception on July 1, 2013 of 16.8%. The gross return*** of the S&P ADR benchmark was 6.4% and 15.4%, respectively, over the same time periods.

    Amid competition and concern over changing legislation, healthcare had a mixed but generally negative impact on performance in the first quarter, with generic company Teva being the biggest detractor. Energy company Technip FMC and Japanese auto manufacturer Nissan were also significant detractors. On the other hand, luxury companies, including Burberry and LVMH, were strong contributors to our performance, as were German companies SAP and Siemens and U.K. consumer company Unilever.

    Treasure Harbor, our international equity income portfolio, also generated good performance, increasing 8.2% for the first quarter of 2017 and up 1.57% since inception on November 1, 2013. The corresponding specialized benchmark**** was up 7.0% and down 4.7%; respectively, for the same time periods.

    Turning in slightly negative performance were Australia telecommunications company Telstra, U.K. utility SSE and the British shares of Royal Dutch Shell. Strong contributors included Brookfield Canadian Office Properties, Spanish companies Telefonica and Banco Santander, and Unilever.

    The small/mid-cap Yellow Tail Folio also posted strong performance, up 8.0% for the first quarter this year. This slightly lagged its VSS***** benchmark, which was up 9.2% during the same period. Since inception in November of 2014, however, Yellowtail has yielded a 25.8% return versus 3.64% for the benchmark. Yellowtail’s first quarter had rather eclectic detractors, including animal health provider Virbac, stationer Societe BIC and Spanish Ebro Foods. The equally eclectic outperformers were French long-term care provider Orpea, Swiss travel retailer Dufry and Japanese food manufacturer Nichirei.

    I still view both international currencies and stocks as attractive, but It appears that the disruption of all different types is bound to continue – it’s the world we live in, and it’s part of progress.

    We will strive to monitor and anticipate these sea changes, and incorporate them into our analysis when selecting our stocks and our portfolios.

    Please let Cale and myself know if you have any questions. In the meantime, thank you for investing along side of us.

    – Retz

    Notes:

    * Gildenberg, Bryan, “Ecommerce/Changing the Sales and Marketing Ecosystem,” Kantar Retail (WPP).
    ** All returns for benchmarks, indices and Folios are estimated and unaudited.
    *** Gross returns do not includes fees or taxes on international dividends and assume gross dividends are reinvested.
    **** 15% SPDR S&P Emerging Market Dividend ETF & 5% SPDR S&P International Dividend ETF
    **** Vanguard FTSE All-World ex-US Small-Cap ETF

    Posted by: Retz Reeves , For Investors
  • IIM International Portfolios – Investor Letter for Q4 2016

    Spreading out financial journals and newspapers, I began my literary diet and breakfast in the New Year. Yes, after a topsy-turvy year full of Brexit, terrorism, corruption and elections, I could still read and eat simultaneously; but the sector rotation, currency fluctuations and market volatility late in the year was upsetting my digestion a little bit. Adding insult to injury, I realized that it wasn’t cinnamon I had just sprinkled on my yogurt.

    The strengthening dollar eroded the U.S. dollar value of many international stocks in 2016, and their representative indices, generally underperformed U.S. equities but benefitted by a late year rally. The S&P ADR index returned a gross* 6.34% versus the net return of Frigate, our international ADR portfolio, of 4.45%**. Since inception on July 1, 2013 through 2016, the cumulative net return of Frigate has been 8.82% versus a gross return of 8.46% for the S&P 500 ADR index.

    In general, investors in pharmaceutical companies were concerned over pricing pressure and competition and this sector detracted from performance. Also some specific stock picks, such as the Swedish telecommunications equipment provider, Ericsson were laggards. On the other hand, energy and commodity companies had a positive influence on performance, as did technology companies Taiwan Semiconductor Manufacturing and SAP and industrial company Siemens.

    I made no position changes in Frigate in the midst of the year-end volatility. At the beginning of 2017, I am looking at adding to some of our most undervalued positions, especially pharmaceutical companies, while monitoring all of our holdings and looking for new opportunities. In fact, I have already set up meetings in Europe for March. In the meantime, Frigate has two positions under bid – agricultural company Syngenta and British communications company Sky.

    Treasure Harbor, our ADR portfolio focused on yield, also benefited from improving commodity prices and had a net return of 5.49% in 2016. This lagged its volatile specialized benchmark*** which was up 13.74%, although since inception on November 1, 2013 through 2016, Treasure Harbor was down 7.73% versus the benchmark return of a negative 10.95%. In 2016, healthcare had a slightly negative effect on performance, whereas telecommunication stocks had a mixed effect depending upon their location – European stocks underperformed and Canadian and Asian stocks outperformed. Indeed, in the final quarter, I trimmed outperforming New Zealand telecommunications Spark New Zealand, along with China Construction Bank. Taking advantage of post-election fears that seemed to spill over to companies exposed to Emerging Markets, I added to Spanish stocks Santander and Telefonica.

    Despite currency headwinds of almost 3%, Yellowtail, our international small- and mid- cap portfolio, outperformed our other International portfolios with a net return of approximately 6% in 2016, handily beating its VSS**** benchmark which was up 0.36% over the same time period. Since inception in November of 2014, Yellowtail has returned a positive 17% versus a negative 5% for its benchmark. Stock selection appeared to drive local currency performance. In Japan, Sawai Pharmaceutical and Casio Computer were detractors while food company Nicherei and Sumitomo Heavy Industries were strong performers. In Europe, poor performance of Hikma and Virbac, human and animal healthcare companies, respectively, were offset by such investments as appliance maker SEB, security firm Prosegur, business service company Ipsos and diagnostic company Biomerieux. Elsewhere in the world, Tiger Brands, an African consumer brands company, also helped performance.

    As 2017 starts, I am finding international stocks attractive: in general, they are trading at a discount to U.S. peers and the weaker local currencies enhance the competitiveness of their exports while making their share prices more affordable to the U.S. investor. So for those not invested internationally, I would suggest considering adding this “spice” to your portfolio. And for those wanting diversification beyond equities, we can also offer exposure to bonds, REITS and private equity utilizing Exchange Traded Funds (ETFs).

    It’s not the same as selecting specific companies as investments, but in my own case, accidentally adding a different spice – cayenne pepper as it turns out – to my cereal and yogurt had surprisingly good results. I hope that any investments you make this year yield a similar positive experience.

    Please write Cale or myself with further questions, and in the meantime, thank you for investing along side of us and Happy New Year.

    – Retz Reeves, CFA



    Notes:
    *Gross returns do not include fees or taxes on international dividends and assume gross dividends are reinvested.
    **All returns for benchmarks, indices and Folios are estimated and unaudited.
    ***15% SPDR S&P Emerging Market Dividend ETF; 85% S&P International Dividend ETF
    ****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