The Island Investing Blog

  • IIM International Portfolios: Investor Letter for 2020

    From Charles Dickens to Amanda Gorman

    Dickens authored 2020. Whether pondering the coronavirus and the vaccines, social injustice and the response or the fall and rise of global equity markets, “It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity…….”

    Against such a backdrop, it’s not surprising that international equity markets experienced periods of volatility in 2020 which led to some unusual activity in IIM’s international Folios. As a Value Investor (albeit not a “deep value” investor), I am used to adding stocks to the portfolio that are out of favor and holding them, sometimes four, five or ten years, and then selling them when I think the market has fully recognized my genius, usually too early, or “fundamentals have deteriorated,” (code for I screwed up). The assumption was that if I was right 2/3 of the time, I would have a good chance of beating the benchmark.

    Well at one point in 2020 almost every stock was out-of-favor, and I found myself buying or rebuying stocks not traditionally considered “value.” In Frigate, our International Large-Cap ADR portfolio, this was a successful strategy for taking positions in L’Oreal (trimmed by year-end) , Adidas and Grifols and adding to Prudential PLC. Less successful adds were to HSBC early in the year and Bayer and Takeda later in the year.  Harvesting losses, China Petroleum and Technip were sold late in 2020 in the year, the latter after averaging down early in the year. Asset turnover increased later in the year as many stocks, especially technology companies were trimmed as they outperformed the broad market and became overly large parts of the portfolio.

    It was a hard year for Treasure Harbor as many companies suspended dividend payouts in exchange for payroll assistance, to offset anticipated customer delinquencies and/or to build a prudent cash pile. Anticipating that dividends would be eventually restored, I resisted the temptation to sell all those stocks whose dividends were at risk.  In some cases that strategy is playing out well; but it didn’t work all the time last year– especially with energy stocks such as Total, Royal Dutch Shell and Pembina Pipeline and stocks with exposure to South America such as Telefonica and AMBEV and HSBC.  Outsized positive contributors were a bit more eclectic, including:  Iberdola, Spark New Zealand,  Rio-Tinto  and LVMH.  Much of the cash position coming into the year and from positions that were trimmed were used to take add to some of the beaten down stocks and initiate positions in Amcor, Diageo, Deutsche Post and Singapore Telecom.

    Overall Yellowtail, our international SMID cap Folio, did well for the entire year, but there was a wide range of performance of individual stocks. Among the worst performers were French catering company Elior, Japanese pharmaceutical company Sawai and British recruiter Hays. The best performers were equally eclectic including; Swiss manufacturing company Bucher, French manufacturer of in vitro diagnostics BioMerieux , German manufacturer of chemicals Wacker Chemie and German manufacturer of specialty glass Gerresheimer.  Swiss producer of personal computer and mobile accessories Logitech was such a successful purchase early in the year that it was trimmed later in the year. Several other trims added to the high cash level with which Yellowtail entered the year, and with an eye toward happier times, was deployed into new positions such as French hotelier Accor, Swiss glass manufacturer Vetropack and Swiss Bell Food Group. Bravely, I added to Swiss travel retailer Dufry and Spanish security provider Prosegur. Most of these additions have done well so far, benefitting especially in the translation of the foreign stock price to the dollar that weakened later in the year.  

    I guess none of us really thought when we threw away the 2020 calendar and hung 2021’s that life would magically improve, and it sure didn’t. A Tale of Two Cities first sentence ends:

    “…….it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair.” 

    And so life goes on today, but being an optimist, I wish that each pair of words was reversed. Rather than end in despair, I would rather end in hope.

    I am not a Pollyannaish, the issues our country and the world face seem insurmountable; but I am encouraged by Amanda Gorman’s (2021) inaugural poem which ends:

    “The new dawn blooms as we free it, For there is always light, If only we’re brave enough to see it, If only we’re brave enough to be it.”

    Amen.

    – Lauretta “Retz” Ann Reeves, CFA AWMA

    __________

    [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. Total return based on price.

    [iv] Benchmark is Vanguard FTSE All-World ex-US Small-Cap ETF. Total return based on price.

    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
  • How Investors Should React to Rising COVID-19 Cases

    From an email sent out to all investors…

    Good morning, IIM investors.

    As COVID-19 cases continue to rise, new restrictions and lockdown measures are being considered. Some states have implemented curfews, dining restrictions, and mask rules in an attempt to curb the exponential spread of the disease. This has often been a heated political issue as the balance between economic activity, personal liberties and control of the coronavirus is debated. At the same time, death rates have remained steady and progress is being made on possible vaccines.

