For the three months ending March 31, 2022, the iMGP International Fund fell 10.72%, while its benchmarks MSCI EAFE Index and MSCI ACWI ex USA Index lost 5.91% and 5.44%, respectively. The average peer in Morningstar’s Foreign Large Blend category dropped 7.01% for the quarter.
Since its inception December 1, 1997, iMGP International has returned 6.61%, annualized. Over the same time period, MSCI EAFE, MSCI ACWI ex USA Index and the Morningstar Foreign Large Blend category have generated an annualized return of 5.07%, 5.39% and 4.27%, 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 www.imgpfunds.com.
Brief Discussion of Performance Drivers for the First 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 time period may however show other factors also explain relative performance.
Country, sector, and stock selection hurt first quarter relative performance. Sector and country/region allocations had the biggest drag on returns versus the MSCI EAFE Index. Underperformance by the Fund’s largest regional overweight (Europe) hurt relative returns in the quarter. The Fund’s overweight to technology stocks also hurt performance. Energy stocks were by far the best performing sector in the first quarter—the Fund does not have any energy exposure.
Stock selection was strongest in the materials sector. Glencore (up 30%) and Incitec Pivot (up 32%) were among the top contributors to performance during the quarter. Stock selection within the communications services sector was also positive. Solid gains from Grupo Televisa and Informa were the main drivers within this sector.
Stock selection was negative in the financials sector, driven lower by poor returns from BNP Paribas and Credit Suisse. The two European financials fell 16% and 18%, respectively, during the first quarter.
Portfolio Breakdown as of 03/31/2022
| By Sector | Fund | iShares EAFE ETF | +/- |
| Finance | 20.7% | 17.6% | 3.1% |
| Consumer Discretionary | 14.2% | 11.6% | 2.7% |
| Information Technology | 16.4% | 8.6% | 7.8% |
| Communication Services | 9.4% | 4.9% | 4.5% |
| Health Care & Pharmaceuticals | 10.2% | 13.0% | -2.8% |
| Industrials | 14.0% | 15.4% | -1.4% |
| Consumer Staples | 4.0% | 10.2% | -6.2% |
| Real Estate | 0.0% | 2.9% | -2.9% |
| Utilities | 5.4% | 3.4% | 2.0% |
| Energy | 0.0% | 4.1% | -4.1% |
| Materials | 1.0% | 8.2% | -7.2% |
| Cash | 4.7% | 0.0% | 4.7% |
| By Region | Fund | iShares EAFE ETF | +/- |
| Europe | 84.2% | 63.1% | 21.1% |
| North America | 5.7% | 1.1% | 4.6% |
| Asia ex-Japan | 5.3% | 4.3% | 1.0% |
| Japan | 0.0% | 22.3% | -22.3% |
| Latin America | 1.3% | 0.1% | 1.1% |
| Africa | 0.0% | 0.0% | 0.0% |
| Australia/ New Zealand | 0.0% | 8.3% | -8.3% |
| Middle East | 3.4% | 0.6% | 2.8% |
| Other Countries | 0.0% | 0.0% | 0.0% |
| *Cash is excluded from calculation |
Quarterly Market and Portfolio Commentary from Managers
David Herro, Harris Associates
Volatile capital markets marked the start to 2022. Inflation fears driven by higher commodity prices led to steadily rising US interest rates through the first quarter. Ongoing supply chain challenges and lingering COVID disruptions coupled with a rapidly escalating Ukraine crisis led to negative returns across most equity and fixed income categories. US and non-US stocks were down roughly mid-single digits for the quarter. The positive longer term narrative surrounding a post-COVID global recovery is now being over-shadowed by near term global recession concerns driven by higher interest rates, lingering COVID, persistent supply chain challenges and re-ignited geopolitical risks. Several of the high-flying growth companies declined significantly in the quarter with a select few starting to look potentially interesting. Across regions, Europe appears to be the most attractively priced and many cyclical sectors, globally, seem to be overly discounting a negative economic environment. As we enter the 2nd quarter, we believe the longer term growth positives will eventually prevail and gradually, albeit slowly, improving economic conditions ought to create a positive backdrop for global equity prices.
