For the three months ending March 31, 2021, the iMGP International Fund was up 5.57%, outperforming its two benchmarks, MSCI ACWI ex USA Index NET and MSCI EAFE Index NET, up 3.49% and 3.48%, respectively. The average peer in Morningstar’s foreign blend category returned 3.76% for the quarter.
In 2020, the fund’s return of 5.02% lagged both its benchmarks’ returns of 10.65% for the ACWI ex USA and 7.82% for EAFE. Almost all the underperformance for the calendar year 2020 was driven by performance around the first quarter, when the pandemic led to a virtual shutdown of the world economy. The fund entered 2020 with heavy exposure to cyclical or economically sensitive areas as the fund’s sub-advisors were finding high-quality and growth parts of the market expensive. With the sudden shut down of global economies due to COVID-19, many of the fund’s holdings declined significantly.
Since the vaccine announcements in November, the fund has recovered strongly. Over the past six months, the fund rose 34.04%, while its two benchmarks, noted in the same order as above, were up 21.10% and 20.08%, respectively. Over the past 12 months ending March 31, 2021, the fund has returned 65.29% versus the two benchmarks’ returns of 49.41% and 44.57%, respectively.
It was and remains our managers’ belief that the companies they hold should continue to survive COVID-19 and potentially emerge stronger. Looking forward, and over the shorter term, our sub-advisors expect leisure- and travel-related names, such as Informa, Safran, Asahi, etc., to do well once Europe gets the pandemic under control within its borders. Their vaccination effort is now progressing relatively well and is expected to take a few months or not much longer, assuming there aren’t new variants that force further lockdowns.
The fund is significantly overweight to Europe and poised to benefit from this post-vaccination recovery that many market strategists also expect to be a relative positive for European stock markets.
Since its inception December 1, 1997, iMGP International has returned 7.16%, annualized. Over the same time period, MSCI ACWI ex US NET, MSCI EAFE NET, and Morningstar Foreign Blend category have generated an annualized return of 5.70%, 5.24%, and 4.53%, respectively.
Past performance does not guarantee future results. Index performance is not illustrative of fund performance. An investment cannot be made directly in an index. Short-term performance in particular is not a good indication of the fund’s future performance, and an investment should not be made based solely on returns.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 fund may be lower or higher than the performance quoted. To obtain the performance of the funds as of the most recently completed calendar month, please visit www.partnerselectfunds.com. Investment performance reflects fee waivers in effect. In the absence of such waivers, total return would be reduced.
Quarterly Market and Portfolio Commentary from Managers
David Herro, Harris Associates
Continued optimism around a growing global economy driven by increasing COVID vaccinations lifted global equities in the first quarter and provided greater optimism that the global pandemic may be closer to an end. Equity markets responded favorably to accommodative central bank policies: U.S. Federal Reserve Chairman Jerome Powell’s forecast for near-zero interest rates through at least 2023. In the U.K., investors pondered if the country would implement negative interest rates. Much like the U.S., the Bank of England also held its rates steady and kept its level of asset purchases intact. Bank of Japan Governor Haruhiko Kuroda projected the country’s economic growth would be “clearly positive” for the fiscal year beginning in April. In terms of projected global growth, the International Monetary Fund increased its guidance for 2021 and now expects 5.5%–6% global growth for the year as well as 4.2% growth in 2022. As we enter the second quarter, global monetary and fiscal stimulus and greater consumer demand ought to create a positive backdrop for global equities.
We initiated a new position in SAP and exited our positions in Ashtead Group and Richemont warrants. We believe the portfolio contains some of the highest quality, internationally domiciled businesses that currently trade at attractive prices. Despite higher equity prices, we continue to find individual company opportunities. We think our portfolio companies will emerge stronger as the crisis subsides and we expect their share prices to follow company fundamentals higher.