    How should investors react to the ongoing pandemic almost a year after it began?

    Unlike the beginning of this year when policymakers and investors were flying blind, much more is known about the disease and its impact on the economy today. There is clearly a trade-off between economic activity and control of the virus due to how easily it spreads. The first nationwide shutdown was a blunt tool but likely helped to slow the spread significantly, especially at a time when the healthcare system was under stress. Fortunately, the economy was resilient and has recovered quickly since shutdown measures were lifted.

    Although COVID-19 and its economic impact have affected all aspects of life, it’s important to separate personal views from investment strategy. Whether or not one agrees with the severity of the disease and the appropriateness of public health measures, it’s clear that staying invested and disciplined with one’s portfolio has been the right approach. With the benefit of hindsight, there are at least three key takeaways that should be considered.

    First, although complete state- and city-wide shutdowns may have been necessary at first, the hope is that they can be done in a more targeted manner going forward. Ideally, public health officials and governments can restrict specific areas and businesses only when needed, preserving the ability of most businesses to operate and individuals to work. This is only possible up to a point, though, and depends heavily on prevention and safety measures.

    Specifically, the full nationwide shutdown resulted in a GDP decline of 31.4% in the second quarter (on an annualized basis). However, the economy then came roaring back by 33.1% in the third quarter even as some parts of the country still faced restrictions. While many businesses and workers in impacted industries such as retail, dining and hospitality are still struggling, this is evidence that a better balance can be struck. Current estimates are for GDP growth to moderate in the coming quarters, but the economy can still fully recover within the next year at this pace.

    Second, many businesses and individuals have had time to adapt to working remotely, social distancing, wearing masks, and more. Office workers are now accustomed to online video calls, many factories are set up with health safety measures in place and retail stores have reduced capacity. Many companies who were able to switch to remote work seamlessly have not only survived but have thrived in this environment. While less than ideal for productivity or collaboration, the ingenuity and adaptability of businesses and individuals when facing a crisis are also reasons that growth can continue.

    The result of businesses adapting can be seen in various metrics such as the ISM indices which measure manufacturing and non-manufacturing activity. These have been above 50 since June, a sign that activity has been rising. Hiring activity also recovered quickly as stores reopened and furloughed employees were allowed to return. More than half of the jobs lost during the shutdowns have been recovered, those seeking jobless claims remain high – but have declined significantly – and the number of open positions across the country has begun to increase again.

    Third, the stock market continues to look forward and is even approaching new highs in spite of rising COVID-19 cases. This is due largely to the factors above which have allowed businesses to operate and grow. Current earnings estimates mirror forecasts for the economy and suggest that profits can return to pre-pandemic levels by the end of 2021. Investors who stayed focused and diversified this year would have done well despite all the market volatility.

    The stock market has also cheered positive news of the multiple vaccines under development. While these are welcome signs, much is still uncertain about the efficacy and approval of these vaccines, let alone how they will be rolled out. Ultimately, it’s clear that the economy can continue to grow without a vaccine in the medium-term…even if one is needed just to return to a sense of normalcy in the long run.

    While the ongoing pandemic is affecting all aspects of everyday life, and there are still many uncertainties ahead, it’s important to remain focused on the economic trends and the experience of the past several months. Below are three charts that may help put this in perspective…

    1. Global COVID-19 cases continue to accelerate

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    COVID-19 cases are accelerating around the world, especially in Europe and certain parts of the U.S. This comes after several months of stable case rates.

    2. Cases are rising in many parts of the U.S.

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    Many states are seeing an acceleration in new COVID-19 cases. These include those that were affected later, such as Texas and Florida, as well as states that were hit hard at the outset such as Illinois. Each state is taking different measures which include curfews, mask rules, and more.

    Nonetheless…

    3. The economy continues to grow despite the pandemic

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    Economic activity began to surge once restrictions were lifted in the summer. Today, many businesses and individuals have adapted to social distancing and remote work measures. For investors, there is evidence that the economy can continue to operate even with targeted shutdowns and other restrictions to control the spread of COVID-19.

    The bottom line?

    Investors who stayed disciplined and persevered earlier this year were rewarded. As we near the end of a long and unpleasant year, staying focused on the long run remains the best strategy.

    Please let me know if we can be of further help.

    Thank you and good weekend.

    – Cale

    Posted by: Cale Smith , Commentary
  • 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