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Commentary iMGP International Fund Second Quarter 2023 Commentary

For the three months ending June 30, 2023, the iMGP International Fund gained 3.05%, outperforming both the MSCI EAFE Index and MSCI ACWI ex. US Index, which returned 2.95% and 2.44%, respectively. The Fund also outperformed the Morningstar Foreign Large Blend category, which notched a 2.90% gain in the quarter.

Since its inception on December 1, 1997, the Fund has returned 6.35% annualized. Over the same period, the Fund has outperformed MSCI EAFE, MSCI ACWI ex. US Index and the Morningstar Foreign Large Blend category, which have generated an annualized return of 4.88%, 5.01% and 4.08%, respectively.

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 *There are contractual fee waivers in effect through 4/30/2024.

Brief Discussion of Performance Drivers for the Quarter

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 period may, however, show other factors that also explain relative performance.

The Fund benefited from its sector allocation relative to the MSCI EAFE Index during the second quarter. An underweight to the underperforming materials stocks added value, as did an overweight to the strong performing consumer discretionary and technology sectors. Stock selection was a headwind in the quarter—largely due to the industrial stocks in the Fund. 

Portfolio Breakdown as of 6/30/2023

By SectorFund
Consumer Discretionary16.7%
Information Technology14.2%
Communication Services5.0%
Health Care & Pharmaceuticals14.5%
Industrials 13.6%
Consumer Staples 6.8%
Real Estate 0.0%
By RegionFund
North America6.2%
Asia ex-Japan3.8%
Latin America 0.0%
Australia/ New Zealand0.0%
Middle East4.1%
Other Countries0.0%
*Cash is excluded from calculation
By Region
US Equities3.3%
Developed International Equities93.0%
Emerging Market Equities3.8%
Summary Statistics
Market Cap Median (bn)$29.54
Weighted Average Market Cap$63.65
# of Holdings45
By Market Cap
Small Cap3.0%
Mid Cap51.5%
Large Cap45.5%

Quarterly Market and Portfolio Commentary from Managers

David Herro, Harris Associates

Major global markets generally finished the second quarter higher, continuing the relief for the year-to-date period following a challenging 2022. While the U.S. and Europe equity markets showed strength on the back of better-than-expected economic data, Asian markets were mixed with China equities finishing lower and Japanese equities reaching 30-year highs. Central banks continued to focus on reining in inflation, which remains elevated across most regions. The U.S. Federal Reserve increased its benchmark interest rate by 25 basis points in May before pausing at its June meeting. Comments from members of the Federal Open Market Committee pointed to further hikes in the future and interest rates remaining elevated for some time. The European Central Bank and Bank of England both increased their respective interest rates in May and June, reaching 4.00% and 5.00%, respectively, while Japan and China opted for more accommodative monetary policies. In the face of tightening financial conditions, inflation fell from prior year levels during the quarter throughout most of the world.

Regardless of the economic backdrop and central bank activity, our disciplined investment process continues to revolve around bottom-up, fundamental research. As long-term investors, we value our companies through the economic cycle and focus portfolio construction on optimizing what we believe are our best investment opportunities. We attempt to identify growing businesses that are managed to benefit their shareholders and invest in those businesses only when priced substantially below our estimate of intrinsic value, then patiently wait for the gap between share price and our estimate of intrinsic value to converge. We believe this approach best serves our goal of growing our client’s capital over the long term.

Mark Little, Lazard Asset Management

Equity markets finished the quarter with strong gains in June—continuing the recovery from 2022. The quarter started on a more cautious note, as the persistence of high inflation extended the expected timeline for central banks to maintain tight monetary conditions and raised the likelihood of a tougher path to resetting of inflation expectations. Anxiety around financial stability lingered, following the first casualties in the financial sector, and concerns that pressure on real estate values could exposure other vulnerabilities in the system. However, the decision by the Federal Reserve in June to pause further rate hikes was perhaps taken as a sign that policy makers remain sensitive to the economic impact of resetting inflation expectations. Combined with some moderation in U.S. inflation data helped sentiment – resulting in more optimism for equities towards the end of the quarter.

A notable feature of the quarter, and year to date, is the outperformance of large cap stocks. While this would traditionally suggest some caution under the surface of a strong equity market, sectors leading the market have been in more cyclical areas—such as consumer discretionary and industrials.

The technology sector continued to outperform in the second quarter with strong gains in semiconductor stocks. Seeing the initial excitement around generative artificial intelligence (AI) translate into actual orders for Nvidia’s leading edge chips has turned the sentiment on the sector. Investors have shifted their lens away from the downcycle in semiconductors to the long-term demand outlook for the industry. The team has been using the downcycle in the industry to build positions in this sector and encouraged to see this now translate into healthy relative performance. An approach we are applying more broadly to other markets with depressed fundamentals, which we expect will eventually turn and contribute to our results.