David Marcus, Evermore Global Advisors
Value investing has certainly been out of favor with many investors for many years. In our view, it is a great time to be a value investor given the large quantity of catalysts for value creation we are seeing. This is especially the case in Europe, where the years of low or no growth are further and further behind us. The self-help amongst companies and stronger balance sheets are underpinning a tsunami of opportunity in our view. The stimulus rollout just starting in the European markets and a remarkable focus on digitalization and sustainability, combined with massive new spending programs in the U.S., make this the time for value-with-catalyst investing.
Mark Little, Lazard Asset Management
The first quarter of 2021 was characterized by investors embracing cyclical optimism amidst a rising market. The main driver was the increasing real-world evidence of the effectiveness of vaccines, which are being rolled out at speed in many countries. This raises the prospect of economic reopening, likely to be met with enthusiasm by consumers who in many cases find themselves in a healthy economic position. Meanwhile, in the United States, new President Biden has launched a very material stimulus program.
Already, a combination of surprisingly resilient demand, and supply bottlenecks, is seeing almost all commodity prices rising steeply. Alongside cyclical optimism, this has raised inflation expectations and bond yields. In this environment, cyclical stocks, such as energy, financials, materials, semiconductors, industrials and autos, performed strongly, while more defensive sectors, such as consumer staples, health care, and utilities, lagged.
While there may be COVID variant-related hiccups, at some point in 2021 and 2022 we are likely to see a startling turnaround in economic activity. Some habits are likely to revert to pre-pandemic routines, while others will have been permanently changed, driving material opportunities for stock selection. Broader market performance will likely depend on the extent of continuing government and central bank support, and the extent of any pick-up in either longer-term yields, or inflation, or both.
Expectations for rising prices have been fueled by the surging cost of many commodities and freight, with supply bottlenecks meeting buoyant demand even before widespread reopening. This is pushing bond yields back up to pre-pandemic levels. The persistence of inflation will depend on the extent to which wages start to rise, and on government fiscal policy.
In the latter part of 2020, many of the most interesting investment opportunities were in stocks whose valuations and/or activity levels was temporarily suppressed by the extraordinary shutdown in economic activity. While these stocks may have further to run as the full strength of demand recovery becomes apparent, some less-cyclical stocks are starting to be neglected and offer potential value, so the range of new opportunities is more balanced from here.
Fabio Paolini and Ben Beneche, Pictet Asset Management
Our approach to valuation and fundamentals has historically drawn us towards an eclectic group of businesses, some of which would typically fit more into a ‘value’ portfolio; companies like EXOR, Bolloré and Jardine Strategic (all are priced at material discounts to asset value). Others are rapidly growing Internet-enabled businesses, which may defer cash generation for several years. Today, these include e-commerce companies (Trip.com, Redbubble) and video gaming (Nexon). These businesses have numerous qualities we look for—long runways for growth, clear competitive advantages, customer centricity and, in most cases, an owner-operator culture we admire. The end result of this blend of characteristics is typically high returns on capital and strong cash generation. They also, critically, fit squarely within our absolute value-oriented hurdle rates.
It is fair to say we can’t justify valuations in a large proportion of ‘growth’ businesses today. The mental models which were once applied sparingly—emphasizing latent pricing power, or adjusting for high upfront customer acquisition costs for stable, subscription businesses (in software or otherwise), or focusing on business operating leverage once network effects kick in—now have to be applied to almost all the IPOs and emergent tech companies we encounter in order to justify valuations. This does not bode well as the laws of competition suggest there will be a fair proportion of losers (the MySpace and AOLs of the world); especially in rapidly changing sectors characterised by the evolution of natural monopolies.
So where are we seeing opportunities? The one particularly distinctive characteristic of the portfolio we manage today is meaningful exposure to leisure and travel, sectors materially impacted by COVID-19. Although we do not know how long the pandemic will persist nor, with precision, what a new normal may look like, we are getting more certainty on both elements through the development of vaccines and clear data points from some of our investments in China where pre-2020 levels of travel and socializing are back, and in many cases have been exceeded. Several of the businesses in our portfolio fit within this broad category; online travel agency Trip.com, brewer Asahi, airplane engine manufacturer Safran, workwear and a supplier of contract linen services to the hospitality trade in Europe Elis, and exhibition/conference operator Informa are just a few—in totality, we estimate around 40% of our portfolio sleeve has been severely impacted by COVID-19. Our decisions to invest, selectively, in businesses most immediately impacted by the pandemic is, by far, the biggest portfolio level risk and one which has been reinforced throughout the year. We have every faith they will emerge from the current crisis stronger and offer strong prospective returns.