We established one new position in the quarter; Iveco, which was a spinoff of CNH Industrial and sold Incitec Pivot as it approached our fair value estimate. Several companies experienced price weakness on the concerns outlined above. We took advantage of the equity price volatility to re-position the portfolio to optimize expected return among existing holdings. While the coming quarters may experience more mixed fundamental progress, due to supply chain disruptions, increasing inflationary pressures, and higher interest rates, we think the long-term fundamental trend across portfolio companies remains positive over the next 12-24 months and should lead to higher equity prices.
Mark Little, Lazard Asset Management
The first quarter of 2022 started with a combination of optimism around the normalization of activity, and continued inflationary pressure, leading to rising expectations of imminent interest rate rises in both the US and in Europe. A large wave of the Omicron variant of COVID-19 swept through many countries, but in most developed markets there was sufficient immunity in the population to lead to a relatively low incidence of severe disease and death. As a result, COVID restrictions have been rapidly removed, allowing an increasingly rapid return to behaviors before the virus spread. The resultant strength in demand has met continued stickiness in supply, pushing up prices across now a very wide range of goods and services. Central banks have duly responded with increasingly aggressive intentions to tighten monetary policy. This backdrop led to a dramatic rotation in the first part of the quarter from companies with higher returns and structural growth, towards companies with low headline valuation metrics such as those in the financial and energy sectors.
Markets were then delivered a different shock by Russia’s decision near the end of February to launch a full invasion of Ukraine. While the direct economic impact of these countries’ economies is limited, the war and associated sanctions have exacerbated the trend for rising prices and disrupted supply chains, giving energy and commodity prices another push, and potentially embedding inflationary expectations across many economies. Bond yields are duly rising everywhere except China, which is facing its own issues around a deleveraging property market and a series of rolling lockdowns in its attempt to maintain a zero-COVID policy in the face of the highly infectious Omicron variant.
In this environment, outperforming sectors were an unusual mixture of deep value commodity and financial stocks, which are usually highly economically sensitive, and much more defensive sectors such as health care, telecoms, and network utilities. Other cyclical sectors, such as industrial stocks and consumer discretionary companies, lagged the market. For once, technology stocks also underperformed, hurt first by the rotation against growth stocks, and then by cyclical concerns in semiconductors.
Todd Morris and Daniel Fields, Polen Capital
Global equity market conditions deteriorated over the first quarter of 2022, as higher inflation increased the possibility of tighter-than-expected monetary policies by global central banks. This triggered an equity market selloff amid fears that a less accommodative monetary backdrop could lead to slower global economic growth. The likelihood of a higher interest-rate environment weighed on growth stocks, which trailed their cyclical and value counterparts. The war in Ukraine resulted in additional market volatility and uncertainty, and intensified investors’ “risk-off” sentiment. The valuations of long-duration assets fell, while commodity-oriented, industrials and utility companies were strong performers.
Short-term rotations have no bearing on how we invest – except to offer us opportunities to buy our favored companies when we believe they are attractively priced. We strongly believe the Portfolio’s returns will ultimately reflect the consistent cash flow and earnings growth of our holdings over longer periods of time. As such, we remain focused on seeking out competitively advantaged companies that we believe will continue to grow well into the future. Short-term market shifts do not impact our long-term thinking, and we can experience periods where we look “wrong” as a result. But therein lies what we believe is our value to our clients. Looking different from the benchmark in the short term can lead to better outcomes for our clients over the long term.
