During the second quarter, the fund’s 4.11% loss trailed the MSCI World Index gain of 2.63% and the Morningstar Global Large-Stock Blend category return of 1.16%.
Performance quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance of the funds may be lower or higher than the performance quoted. To obtain standardized performance of the funds, and performance as of the most recently completed calendar month, please visit www.imgpfunds.com. The advisor has agreed to waive fees and limit the expenses of the fund through at least April 30, 2025.
For standardized performance click here: https://imgpfunds.com/global-select-fund/
Quarterly Portfolio Commentary from Managers
Scott Moore and Chad Baumler, Nuance Investments, Global Mid-Cap Value
While our sector overweight and underweight exposures were unchanged during the quarter, we did make changes to the composition of the portfolio as risk reward opportunities shifted. We added to our positions in the health care sector as we continue to see what we view as attractive risk rewards. Within the sector, we would mention two specific opportunities. The first opportunity is companies that sell into the dental space which include positions in the health care supplies, health care equipment, and health care distributors sub-industries. We are seeing under-earning and underperformance manifesting across the broader group of dental companies. The second opportunity we are seeing within the health care sector is in the life sciences tools & services sub-industry. We believe a combination of excess capacity being built out combined with a below normal funding environment for biotechnology has created select opportunities across the sub-industry.
We also increased our exposure within the utilities sector. Our overweight in the sector is made up primarily of exposure to the water utilities industry as we believe these companies are under-earning our view of their normal returns on capital. The prolonged period of low interest rates over the last decade has resulted in historically low allowed returns on equity and regulatory lag, which has been exacerbated by the recent inflationary environment. We believe these lower returns on equity will reset higher as utility regulators incorporate a more normal cost of capital environment.
In the consumer staples sector, we are continuing to see input cost inflation-related under-earning in a number of leaders across the household products sub-industry. Our view is that earnings in this sub-industry have been negatively impacted by rising raw material costs. We believe these costs can ultimately be mostly offset by price increases which generally lag the raw material price increases. We are also finding what we believe to be select opportunities within the packaged foods & meats sub-industry.
Polen Capital, Global Larger-Cap Growth and Global SMID-Cap Growth
In the second quarter, AI remained the dominant narrative in markets. Companies perceived to be AI beneficiaries have seen their share prices markedly outperform those where the benefit is less clear in the immediate term. Nowhere is this more evident than in the semiconductor industry, +19% in the quarter and accounting for more than 50% of the MSCI ACWI Index (“the Index”) return. Add in hardware and that figure increases to 80%. NVIDIA alone has contributed 40% and 24% of the Index return over the quarter and YTD periods, respectively.
Amid higher-than-expected inflation readings and a tight labor market, interest rates have remained higher for longer. The Fed recently signaled the potential for just one rate cute this year. On the one hand, it appears to us that increasing uncertainty around the macro backdrop has led to a “crowding” into secular growth wherever it can be had now, ostensibly AI. On the other hand, it also seems that this uncertainty has contributed to the outperformance of lower volatility, lower growth businesses with a high degree of earnings stability (downside protection/safety trade).
As a quality growth manager investing for the long-term, we can readily admit environments like these come with their undue share of frustration. It’s especially helpful in times like these to take a step back to not lose sight of our goal, which is to pay a fair price for a small group of high-quality businesses that we believe can grow earnings per share at a mid-teens rate or higher over time. History shows that this patient, methodical approach to compounding earnings growth can lead to compelling long-term outcomes for our clients.
Brian Krawez and Gabe Houston, Scharf Investments, Global Larger-Cap Value
Mega cap US IT stocks again propelled global markets. The Magnificent Seven have now contributed more than half (and Nvidia a quarter) of the MSCI ACWI’s return year to date.
Make no mistake, this is a risk-on market. The MSCI ACWI Momentum index has now returned an astounding 28.74% vs. 5.35% for the Low Volatility index year to date. Within the US, Growth has returned 20.7% vs. 6.6% for Value year to date. Over the trailing 10 years, Growth has delivered an annualized return of 16.33% vs. 8.23% for Value. While tech-related profits have been supportive of the outperformance, valuations have outpaced earnings growth. At 30x, the Russell 1000 Growth index forward P/E now trades nearly 50% higher than its 25-year average (21x). Meanwhile, interest rates are appreciably higher today than their post Global Financial Crisis average and consensus estimates have tech and non-tech earnings growth narrowing. Like the IT sector (30x P/E), consensus forward earnings growth for Financials (15x P/E), Industrials (20x P/E) and Health Care (19x P/E), are each forecast to be in the teen percentages.
Such narrow market leadership, for so long, is not indictive of a healthy market dynamic. The last time we saw such wide spreads between market cap and equal weight index performance (as well as growth vs, value) was during the tech bubble
Edited Commentary from the Respective Managers on Selected Contributors
It is worth remembering the fund’s overall positioning is driven by the managers’ stock picking. As a result, stock selection is always the main driver behind the fund’s absolute and relative performance. Attribution analysis over a given time period may however show other factors also explain relative performance.
Stock selection and sector allocation detracted value during the second quarter. The former was the main detractor. Positions within the technology sector detracted the most from relative gains during the quarter. Stock selection in the health care and consumer discretionary sectors were also a meaningful drag on returns.