Brief Discussion of Performance Drivers for the First Quarter and Portfolio Positioning
Stock selection was the primary driver behind the fund’s outperformance during the quarter. At the regional level, the fund’s overweight to Europe was a positive. At the sector level, the fund’s underweight to health care and overweight to communication services were slight positives.
Stock selection was strongest in the consumer discretionary sector, with stocks such as Gamesys (discussed below) up around 70%. Daimler AG turned out strong operating performance and rose over 25% for the quarter. Stock selection within the materials sector was a positive, driven largely by Glencore, which rose over 20% during the period.
On the negative side, stock selection within communication services detracted from relative performance. Nordic Entertainment, discussed below, was the top detractor in this sector.
Moving to portfolio positioning, it is important to remember the fund’s sector and country allocations are largely a residual of managers’ stock picking. The fund continues to be significantly overweight to Europe where sub-advisors are finding attractive opportunities.
The fund remains overweight to industrials and communication services. In the latter, the fund’s exposure covers a wide spectrum of business models and many are sensitive to the economic cycle. As global growth recovers from the pandemic, we expect stocks in this sector to perform relatively well. The fund continues to be significantly underweight to technology.
| Sector Weights* | Fund | iShares MSCI ACWI ex- U.S. as of 3/31/2021 |
|---|---|---|
| Communication Services | 25.4% | 6.9% |
| Consumer Discretionary | 10.8% | 13.4% |
| Consumer Staples | 9.9% | 8.1% |
| Energy | 1.1% | 4.1% |
| Finance | 20.9% | 18.0% |
| Health Care & Pharmaceuticals | 2.4% | 8.7% |
| Industrials | 16.3% | 11.6% |
| Information Technology | 4.6% | 12.2% |
| Materials | 4.0% | 7.9% |
| Real Estate | 0.0% | 2.6% |
| Utilities | 2.1% | 3.0% |
| Cash & Other | 2.6% | 3.4% |
| 100.00% | 100.00% |
| Regional Allocation | Fund | iShares MSCI ACWI ex- U.S. as of 3/31/2021 |
|---|---|---|
| Africa | 1.5% | 1.2% |
| Australia/New Zealand | 2.2% | 4.5% |
| Asia ex | 2.6% | 24.5% |
| Japan | 13.7% | 15.4% |
| Western Europe and UK | 71.7% | 39.7% |
| Latin Am | 2.2% | 2.3% |
| North America | 1.7% | 7.3% |
| Middle East | 1.8% | 1.8% |
| Cash | 2.6% | 3.4% |
| 100.00% | 100.00% |
Edited Commentary from the Respective Managers on Selected Contributors
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.
We were pleased with Glencore’s full-year results as adjusted earnings in both the industrials and marketing segments exceeded our expectations by 10% and 4%, respectively. Full-year total adjusted earnings of $11.56 billion were also better than market estimates of $10.69 billion. The industrials segment benefited from both a recovery in commodities prices from Covid-19 lows and higher production. Management also proposed a $0.12 per share dividend, which surpassed analysts’ estimates for $0.0625 per share. We spoke with management following the release, including current CEO Ivan Glasenberg and his newly appointed replacement Gary Nagle. In our view, Nagle’s messaging was consistent with what we have heard from both Glasenberg and Chairman Tony Hayward. In addition, we remain optimistic that further value can be unlocked under his leadership.