Edited Commentary from the Respective Managers on Selected Contributors
| Leading Contributors 1/1/22-3/31/22 | ||||||
| Leading Contributors | Average Portfolio Weight % | Portfolio Return % | Contribution to Return % | Index Weight % | Country | Sector |
| Bayer AG | 2.42 | 29.27 | 0.51 | 0.36 | Germany | Healthcare |
| Glencore PLC | 1.52 | 29.63 | 0.37 | 0.35 | Australia | Materials |
| Grupo Televisa SAB ADR | 1.63 | 24.87 | 0.32 | 0.00 | Mexico | Communications |
| Hensoldt AG | 0.53 | 19.02 | 0.29 | 0.00 | Germany | Industrials |
| AON PLC | 3.19 | 8.34 | 0.27 | 0.00 | Ireland | Financials |
| Incitec Pivot PLC | 0.91 | 31.62 | 0.23 | 0.00 | Australia | Materials |
| Medtronic PLC | 2.05 | 7.89 | 0.15 | 0.00 | Ireland | Healthcare |
| Informa PLC | 2.70 | 13.24 | 0.14 | 0.07 | United Kingdom | Communications |
| Allianz SE | 1.96 | 2.03 | 0.10 | 0.60 | Germany | Financial |
| CAE Inc | 2.31 | 3.13 | 0.07 | 0.00 | Canada | Industrials |
Bayer (David Herro)
In our determination, Bayer’s merger with Monsanto creates the best agriculture business in the world within its vertical markets in terms of size and quality. Despite some recent glyphosate-related litigation issues, we believe Bayer’s collaboration with Monsanto should deliver benefits to its crop sciences business from 1) increased channel access in the U.S. thanks to Monsanto’s direct dealings with farmers and 2) expanded application of its seed growth solutions on additional quantities of Monsanto seed, which would afford a pathway to near-term revenue synergies.
Bayer’s pharmaceutical business developed blood thinning drug XARELTO®, which is in wide use and has an excellent outlook over the medium-term, in our view, given that its patent is held until at least 2023 (or beyond depending on the country).
In addition to its crop sciences and pharmaceutical businesses, Bayer is a leading global provider of over-the-counter consumer health products and possesses a robust portfolio of brands (including Aleve™, Alka Seltzer™, Claritin™, Afrin™ and MiraLAX™, among others), which supports a healthy level of continuing cash flow.
Bayer reported strong earnings results for 2021, in our view, with growth exceeding expectations across divisions. Notably, the crop science division delivered 11% growth, staging a robust recovery following two years of an agriculture downcycle and competitive challenges. Management’s increased guidance for crop sciences in 2022 calls for 7% organic growth and a 25-26% margin, which we believe is a key positive for the segment as it signals a long-awaited favorable transition toward profitable growth. In the pharmaceuticals division, revenue growth of more than 7% also bested expectations, supported by a strong recovery of Eylea, continued growth of Xarelto and the ramp of new products. Moreover, Bayer’s pipeline enjoyed notable successes in the period, including a favorable read-out for cancer drug Nubeqa. We spoke with Bayer CFO Wolfgang Nickl during the quarter who noted that tailwinds are robust in the business today. Notably, he expressed confidence in both the pricing and competitive backdrop in the crop sciences business as rate increases are layering into sales growth and cost cuts begin to come through. Nickl also reiterated Bayer’s expectations for continued growth in pharmaceuticals, driven largely by new launches and technologies.
Glencore (David Herro)
We like that Glencore is run by smart, hyper-competitive and value-focused managers with a focus on improving asset returns. In our estimation, Glencore differentiates itself from other miners with its trading business that provides high returns and cash flow with low cyclicality and significant barriers to entry. We appreciate the company’s leading market positions in attractive commodities and believe existing mining operations will benefit from normalized prices, higher volumes, lower costs and the move towards a low carbon economy.
