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Commentary International Fund Second Quarter 2021 Commentary

For the three months ending June 30, 2021, the iMGP International Fund was up 2.93%, underperforming its two benchmarks, MSCI ACWI ex USA Index NET and MSCI EAFE Index NET, up 5.48% and 5.17%, respectively. The average peer in Morningstar’s foreign blend category returned 5.12% for the quarter.

Over the trailing one-year ending June 30, 2021, the fund is up 47.89%, beating the ACWI ex USA index (up 35.72%) and the EAFE index (up 32.35%). The fund is significantly overweight to Europe and we think poised to benefit as the ongoing vaccination rollout allows European economies to reopen more. Our discussion with sub-advisors suggests many of the fund holdings that have lagged the broad benchmarks this year may benefit from this cyclical rebound in Europe.

Since its inception December 1, 1997, iMGP International Fund has returned 7.21%, annualized. Over the same time period, MSCI ACWI ex USA NET, MSCI EAFE NET, and Morningstar Foreign Blend category have generated annualized returns of 5.87%, 5.41%, and 4.70%, 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

Quarterly Market and Portfolio Commentary from Managers

David Herro, Harris Associates

Global equity prices continued to move higher in the second quarter, despite the impact of the COVID-19 Delta variant in certain parts of the world. Continued optimism around the efficacy of the vaccine and steady vaccination efforts have convinced market participants that the global pandemic is closer to an end. Equity markets also continued to respond favorably to accommodative central bank policies, increased consumer spending, and low interest rates. As we enter the third quarter, global monetary and fiscal stimulus and greater consumer demand ought to create a positive backdrop for global equities. 

There was a small amount of portfolio activity this quarter. We participated in Credit Suisse’s capital raise and now hold mandatory convertible rights, which will convert to common equity this fall. Since the beginning of the year, the companies we own have reported largely favorable earnings and cash flows. We think this trend will continue as the world continues to emerge from the pandemic. We believe the portfolio contains some of the highest-quality, internationally domiciled businesses that currently trade at attractive prices.

David Marcus, Evermore Global Advisors

As of June 30, 2021, our top two positions were Swedish companies—Modern Times Group (MTG) and Nordic Entertainment—that are not only cheap but have very strong growth profiles. The next three top holdings are what we call “compounders”—family-controlled companies whose stock prices have compounded significantly over the long-term. We expect these investments in Bolloré SA, Vivendi SA and Exor NV to continue to compound nicely for many years to come. Of note is Vivendi, which has announced that it will spin off to shareholders a significant part of their stake in Universal Music Group (UMG), which is the largest music company in the world. This will give us a direct investment in UMG as well as transform Vivendi as it refocuses on other media and telecom assets in its portfolio. We believe our sleeve of the iMGP International Fund is positioned to perform well as catalysts continue to drive value creation in the near- and longer-term. 

Mark Little, Lazard Asset Management

After a first quarter dominated by cyclical stocks, international markets in the second quarter rotated more towards stable growth companies, as investors surmised that the market had seen the peak of the rebound in economic activity and inflation following vaccine rollouts. In addition, concerns over virus variants suppressed the recovery of stocks exposed to international travel in particular. We continue to see upside in many stocks exposed to reopening of the economy, as well as opportunities in countries like China and in companies exposed to the multiyear demand for renewable energy, both of which have lagged in 2021.

We are in the midst of 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. In the latter part of 2020, many of the most interesting investment opportunities were in stocks whose valuations and/or activity levels had been 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, especially after recent weakness, some less-cyclical stocks are also starting to offer potential value, so the range of new opportunities is more balanced from here.

Fabio Paolini and Ben Beneche, Pictet Asset Management

Our portfolio sleeve has had significant exposure to leisure and travel over the past year or more. We believe we own competitively advantaged businesses that are soundly financed and would emerge from the COVID-19 pandemic stronger. For example, two positions, Asahi and Matsumotokiyoshi, announced what could be described as ‘transformational’ mergers & acquisitions (M&A) over the course of the past year amid severe stress in their industries. In both cases we believe the transactions will create significant value over the long term. Although exposure to discretionary spending remains a key feature of the portfolio today, valuations and our bottom-up approach is leading us towards a more eclectic group of businesses around the margin.

