For the three months ending March 31, 2024, the iMGP International Fund returned 6.70%, outperforming the MSCI EAFE Index benchmark, which gained 5.78%. The Fund also outpaced the Morningstar Foreign Large Blend category, which returned 5.22% gain in the quarter.
Since its inception on December 1, 1997, iMGP International has returned 6.47% annualized. Over the same period, the Fund has outperformed MSCI EAFE and the Morningstar Foreign Large Blend category, which have generated an annualized return of 5.19% and 4.35%, 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. *There are contractual fee waivers in effect through 4/30/2025.
For standardized performance click here: https://imgpfunds.com/international-fund/
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 during the quarter. An overweight to the tech sector and underweight to both materials and utilities were the main drivers from a sector standpoint. Security selection within industrial and consumer staples was strong, while consumer discretionary and financials sectors detracted from returns.
Portfolio Breakdown as of 3/31/2024
| By Sector | Fund |
| Finance | 18.7% |
| Consumer Discretionary | 15.7% |
| Information Technology | 15.5% |
| Communication Services | 3.3% |
| Health Care & Pharmaceuticals | 23.0% |
| Industrials | 12.4% |
| Consumer Staples | 5.4% |
| Real Estate | 0.0% |
| Utilities | 0.0% |
| Energy | 0.0% |
| Materials | 2.9% |
| Cash | 3.6% |
| By Region | Fund |
| Europe | 85.9% |
| North America | 3.9% |
| Asia ex-Japan | 3.9% |
| Japan | 4.3% |
| Latin America | 0.0% |
| Africa | 0.0% |
| Australia/ New Zealand | 0.0% |
| Middle East | 2.0% |
| Other Countries | 0.0% |
| *Cash is excluded from calculation |
| By Region | |
| US Equities | 1.1% |
| Developed International Equities | 95.0% |
| Emerging Market Equities | 3.9% |
Quarterly Market and Portfolio Commentary from Managers
David Herro, Harris Associates
Major global equity markets showed strength throughout the first quarter of 2024. The US and Europe were aided by excitement surrounding artificial intelligence, encouraging economic data and investor expectations for rate cuts from central banks some time this calendar year. During the quarter, the S&P 500 Index reached over 5,000 points for the first time and Japanese equities continued to reach higher levels, thus surpassing a record high from 34 years ago. While equities in China had been pressured throughout 2023, the first quarter of 2024 showed a recovery. In March, the US Federal Reserve, Bank of England, European Central Bank and Bank of Japan all held meetings. While the US, UK and Europe chose to leave interest rates unchanged while they continue to monitor evolving economic data, the Bank of Japan enacted its first rate hike since 2007 and exited negative interest rates.
While we keep a watchful eye on the macroeconomic environment, we remain focused on our bottom-up, fundamental analysis at the company level when constructing portfolios. We invest in businesses priced at substantial discounts to our estimate of intrinsic value, that we believe will grow per share value over time, and have management teams that think and act like owners. Our analysts are generalists who remain industry agnostic and focused on finding value, regardless of what is in favor at any given moment. We believe this positions our portfolios for sustainable, long-term success.
Robin Jones, Lazard Asset Management
Equity markets picked up steam again in February and March after a more muted start to 2024 as global growth picked up. Bond yields rose in most developed markets as central banks made efforts to curb expectations for rate cuts. Strong growth in the US coupled with signs of persistent inflation, are leading to debate about rates remaining higher for longer. The late reaction by central banks to inflationary pressures is likely to put policy makers in a more conservative mindset when it comes to cutting rates. This ongoing uncertainty will likely be central to markets in 2024.
Globally, there is a polarized picture, ranging from a strong US economy to a change in Japan to a weak economic backdrop in China. In China, targeted fiscal and monetary policy interventions have yet to backstop the risk of a deflationary spiral, a real estate crisis, falling export growth, and a weakened yuan. This initially played out in the local stock markets and have gradually spread to equities with exposure to China, such as Hong Kong.