In our view, Glencore delivered a solid fiscal year 2021 earnings report as financial metrics improved materially year-over-year. In the marketing segment, earnings handily bested expectations ($3.7 billion vs. $3.48 billion). In metals, earnings increased to $2.5 billion from $1.7 billion for the year-ago period due to strong demand, supply constraints and inventory drawdowns. We recently met with CEO Gary Nagle and CFO Steve Kalmin and discussed the massive impact the crisis in Ukraine is having on Glencore’s markets. As customers bypass Russian oil, natural gas and coal, the tightened supply translated to large price increases. In particular, European nations are now buying coal at elevated prices as a replacement for Russian natural gas, leading to stronger than expected free cash flow. Management also noted that the company now has 27 assets either in sale processes or under consideration on top of the nine assets already sold as part of the portfolio simplification. We appreciate CEO Gary Nagle’s focus on efficiency and returns and believe the company trades at a large discount to our perception of its intrinsic value.
Hensoldt (Mark Little)
Hensoldt is a leading European defense company which is especially exposed to German military spending. Russia’s invasion of Ukraine has fundamentally changed the outlook and potential valuation of these stocks. The German government, despite being led by a coalition of left-wing parties, announced an extraordinary reversal of thirty years of foreign policy the weekend after the commencement of the war. In particular, they agreed to send weapons to Ukraine, and to authorize a very substantial increase in the German defense budget both on an ongoing basis and in the form of an extraordinary €100bn fund. This has resulted in both a material rise in future sales expectations for Hensoldt, and a reassessment by investors of the ESG characteristics of a sector that had been marked down for its harmful properties, without recognition of its role in keeping responsible societies safe. As such, while the stock rose sharply in the days following the start of the war, it did so from a very low valuation starting point, and so remains extremely attractively valued given the entirely new outlook for the business.
Aon (Polen Capital)
World-leading insurance brokerage Aon has continued to execute well and has exhibited strong growth through the pandemic. In 4Q 2021, revenue grew 10% while operating margins expanded to more than 30% delivering profit growth greater than 25%. The company tends to benefit from inflation through a data centric approach to selling and distributing insurance solutions on a recurring basis. By scouring policy data flows across its business, Aon offers insights that intelligently match buyers and sellers of protection. As an asset-light and cash generative business Aon can return capital to shareholders regularly. In the fourth quarter alone, it repurchased more than 4% of shares outstanding and in the last decade Aon repurchased one third of all shares outstanding.
Our thesis remains unchanged in that scale on both the supply side and demand side of its insurance distribution operations ensure that Aon can continue to win share within a highly fragmented marketplace. The stock is compellingly valued at a 24x forward 12-month P/E multiple given the durable demand profile (70% of sales are recurring) and the proven record of capital deployment by Aon management. Total returns can continue to compound at a low teens rate going forward. Continued solid execution and results speak to stock price strength, as well as the company’s inclusion in a sector, financials, where other companies shoulder significant balance sheet risk and cyclicality. Although interest rates are rising, economic growth has been slowing and yield curves are generally flat, so banks could continue to be out of favor. Aon operates a toll booth with solid inflation protection. Share price strength could be warranted on that basis alone, but we prefer to focus on strong fundamentals coming through.
