The Island Investing Blog

  • IIM International Portfolios: Investor Letter for Q3 ’18

    As discussed in my recent blog post, international investing this year has been like walking through a mine field, as stock prices discounted the implications of tariffs, Brexit and volatile emerging markets. Adding insult to injury, the strengthening U.S. dollar further eroded domestic returns for foreign stocks. Unless otherwise noted, the performance in this letter is either for the first nine months of 2018 or since inception to September 30, 2018. Returns for the portfolios are net of fees.

    During the former period, Frigate eked a small net gain of 1.29% while its benchmark, the S&P 500 ADR Index, returned a negative 4.02%. Since inception on July 1, 2013, Frigate was up 26.12% versus the benchmark gain of 27.04%. Working against performance this year was Swiss employment agency Adecco, where revenue growth has slowed but margins have been resilient. I added to this position following my visit with them in September as I believe 1) they will benefit from increased digitalization and integration of acquisitions and 2) the valuation was very compelling. German health/agriculture company Bayer’s share price reflected the company’s difficulty digesting its Monsanto acquisition which gives its increased scale but also increased exposure to litigation around glyphosate herbicides. As of now, due to its strong human healthcare portfolio, Bayer remains a core holding – especially in-light of new trials which may mitigate or reverse glyphosate punitive damage charges. French Bank BNP Paribas has been enjoying good business development in-line with economic growth in Europe, but its share price has suffered from the less favorable financial markets for Corporate Investment Banking and Foreign Exchange. BNP’s share price versus future earnings and current book value is very attractive in my opinion, and I believe in a more normal environment shareholders will benefit from improved earnings, more beneficial exchange rates and an expansion in valuations.

    The Frigate Folio benefitted from its holding in UK communications company, Sky, which continued to be the subject of a bidding war. China Petroleum and Chemical’s share price, also known as Sinopec and as half a government-protected oil and gas duopoly, enjoyed higher oil prices. Swedish- based telecommunication equipment provider Ericsson showed a very nice performance probably from the anticipation of ramp-up in 5G network spending and the improvement in profitability from the company’s turnaround efforts.

    Not surprising, Treasure Harbor’s focus on higher dividend paying stocks did not fare as well during this period of rising interest rates. It was down 4.93% versus a negative return of the blended benchmark (15% SPDR® S&P Emerging Markets Dividend ETF/ 85% SPDR® S&P International Dividend ETF) of a negative 4.7%. Since inception, October 1st 2013, Treasure Harbor has returned a negative .74% versus a positive return of 2.12% for the benchmark. Despite a strong second quarter, the share price of Ambev, the Latin American arm of Anheuser-Busch InBev, suffered along with the Brazilian Market. Banco Santander, with extensive exposure to Latin America, also underperformed. UK Telecom company Vodafone slumped as investors worried that as its reach is expanding, so is its debt, and its 8% yield is therefore threatened. Even if the dividend is cut, the yield will still be compelling and the excess cash could be used to deleverage and assist the company’s growth. Although I am monitoring these positions, I believe that they are extremely undervalued, as does Morningstar – which has them rated at 4 stars – and for now they remain holdings. Coca Cola Enterprises, a distributor of non-alcoholic beverages in Europe, reported better than expected earnings, enjoyed broker upgrades and performed very well this year. French-based, integrated oil producer Total benefitted in part from the higher oil prices but also from a confident analyst’s day that showed their continued ability to improve costs and improve cash flows. UK pharmaceutical company, Glaxo, also did well as investors showed appreciation for its current product-line and early stage pipeline.

    After displaying great performance for years prior, Yellowtail retrenched a bit returning a negative 6.9% for the first nine months of this year versus a negative 5.18% for its benchmark VSS (Vanguard FTSE All-World ex-US Small-Cap ETF). Since inception on December 1st 2014, Yellowtail has generated a positive return of 33.78% versus 26.5% for its benchmark. Profits at Spanish Supermarket chain Dia continued to deteriorate, along with its share price, and it was liquidated after the quarter’s end. Wacker Chemie, A German manufacturer of chemicals and plastic products, also performed poorly. Japanese Minebea Mitsumi also detracted from performance as management fine-tuned estimates at its 1st quarter earnings review due to the continued shrinkage of the cell phone market and uncertainty in the macro environment. With a 60% market share in the growing miniature ball-bearing market and a penchant for innovation, I still find this stock attractive. On the positive side, Japanese generic pharmaceutical manufacturer Sawai reported good 1st quarter core profits and confirmed expectations for full year results after acquiring Minnesota based Upsher-Smith Laboratories last year. Swiss-based Lonza, which supplies pharmaceutical, biopharmaceutical and services also had a great nine months as it continued to reinforce it mid-term targets. The price of Jordan-based, London-listed generic and pharmaceutical manufacturer Hikma staged a huge rebound as the company reported good interim results and upgraded its 2018 outlook.

    Following the third quarter, investors struggles with the aforementioned challenges and volatility returned with a vengeance – mainly to the downside – and all of our international products are in negative territory. I am expecting this volatility to continue, but I also believe that this is an opportunity, which I have used to add to positions or initiate new ones that appear to be of good quality and under-valued. In confusion, there is opportunity.

    Please don’t hesitate to reach out if you have more questions on any of our portfolios or our financial planning services.

    – 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, For Investors
  • 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