Brief Discussion of Performance Drivers for the First Quarter and Portfolio Positioning

It is worth remembering the fund’s overall positioning is driven by 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.

In the second quarter both sector allocation and stock selection drove the fund’s underperformance. The fund’s overweight to communication services and an underweight to health care explain almost 100 bps of relative performance.

Stock selection was weak in the consumer discretionary sector. Naspers, a holding in this sector, which has the majority of its value underpinned by Tencent, declined during the quarter due in part to the ongoing regulatory scrutiny of technology platforms in China. We discuss other detractors in more detail below.

On the positive side, stock selection was relatively strong in the communication services and energy sectors. Grupo Televisa’s share price rose over 60% as it announced it is merging its content and media assets with Univision. The new company will become a globally dominant Spanish language content streaming service. Within energy, Frontline appreciated over 25% during the quarter. Evermore Global, the sub-advisor who owns this crude tanker vessel operator, says despite the uncertainty with the timing of the COVID-19 recovery (Delta variant flare-ups), underlying day rates have started to improve, and asset values of the vessels have started to move up as well.

Moving to current portfolio positioning, the fund continues to be significantly overweight to Europe (71.39% versus 40.30% for the benchmark, MSCI ACWI ex USA) where sub-advisors are finding attractive opportunities. As of the quarter-end, the fund was underweight emerging markets versus its primary benchmark MSCI ACWI ex USA (4.10% versus 20.95%).

Looking at sectors, the fund is overweight to industrials (18.61% versus ACWI ex USA’s 11.72%) and communication services (25.04% versus 6.73%). In the latter, the fund’s exposure covers a wide spectrum of business models, and many are economically sensitive. As global growth recovers from the pandemic, we expect stocks in this sector to perform relatively well. The fund is slightly overweight financials versus its primary benchmark (20.98% versus 18.40%) and continues to be significantly underweight to technology (5.09% versus 12.82%).

Sector Weights*FundiShares MSCI ACWI ex- U.S.
as of 6/30/2021
Communication Services25.0%6.7%
Consumer Discretionary6.1%13.7%
Consumer Staples11.1%8.5%
Health Care & Pharmaceuticals2.6%9.2%
Information Technology5.1%12.8%
Real Estate0.0%2.5%
Cash & Other2.4%0.6%
Fund holdings and/or sector allocations are subject to change at any time and are not recommendations to buy or sell any security.
Regional AllocationFundiShares MSCI ACWI ex- U.S.
as of 6/30/2021
Australia/New Zealand2.6%4.5%
Asia ex3.8%27.2%
Western Europe and UK71.4%40.3%
Latin Am1.2%2.5%
North America1.8%7.8%
Middle East3.2%1.8%
Fund holdings and/or sector allocations are subject to change at any time and are not recommendations to buy or sell any security.

Top 10 Individual Contributors as of the Quarter Ended June 30, 2021

Company Name Fund Weight (%) Benchmark Weight (%) 3-Month Return (%)Contribution to Return (%) CountryEconomic Sector
Grupo Televisa SAB1.850.0062.121.19MexicoCommunication Services
Bollore3.760.0011.760.43FranceCommunication Services
Asahi Group Holdings Ltd3.140.0711.700.40JapanConsumer Staples
Lloyds Banking Group2.580.0011.370.32United KingdomFinancials
Calsberg A/S1.560.0621.040.29DenmarkConsumer Staples
Elis SA2.010.0015.180.28FranceIndustrials
Frontline Ltd1.140.0025.870.27BermudaEnergy
Israel Discount Bank Ltd2.000.0214.350.26IsraelFinancials
Constellium SE0.910.0028.910.23FranceMaterials
China Longyuan Power Group Corp Ltd0.840.0228.330.23Hong KongUtilities
Portfolio contribution for a holding represents the product of the average portfolio weight and the total return earned by the holding during the period. Past performance is no guarantee of future results. Fund holdings and/or sector allocations are subject to change at any time and are not recommendations to buy or sell any security.