Edited Commentary from the Respective Managers on Selected Detractors
| Leading Contributors 1/1/22-3/31/22 | ||||||
| Leading Detractors | Average Portfolio Weight % | Portfolio Return % | Contribution to Return % | Index Weight % | Country | Sector |
| Prosus | 2.41 | -35.59 | -0.90 | 0.40 | China | Consumer Discretionary |
| Evolution Gaming Group | 2.71 | -27.85 | -0.84 | 0.12 | Sweden | Consumer Discretionary |
| Icon PLC | 3.33 | -21.47 | -0.82 | 0.00 | Ireland | Health Care |
| SAP SE | 3.12 | -20.79 | -0.68 | 0.78 | Germany | Information Technology |
| Temenos AG | 1.85 | -30.09 | -0.64 | 0.05 | Switzerland | Information Technology |
| Wordline SA | 2.79 | -21.17 | -0.60 | 0.07 | France | Information Technology |
| Carlsberg A/S Class B | 1.92 | -26.48 | -0.55 | 0.09 | Denmark | Consumer Staples |
| Continental AG | 1.61 | -31.28 | -0.54 | 0.06 | Germany | Consumer Discretionary |
| adidas AG | 2.54 | -18.12 | -0.48 | 0.30 | Germany | Consumer Discretionary |
| Credit Suisse Group AG | 2.56 | -18.09 | -0.47 | 0.05 | Switzerland | Information Technology |
Prosus (David Herro)
During the reporting period, we received shares of Prosus as part of a corporate action related to our holding of Naspers. We elected to tender our Naspers shares in favor of Prosus as we think the latter domiciles in a better location (the Netherlands versus South Africa), trades in a less volatile currency (EUR versus ZAR) and has a better tax position than the former. We believe that an investment in Prosus is the most optimal way to gain access to Tencent, one of the most valuable internet companies in the world. In our view, management is committed to closing the gap between the company’s current share price and our perception of its intrinsic value.
Owing to its 29% stake in Tencent and the impact of the Russian invasion of Ukraine, Prosus’ share price declined in the first quarter. Tencent was negatively impacted by fears for increased regulation and a poor macro backdrop, which have negatively impacted fundamentals. We have spoken with numerous contacts on the changing regulatory landscape in China. While we believe structural growth at Tencent will be lower in the future as a result of the new regulatory environment, Tencent remains an excellent business with a high degree of innovation. Later during the quarter, Russia’s invasion of Ukraine weighed on companies with exposure to Russia. In Prosus’ case, its two Russian assets, Avito (the largest online classifieds company in Russia) and Mail.ru (the largest social media company in Russia), are now valueless, in our estimation, and resulted in our small reduction of our estimate of Prosus’ intrinsic value. While we are monitoring any new developments closely, we continue to believe Prosus remains extremely undervalued relative to its sum of the parts.
Carlsberg (Mark Little)
Carlsberg is a leading global beer company with significant exposure to Europe and to China, which has been continuously improving its financial performance over the last several years under a very capable CEO. It is also the owner of the leading beer brand in Russia, Baltika, which before the war in Ukraine represented, we believe, 5-6% of group profits. This profit stream is of course now in severe doubt, and indeed Carlsberg subsequently announced the sale of its Russian business. The stock fell in the quarter to reflect the loss of this business, but in our view, this is now more than reflected in the share price.
ICON (Polen Capital)
One of our largest Portfolio positions, and one of its best performers in 2021, ICON is an Ireland-based contract research organization that provides outsourced drug trial services to the pharmaceutical and biotech industries. ICON delivered positive results during the quarter and continues to build on its track record of above-market growth and exemplary profit margins. The company reported that new orders were exceeding current revenues, implying future organic growth at above market rates. During the quarter, the company addressed concerns regarding a potential slowdown in biotech funding, which it has seen no indication of. Short-term stock price volatility aside, we believe ICON will continue to compound total shareholder returns at a mid- to high-teens rate for the foreseeable future.
Our thesis remains unchanged; ICON is a best-in-class operator offering superior value (drug trial outcomes) to customers in a fragmented market. Short term performance headwinds could have stemmed from profit-taking after a solid 2021. Furthermore, growth stock and biotech-specific selling gained steam recently. Considering strong results and guidance, recent weakness in ICON shares could well be factor driven. One could argue the valuation was stretched on 12/31/2021, but we feel markets more than ironed out any concerns on that front. ICON is a steady services company with some look-through exposure to biotech discovery funding. Though this end market does bring cyclicality, it accounts for ~15% of ICON sales and the company recently claimed that there is no apparent funding slowdown. At ~20x forward 12-month P/E ICON is exceedingly well valued. While there can be no guarantees, we believe the company can compound total returns at >15% for the next five years.