SiTime (Rayna Lesser Hannaway & Team, Polen Capital)
SiTime is a semiconductor company that pioneered the use of silicon micro-electromechanical systems for use in precision timing. The company has been impacted by inventory destocking over the last 12-18 months, and the stock has been volatile. While results continue to be weak, we believe the trajectory of the business has improved and management’s comments have been encouraging.
These incrementally positive developments have not gone unnoticed with the stock up 78% from mid-April to mid-May. While we continue to believe SiTime is a structurally advantaged business with a long growth runway, we took advantage of the stock’s significant appreciation over a brief timeframe and trimmed our position.
Henkel AG & Co (Nuance Investments)
Henkel is a leading global producer of adhesives for a variety of applications, and a producer of household products, including the Persil®, All® and Snuggle® brands. The company holds a number one or number two market share position in most of its product categories and has exhibited stable to gaining market share over time. Additionally, their balance sheet has only modest amounts of financial leverage and has an ‘A’ S&P Credit Rating. We believe Henkel is currently under-earning its long-term potential as raw material inflation from key inputs such as resins and other petrochemicals has taken margin levels and earnings below their history and what we would consider normal. These falling earnings caused the stock price to trend down as well, and according to our internal research, the stock is trading at a discount to our estimate of normalized earnings. We believe Henkel’s market share position, inexpensive valuation, and solid balance sheet create a situation that could position us for a win with this stock in multiple ways over time. While the stock has appreciated year-to-date, we continue to maintain a material position in our portfolio as of quarter end.
Microsoft (Damon Ficklin and Bryan Power, Polen Capital)
Microsoft is benefitting from a growing appreciation for the ways in which the company has an opportunity to monetize generative AI, be it in its office suite or Azure cloud business, where in the latter case it contributed seven percentage points to that unit’s revenue growth in the most recent quarter. We believe Microsoft remains a highly advantaged business with many secular tailwinds driving durable growth for the foreseeable future, even at its immense scale.
Edited Commentary from the Respective Managers on Selected Detractors
Workday (Damon Ficklin and Bryan Power, Polen Capital)
In line with broader weakness across the enterprise software complex, Workday sold off as management guided to organic subscription sales growth in the range of 16.6-17%, 50 basis points lower than previously guided. Zooming out longer term, we believe nothing has fundamentally changed for Workday. In our view, this remains a solid, market-leading, long-term compounder with substantial possibility for future growth in the market for both its human capital management and financial software.
Five Below (Rayna Lesser Hannaway & Team, Polen Capital)
Five Below’s results had been strong and the company was a great destination for cost-conscious consumers in the high inflationary environment. However, more recently the business has been pressured on weaker consumer spending and higher shrink (losses from theft or damage) which have weighed on the stock. Despite these near-term headwinds, we continue to believe Five Below is still well positioned as a long-term compounder.
Dentsply Sirona (Nuance Investments)
Dentsply Sirona is the leading global manufacturer of high-end dental equipment and consumables. In general, value-add dental products is a part of the economy that our team has deemed attractive due to its highly stable demand profile over cycles. The company holds a top three market share position in restoratives, preventatives, general supplies, implants, endodontic tools, dental lab supplies, chairside milling equipment, and imaging equipment and has maintained or gained share in most of its products over this last economic cycle, according to our research.
We believe the company is under-earning our view of normalized earnings power. First, sales of dental equipment, particularly high cost and high margin imaging equipment, are below normal levels due to higher financing rates and some pull-forward of demand into the 2021 time-frame during the reopening of dental practices. Second, the company is in an internal investment cycle in additional sales reps, dentist clinical education, and technology spending including an ERP modernization project, all of which we believe are temporarily impeding margins. Finally, the company is gaining market share in clear aligners, but having previously invested in clear aligner manufacturing capacity, aligners remain below normal margin levels as the manufacturing capacity remains under-absorbed. As the company gains share and volumes grow, we believe capacity will fill up and margins are likely to improve.
We believe the stock is trading at a price-to-normalized earnings discount that is less expensive than the stock’s historical median valuation multiple of 19x to 20x price-to-earnings and among the most inexpensive valuation observations we have seen since 2009. We believe, at these levels, the stock has more than 50% upside to our internal view of fair value with around 10% risk to the downside.
iMGP Global Select Equity Fund Region and Sector Allocations as of June 30, 2024
| By Sector | |
|---|---|
| Finance | 17.7% |
| Consumer Discretionary | 7.5% |
| Information Technology | 17.0% |
| Communication Services | 6.4% |
| Health Care & Pharmaceuticals | 22.8% |
| Industrials | 9.3% |
| Consumer Staples | 9.6% |
| Real Estate | 2.0% |
| Utilities | 5.0% |
| Energy | 0.0% |
| Materials | 0.0% |
| Cash | 2.7% |
| By Region | |
|---|---|
| Europe | 26.0% |
| North America | 71.0% |
| Asia ex-Japan | 2.6% |
| Japan | 0.4% |
| Latin America | 0.0% |
| Africa | 0.0% |
| Australia/New Zealand | 0.0% |
| Middle East | 0.0% |
| Other Countries | 0.0% |
| By Market Cap | |
| Small Cap | 21.6% |
| Mid Cap | 30.7% |
| Large Cap | 47.7% |
| By Region | |
| US Equities | 66.8% |
| Developed International Equities | 30.6% |
| Emerging Market Equities | 2.6% |