Prudential (Mark Little)
Life assurer Prudential combines an attractive Asian business with high incremental returns and a material growth opportunity, with a more volatile and capital-intensive U.S. variable annuity business, Jackson. The Asian business looked materially undervalued within Prudential, and has been the key driver of our investment thesis on the stock. During the quarter, the company announced a full split of the businesses. This helped crystalize the low valuation of the Asian operations, which will remain part of our thesis. In addition, the business is geared to normalization of travel between Hong Kong and the Chinese mainland, and also benefits from higher rates, so Prudential performed well alongside other financial and reopening stocks.
Gamesys Group PLC (David Marcus)
Gamesysis an operator of online real money bingo and casino offerings doing business across key markets in Europe and Asia. We originally purchased shares in the company in the high GBp 700s in January 2020 at a multiple no more than 6x Price/Free Cash Flow, for what was then a strong deleveraging story post a major acquisition. However, as the pangs of the pandemic began to be seen in the stock price in February 2020, we purchased additional shares as low as GBp 518. Counter to the weak performance of the shares, we concluded that the impact of mass quarantines across Gamesys’ markets would be nothing but significantly positive for its business. Our conclusion was ultimately proven correct, and Gamesys saw about two years’ worth of deleveraging in the last year, which allowed the company to announce an inaugural dividend in September 2020, well before our expectation prior to the COVID-19 outbreak.
Shares in Gamesys climbed around 70% in the first quarter to GBp 1932. Most notably, late in the period, Bally’s Corporation (ticker: BALY in the United States) made an offer to acquire Gamesys for either GBp 1850 in cash (with GYS shareholders still privy to an additional GBp 28 dividend), or 0.343 shares of BALY for every 1 share of GYS held. The deal, which is set to combine Bally’s land-based casinos and online sports book with Gamesys online offerings, is expected to close by the end of 2021. We thus find ourselves in a good position of knowing there’s a floor at the cash offer price, while we dig into Bally’s standalone business and the merits of the stock offer. One important factor in the decision is that even though Bally’s is the acquiror in this deal, the Gamesys executive team, whom we believe are best-in-class, will be leading the combined business.
Jardine Strategic (Fabio Paolini and Ben Beneche)
Jardine Strategic (JS SP), the Asian-based holding company, was taken private by its parent company, Jardine Matheson, in March. The investment case was based on three pillars. First of all, its portfolio of high-quality assets across retail, real estate and automotive, benefiting from the exposure to an emerging middle class across South East Asia and China. Secondly, its conservative balance sheet with a net cash of around 4 billion USD that supported operating businesses throughout numerous crises and the recent pandemic. Most importantly, Jardine is a well-managed family-owned business dating back to 1832, with a history of prudent and counter-cyclical capital allocation.
Due to a complex, dual holding structure that was put in place in 1980s (Matheson, the ultimate holding company owned 85% of Strategic), Jardine Strategic was trading at a large discount to our estimate of net asset value (40%–50%). At the beginning of March, management decided to simplify the organisation by eliminating dual holdings. As a result, Matheson made a cash offer for the remaining 15% of shares in Strategic it didn’t own. The offer represented around a 20% premium to the share price prior to the announcement. This drove the stock’s performance in the quarter. We are disappointed, however, with the ultimate outcome as this transaction values Strategic at a large 30%+ discount to our estimate of NAV.
Edited Commentary from the Respective Managers on Selected Detractors
Credit Suisse Group (David Herro)
- Despite the resignation of CEO Tidjane Thiam, we believe changes implemented by him and his team have made Credit Suisse Group a stronger and vastly improved organization and paved the way for further progress.
- We are optimistic that CEO Gottstein will stay the course on strategic initiatives already underway, and as restructuring costs normalize and divestments of non-core assets are completed, we expect a meaningful improvement in reported profitability.
- In our assessment, Credit Suisse Group’s balance sheet reflects a solid and growing capital position and the company is capable of generating significant free cash flow going forward.
- The company will be making material leadership changes in areas of its risk management controls. Combined with the arrival of new Chairman António Horta-Osório, the current CEO of Lloyds Banking Group, we expect significantly better governance and risk management going forward.