Meanwhile, economic growth in Europe remains weak with a decline in real wages across most countries following a period of high inflation.
Japan’s strong gains continued through the first quarter, and in sharp contrast to other developed markets, the Bank of Japan raised interest rates for the first time in 17 years in March. Signs of Japan’s economy strengthening, after decades of stagnation, coupled with efforts to improve governance practices in the country, is showing. Some corporates, driven by efforts of the Tokyo Stock Exchange to drive reform, are unwinding crossholdings, announcing cash return programs in a sign of a fundamental shift in focus towards financial productivity and shareholder value.
The conflict in the Middle East continues in 2024, but for now looks contained–albeit with ongoing supply disruptions.
The above regional narrative played out in fourth quarter earnings–where most results by US companies came in ahead of expectation, while the majority in Europe lagged.
Information technology was the best performing sector in the quarter, notably reflected in the US, with Nvidia leading the charge–and feeding through to the semiconductors supply chain, particularly in Asia. Real estate was the worst-performing sector. The sector came under pressure due to high interest rates and soft demand for office space as the result of remote-work policies.
Todd Morris and Daniel Fields, Polen Capital
During the quarter, returns were driven by our higher conviction weightings. Most of these companies are seeing a healthy combination of building business momentum, accelerating earnings growth and reasonable valuations.
Markets around the world continue to reflect sluggish economic growth. Data readings in many corners of the world show measured inflation moving downward, but still in positive territory. The cumulative impacts of post-COVID price changes remain, which is a drag on consumer spending across the world. In recent months some central banks began monetary policy easing cycles, while others use the media and rhetoric to adjust financial conditions.
Central Bank governors and investors will continue to look for new evidence from economic releases and corporate earnings as to the extent of the slowdown in growth and inflation. Evidence so far suggests a benign situation, but history advises alertness to swift changes.
Edited Commentary from the Respective Managers on Selected Contributors
Hendsoldt (Lazard Asset Management)
The war in Ukraine has been a catalyst for a complete rethinking of defense policy in Europe. Funding levels have improved and there is a recognition that the industrial complex is underinvested to match near-peer capabilities. Hensoldt is a German defense electronics company with exposure to large emerging defense program in Europe.
The shares have performed well against this backdrop but came under pressure towards the end of 2023 when management launched an equity raise to fund an acquisition. The shares recovered strongly in the beginning of 2024 as the acquisition closed and full year results exceeded expectations. Order intake was well ahead of consensus, suggesting the environment for defense companies in Europe remains strong. Margins and free cash flows were well ahead of expectations, which reassured investors that project execution remains on track. European defense companies have become more expensive after the Ukraine war–but this also reflects a different fundamental outlook for the companies and a major shift in investors perception of the sector from a sustainability/ESG perspective.
We have trimmed our position size as the shares have rerated, though we have kept a position noting that Hensoldt shares still trades at a discount to other capital goods companies despite higher margins and better topline growth. The strong backlog and order intake combined with solid execution should continue to support the share price.
Nippon Sanso (Lazard Asset Management)
Nippon Sanso is an industrial gases company with a dominant position in Japan. The acquisition of divested assets from the Praxair-Linde merger expanded their footprint in Europe/North America and injected new management into the business. The company has since embarked on a journey to change the commercial organization to take advantage of the dominant position in Japan where margins are still materially below other developed markets.
Pricing has been strong during our holding period of the shares, and we believe this will continue to run ahead of cost inflation to bring margins closer to international levels. The shares remain materially cheaper than other industrial gases companies despite the strong opportunity to drive pricing and margins relative to peers. We maintain our conviction in the investment case given the defensive characteristics of industrial gases, improving return profile and valuation discount to peers, continue to underpin a strong outlook for the shares.