Edited Commentary from the Respective Managers on Selected Contributors

Grupo Televisa (David Herro, Harris Associates)

  • Even though Grupo Televisa is the world’s largest producer of Spanish speaking content, pay television and broadband has reached only about half of these respective markets in Mexico, which we believe positions the company to realize growth and enhanced earnings going forward.
  • We find Televisa’s target audience in Mexico and the United States provides an attractive opportunity, as the population is young and growing and this demographic is increasing wealth at a healthy rate.
  • We like that Televisa’s ownership of its distribution helps to both better protect content and save on distribution costs.

The share price of Grupo Televisa jumped when the company revealed it is merging its content and media assets with Univision. In a call with shareholders, CEO of Televisa Alfonso de Angoitia and CEO of Univision Wade Davis provided details on the $4.8 billion agreement, which combines these leading media businesses in the two largest Spanish-speaking markets in the world. Overall, we think the deal makes strategic sense as streaming is the future in television and the new company will be the dominant Spanish language content streaming service globally when it is fully operational. We think Televisa’s separation of its content business into a new entity should prove positive for investors as this is a business that the market has assigned a low price-to-earnings multiple given its lackluster growth for nearly a decade. Theoretically, the separation should lead to stronger revenue growth for Televisa and potentially a better earnings multiple as cable moves from 50% of total earnings to 70%. In addition, the new Televisa-Univision will offer a streaming service, which will be led by former Netflix executive Rodrigo Mazon. Later, Televisa released first-quarter results with revenue that rose 3.2% from a year earlier and total EBITDA earnings that advanced 1.5%, driven by broadband growth and a rebound in advertising. However, business in the core cable segment slowed, illustrated by net subscription additions that declined roughly 34% from the same period last year. We discussed this issue with Televisa’s new CEO of the cable segment José Antonio González. While we are still getting acquainted with González, we like that he has a long-term focus, particularly for investments intended to stem competition.

Bolloré SA (BOL FP) (David Marcus, Evermore Global Advisors)

Bolloréis a €13 billion market cap conglomerate based in France that owns businesses and stakes in companies in international transportation and logistics, port concessions in Africa, communications and various other industries. The company also controls media assets including a 28% stake in Vivendi, a listed French media and telecom powerhouse which in turn owns, among others, Universal Music Group (UMG), Canal+ and Havas. 

During the quarter, Bolloré had continued improvements of maritime volumes in freight forwarding, significant improvements in its port activities in Africa, and early signs of recovery in the logistics business in Africa on the back of higher commodity prices. In addition, Bolloré increased its overall exposure to Vivendi through its parent, Odet (renamed to Compagnie de l’Odet) that invested directly in Vivendi. We believe Vivendi’s impending spin-off of UMG that is scheduled for September (60% to shareholders and Vivendi to retain 10%) will be the next near-term catalyst within Bolloré’s diverse set of assets. 

Asahi (Fabio Paolini and Ben Beneche, Pictet Asset Management)

Asahi Group is a global brewer, with its headquarters in Japan. As the global economy slowly reopens, the stock has also begun to recover. Post their 2020 acquisition of Carlton & United Breweries (CUB) in Australia, Asahi now generates the majority of its profits outside the Japanese market. A sharp recovery in on-premise volumes have been observed in all countries where COVID restrictions have been eased. Our meeting with the new CEO Katsuki recently confirmed our belief that he will follow the game plan set out by now chairman Koji-san: (i) a global premiumization strategy, coupled with (ii) strong cost control in the more challenged domestic market, which is suffering from declining volumes and less evidence of pricing power. The company remains one of our larger positions, and trades at a material discount to global peers, which we do not feel is warranted today. The company currently trades at 12x normalized free cash flow.