The share price of Credit Suisse Group suffered upon revelations about the company’s exposure to Greensill Capital followed by its association with Archegos Capital. Early in March, the company’s share price decline led to a loss of roughly $2–$3 billion in market capitalization. Investors sold shares over concerns that an investment fund run by its asset management division had exposure to the now-insolvent Greensill Capital, which specialized in supply chain finance. The lost market cap far surpassed Credit Suisse’s direct exposure to Greensill and ignored the fact that a large portion of its clients’ exposure was in cash, highly rated securities or insured investments. We do not foresee a material direct liability for Credit Suisse in connection with Greensill. We believe any direct cost will likely be covered by the general litigation provisions that we incorporated in our valuation estimates. At the end of March, Credit Suisse’s share price dropped again as New York–based hedge fund client Archegos Capital defaulted on its margin calls to the company’s prime brokerage business. We are reviewing our valuation assumptions following this news and will continue to monitor the situation closely. In light of both incidents, we are disappointed by Credit Suisse’s risk management implementation and believe it would be appropriate for outgoing Chairman Urs Rohner to forego any further compensation. We are hopeful that incoming Chairman António Horta-Osório will bring a fresh perspective following his tenure as CEO of Lloyds Banking Group.
Nordic Entertainment Group (David Marcus)
Nordic Entertainment was a detractor from performance during the first quarter in 2021. With a market cap of $3.8 billion, Nordic Entertainment (“NENT”) is a Nordic broadcasting and media company comprising free TV, Pay TV, distribution platforms (satellite, IPTV, cable networks, streaming) and a leading content portfolio including original programming. Despite the share price underperformance, the company has performed well operationally and achieved some notable developments during the quarter.
In February, NENT raised SEK 4.35 billion (approximately $520 million) in an oversubscribed accelerated equity raise to fund the strategic expansion initiatives outlined during the Capital Markets Day held last November. This capital raise and short-term trading around it may have caused the stock to decline during the quarter. As such, this stock has been a significant contributor to the portfolio’s performance over time. NENT’s target is to become the European preeminent streaming champion by expanding its Viaplay streaming service to 10 new markets over the next 3 years. We believe this is a huge opportunity that was not included in our original investment thesis. The growth plan to rollout Viaplay to the targeted markets has already begun—starting with the Baltic region as of March. In addition, NENT has implemented price increases to its Viaplay services, which has 3 million subscribers in the Nordics. We believe the price increase should be absorbed with limited churn, as prices for the Viaplay TV/Movie package have not increased since 2017 despite NENT having significantly improved the content and service offering.
NENT has been trading over 17x current year earnings before interest, taxes, depreciation and amortization (ex int’l expansion) and 6.5-7x when included. Finding the appropriate comp group is a challenge, as there are no pure plays similar to NENT. Regional comps trade around 8-10x, but they do not have NENT’s level of streaming penetration. The key for NENT is that they are expanding into small- and mid-sized countries that have good scale potential. Another key point is they produce content locally in addition to using other production that is dubbed/subtitled. Producing shows locally, in Poland, for example, helps differentiate and take market share. We believe the potential for NENT Group is exceptional. They have beaten their targets consistently and have one of the best management teams we have seen. We see this as a compounder that’s attractively valued, in line with some other names in our portfolio sleeve—Exor, Bollore, and Vivendi.
Nintendo (Mark Little)
Nintendo reported extremely strong results for both sales and profits, driven by booming sales of its Switch console and associated software titles, many of them delivered digitally at high margins. Despite profit forecasts rising sharply, it was down around 10%. The market is concerned that profits will fall from here as the pandemic effect wears off and console sales mature. This is a short-term risk, but we believe Nintendo has further to go on its digitalization journey. In addition, it has only just begun addressing the opportunities afforded by China, by launching its games on third-party mobile devices, and by licensing its Intellectual property into areas such as theme parks. The valuation remains undemanding. Nintendo’s stock trades at 18x earnings. For a cash-rich company, this valuation in today’s market implies very little growth opportunity going forward. However, while 2020 may be a near-term high given the unusual environment, we believe the opportunities for Nintendo to expand the business at high returns from here remain very substantial and underappreciated by the market.