Daimler Truck (Harris Associates)
Daimler Truck is the world’s largest manufacturer of heavy-duty trucks and commercial vehicles, including leading positions in the US and Europe. The spin-off from Daimler represents a turning point for the business that will allow it to receive more focus, pursue its own strategy, and enter into value-added partnerships. In our view, management has offered a credible plan to deliver margin improvement driven by higher service attachment, fixed cost reduction, and more customer-focused and localized products and distribution. Targeted margin and cash flow conversion levels are supported by the current levels of key peers Scania and Volvo. We believe that Daimler Truck is well positioned for the transition away from the internal combustion engine with strong capabilities in both battery electric and fuel cell technologies.
Daimler Truck Holding was a top contributor during the quarter. In March, the German truck and bus manufacturer released strong fourth-quarter results, accompanied by 2024 margin guidance that significantly exceeded consensus expectations. The expected margin resilience is in spite of a weaker global truck market and is a result of management’s decisive actions to improve pricing, drive higher service penetration and increase the flexibility of the cost base. This is most evident in the Mercedes-Benz segment, primarily serving the European and Latin American markets, which increased its adjusted EBIT margin from sub-1% in 2019 to over 10% last year. We are impressed by management’s execution following the 2021 spin-off from the former Daimler Group and believe the company is positioned to earn structurally higher through-cycle margins than in the past. We met with CEO Martin Daum following the release and continue to see an attractive upside for this investment.
Edited Commentary from the Respective Managers on Selected Detractors
Worldline (Harris Associates)
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 US. 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 was a detractor during the quarter. In February, the French payments firm’s stock price fell following the release of its fourth-quarter results. Despite the negative share price reaction, we believe that Worldline’s results were generally in line with consensus expectations. Overall, we think there were two negatives from the results. First, Worldline took a EUR 1.15 billion impairment on its merchant business, which we believe relates to Ingenico. Second, guidance was cut significantly from third-quarter results with management citing a weakening macro and a desire to set up guidance they could more easily beat as reasoning. Although we think that we could see some near-term weakness over the next few quarters, we continue to believe in the long-term prospects of Worldline.
Teleperformance (Polen Capital)
Teleperformance is a French company and the world’s leading provider of outsourced customer experience management. We see an increasing need for companies to offload customer service capabilities to service providers like Teleperformance. Shares have been under pressure this year due to a combination of factors. The first is a weaker macroeconomic backdrop creating a short-term reduction in customer spend. We have seen this dynamic across the IT services industry and do not believe it is specific to Teleperformance. Secondly, negative sentiment continues to fester toward the customer experience category as a potential “AI-loser.” We see AI as an opportunity for the company. Teleperfomance is leaning into AI as an enabler of faster call resolution for low complexity customer interactions. However, these only account for 6% of call volume with most calls needing human agents to address the nuance and emotion arising from customer interactions. We believe Teleperformance’s competitive advantages are unchanged, and we view the weaker operating performance as a function of the economic backdrop. The stock’s current forward 12-month P/E multiple of 6x reflects negative sentiment toward the industry. In the long run, we feel the company can grow its earnings at a healthy double-digit rate. As such, we believe shares offer a compelling investment opportunity today.
NAVER (Harris Associates)
In our view, NAVER’s dominance stems from its high-quality search results as the company is better equipped than Google to process Korean syntax, so it tends to produce more relevant results for its users. Koreans’ preference for a portal experience (as opposed to a strictly search engine-based website) and the incorporation of other services/assets make the company even more attractive, in our view. We also believe NAVER should benefit from further e-commerce growth in Korea, most notably from additional advertising revenue, as inventory and pricing increase with display and video ads.
NAVER was a detractor during the quarter. The South Korea-headquartered communication services company released fourth-quarter results. Importantly, gross merchandise value (GMV) growth slowed as well as growth in the search, fintech, content and cloud segments. We met with CEO Choi Soo Yeon to discuss the underperformance in the commerce businesses over the past few quarters. Yeon addressed our concerns, including improving personalized content in feed (more short videos) and its logistics strategy. She expects these initiatives to reaccelerate GMV growth over the next few years. Given the challenges in commerce, we have modestly lowered our estimate of intrinsic value following the meeting but continue to remain invested in NAVER.