Energy and materials underperformed in the second quarter, as hopes faded that the reopening of China would results in a resurgence in demand. The sectors are now among the weakest year-to-date together with real estate, which continues to suffer in a high-rate environment. Other defensive areas of the market have also been weak with underperformance in consumer staples, communication services, and pharmaceuticals.

Earnings results year-to-date have proven resilient, and corporates generally report easing cost and less supply chain pressures but generally providing a cautious outlook for the year. Persistent inflation brings into question the pace and magnitude of margin recovery while consumer demand is proving a bit weaker than expected. Adding to this, management teams are destocking as lead times in supply chains return to more normal levels and higher financing cost creates its own urgency for efficient cash management. Sales cycles have been extending in some sectors as corporates assess the demand outlook for their businesses against a slowing macro backdrop.

On a regional basis, Europe performed in line with EAFE during the second quarter after a strong recovery set in motion toward the end of 2022. Weak economic data out of Germany, a sputtering economic recovery in China and a continued resolve to raise rates at the European Central Bank weighed on the region. Japan was the strongest performing market even as the currency continues to depreciate against the U.S. dollar. The market has seen strong inflows from overseas investors at a time when Chinese equity markets have been notably weak. The weakness in Chinese and Hong Kong equity markets continues in the second quarter, as economic data has fallen short of the initial hope following the abandonment of the “zero-COVID” policy. It has become clear the policy shift will lead to a weaker economy in the short term, as the virus spread through the populous combined with a somewhat hampered outlook for exports as trade frictions, notably with the U.S., persist. We are starting to see policy measures put in place to stimulate the economy but have yet to see a meaningful economic recovery take shape.

Todd Morris and Daniel Fields, Polen Capital

European markets, which rallied off the October lows, slowed in May as data began pointing to contractions in key markets like Germany and Sweden. The European Central Bank (ECB) continues to drive policy rates higher in the face of persistent inflation. U.S. market hype around artificial intelligence (AI) hit a fever pitch in May and may have spurred investor flows away from European equities back to the U.S.

China provides an interesting counter to many trends seen elsewhere. Markets eagerly anticipated strong post-COVID reopening growth last fall, but China’s reopening has been a dud. Note how COVID responses in China ran counter to supporting consumer spending—a sharp departure from the combined monetary and fiscal largesse many Western countries used during the pandemic. Of course, Western policies played significant roles in stoking inflation. Now, more than six months after reopening, China’s inflation statistics are grinding towards outright deflation each month. A battery of other issues matter in China, so we can’t pin poor growth and inflation solely on COVID responses. However, juxtaposing China’s weak inflation with the West’s persistent inflation does prompt questions about the government’s stance towards consumer spending as an economic driver.

ICON (Polen Capital)

ICON is an Ireland-based contract research organization which helps pharmaceutical and biotech companies design and complete trials for new products. ICON has consistently taken market share, but the industry remains highly fragmented, providing a good opportunity for it to win even more share as vendor consolidation remains an ongoing trend. Recent results have reinforced our conviction in the business; it continues to produce industry beating revenue growth and margin expansion. ICON’s shares were under pressure in 2022 owing to some investor’s concerns on the sustainability of growth from small biotech customers in an environment where funding is tight. Though these concerns are not without merit, we note that small biotech customers represent only 15% of ICON’s sales. Strong growth from larger pharma customers is helping offset a slowdown in small biotech revenues. A recent meeting we had with ICON’s CEO, Dr. Steve Cutler, gave us confidence that the recent merger with PRA Health is going to plan. Post-merger we believe ICON is even better prepared to drive revenue growth and margins expansion. We believe ICON is poised to deliver strong compound total returns  for the next five years. This makes the current valuation of ~17.5x forward earnings attractive in our view.

ICON (Lazard Asset Management)

Shares in ICON outperformed on the back of solid first quarter results. The results showed a combination of resilient order intake, and healthy growth in revenues and margins. Concerns around weak biotech funding conditions has been a significant headwind to sentiment around the shares. The +6% growth in gross booking during the quarter and reports of continued healthy levels of RFP activity helped to ease concerns of an imminent deterioration in the market.

Management hosted an event for investors in May, which highlighted the improved position of the company following the acquisition of PRA. The combination makes ICON the second largest clinical research organization (CRO) in the world, which has opened new commercial opportunities and resulted in economies of scale to that extend their competitive position. Their data offering and decentralized clinical trial capabilities are becoming harder to match by smaller CROs, which should help drive market share gains over time. In addition, management expect further SG&A savings to come as a result of the merger, which should underpin further margin expansion.

Renesas Electronics (Lazard Asset Management)

Renesas shares performed well after delivering a reassuring set of results at the end of April. Results came in ahead of consensus on better-than-expected margins driven by better product mix and good cost control. Management guided to flat profit quarter on quarter, which was also better than expected given some weakness in the end-markets.

The update demonstrated how the new management team have changed the business for the better, in our opinion. The strong order backlog, resilience of margins and better control of inventory provided confidence that the company is far better positioned to weather a potential downturn. This was followed by a capital markets day in May, which outlined the medium-term opportunities for the business to continue to grow and, more importantly, continue to improve the return profile of the business.

Worldline (Harris Associates)

Worldline is a multinational payments and transactional services company headquartered in France. The company offers payment solutions to merchant services, financial services, mobility, and e-transactional services, and also provides terminals solutions and services. We appreciate Worldline’s position as a leader in European payments, and believe it has a long growth runway ahead due to Europe’s lower cashless penetration and higher levels of bank payment in-sourcing when compared to the U.S. We believe the payments industry is structurally attractive with high recurring revenues, low customer churn and strong free cash flow generation. In our view, Worldline’s revenue acceleration, which is driven by e-commerce business, travel recovery and synergy opportunities, is underappreciated by the market.

Worldline reported first-quarter results largely in-line with prior guidance. Organic growth was up 9.2% with merchant services continuing to drive growth, up 12.6%, due to continued strong transaction volume growth in store (11%) and online (19%). Going forward we expect merchant growth to benefit from the lapping of the 2% Russia-exit headwind and pricing initiatives. In addition, a rebound of Chinese travel to Europe should prove beneficial as Worldline is Europe’s top partner for UnionPay, Alipay, and WeChat Pay. Financial services grew 2.3%, in-line with management’s expectations, and full-year guidance reiterated 8-10% organic revenue growth, a 100 basis point margin improvement, and 46-48% free cash flow conversion. Management noted that Worldline’s new partnership with Credit Agricole (CA) will allow the company to enter the French merchant acquiring market, which we view as an attractive opportunity. France is a EUR 700 billion payment volume market that has been closed to non-bank merchant acquiring, and CA holds around 25% market share within France. The joint venture is split equally and will start operating independently in 2025. The target for the first few years of operation will be migrating the largest merchants. The near-term margin dilution is likely to be a short-term headwind through 2025 due to the EUR 40 million in startup costs and lower initial profitability of the joint venture.

We recently met with Worldline’s CEO and CFO, Giles Grapinet and Gregory Lambert, who remain optimistic on the company’s ability to generate 8-10% organic growth in 2023, despite the potential macro headwinds during the second half of the year. Management plans to focus on improving margins and utilizing a more structured capital allocation framework which should shift growth to be primarily organic. Further, the reduction of costs from merger and acquisition integration and platform consolidation should result in an acceleration in margin improvement. Worldline’s assets in Italy and Greece are performing well, in our view, while ANZ in Australia experienced lower growth and higher costs due to its delayed platform delivery and new product launches. Management is confident ANZ will deliver synergies and growth in the long term despite near-term headwinds. As the company finishes its asset integration in 2024, management noted the duplicative costs of the business will come down, and its efforts to move workloads to the cloud will lead to additional cash cost reductions. Cost optimization in the financial services business is another key area of focus as banks are slowing contract renewals ahead of potential macro pressure.

Teleperformance (Polen Capital)

Teleperformance, the world’s leading outsourced customer service provider, was the largest detractor to performance during the second quarter. The company’s stock price has been under pressure the past few months—a weaker IT services backdrop combined with concerns about generative AI disrupting Teleperformance’s business model have negatively impacted short-term returns. Amidst an AI hype cycle markets reflexively assume generative AI will bring about the end of many human capital-intensive businesses. Teleperformance management believes generative AI is another evolutionary development causing changes for the industry as have other technologies in the past. Management projects certain workflows will be negatively impacted by AI, but the business should continue to grow revenue at a high single digit rate over the long-term net of AI headwinds. Further, Teleperformance has long been using AI enhanced workflows to better serve call center customers. Generative AI may well offer useful efficiency gains to the business moving forward. Despite near-term weakness, we continue to have conviction in Teleperformance, and we view the concerns around generative AI to be overblown. The stock’s current NTM P/E of ~10x is compellingly undervalued.   

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The MSCI All Country World ex U.S. Value Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets, excluding the United States. It includes companies with lower price-to-book ratios and lower forecasted growth values.

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