Top 10 Individual Detractors as of the Quarter Ended June 30, 2021

Company Name Fund Weight (%) Benchmark Weight (%) 3-Month Return (%)Contribution to Return (%) CountryEconomic Sector
Nexon Co. Ltd. 2.040.00-31.28-0.56JapanCommunication Services
Informa PLC4.310.04-10.28-0.48United KingdomCommunication Services
Incitec Pivot Ltd.1.510.00-20.64-0.35AustraliaMaterials
Siemens Gamesa Renewable Energy SA1.820.03-13.90-0.30SpainIndustrials
Redbubble Ltd0.850.00-28.98-0.29AustraliaConsumer Discretionary
Atlantic Sapphire ASA1.060.00-25.17-0.29NorwayConsumer Staples
Modern Times Group3.060.00-6.62-0.22SwedenCommunication Services
Exor NV4.210.00-4.80-0.22NetherlandsFinancials
Prudential PLC1.840.20-10.73-0.21United KingdomFinancials
Naspers Ltd1.580.00-12.03-0.20South AfricaConsumer Discretionary
Portfolio contribution for a holding represents the product of the average portfolio weight and the total return earned by the holding during the period. Past performance is no guarantee of future results. Fund holdings and/or sector allocations are subject to change at any time and are not recommendations to buy or sell any security.

Edited Commentary from the Respective Managers on Selected Detractors

Informa (Fabio Paolini and Ben Beneche, Pictet Asset Management)

Informa’s price has continued to be range bound and, in absence of stock specific news, concerns over COVID have continued to weigh on the share price. Despite the weak performance, the reasons for owning the stock remain unchanged.

Informa is a leading exhibition and information service provider (exhibitions, conferences and academic publishing) and we continue to believe that it remains a high-quality business with leading market positions, operating in industries with consolidation potential. It has a business model that allows them to ‘build once and sell many times’, resulting in high incremental profits that lead to cash flow growth that exceeds revenue growth. Whilst the exhibition and conferences divisions have some degree of cyclicality, in a normal environment, revenues, to a large extent, are predictable and recurrent. High margins and low capital intensity leads to strong cash conversion and free cash flow generation.

It is clear that Informa’s business model depends on people gathering together and whilst we don’t know when the epidemic will end, we remain of the opinion that the business model cannot be disintermediated and as a result the normalized earning power of Informa remains unchanged. The valuation remains attractive with a stock price that discounts a significant disruption of activity in perpetuity and increasingly at odds with actual evidence of a recovery in the exhibition business and more generally to peers or even COVID-exposed stocks that have recovered strongly.

Incitec Pivot (David Herro, Harris Associates)

  • We find that both of Incitec Pivot’s business segments provide the company with unique advantages: Incitec is the leading fertilizer distributor in Australia and is also Australia’s only phosphate producer.
  • We believe Incitec’s explosives business is well positioned to generate solid returns, as it holds the top market position for explosives in North America, the second position in Australia, and also benefits from direct exposure to mined commodity volumes without exposure to commodity price volatility.
  • Certain factors caused by increasing geological complexity (such as a requisite high level of technical expertise, transport restrictions and heavy regulation) has worked to limit competition in the explosives market, which we think will prolong Incitec’s market shares going forward.
  • Incitec Pivot’s leadership team has a long-standing, solid background in the business and, in our determination, the team is financially disciplined with an impressive track record for successful mergers and acquisitions.

The share price of Incitec Pivot dropped in the first quarter after management announced a delay in reopening its Waggaman ammonia plant. The facility resumed operations in mid-April as management had expected. However, the company subsequently experienced some unexpected equipment issues and the restart process halted in May, which management thinks will additionally decrease full-year earnings by AUD 33-42 million. Later, Incitec released fiscal first-half results that we saw as mixed. Total revenue declined 6.7% from the prior year and earnings fell nearly 31%, both of which also undershot market projections. As we had anticipated, the explosives business suffered from Waggaman and other planned and unplanned facility outages, including the Cheyenne and Louisiana Ammonium Nitrate plants. Consequently, total earnings fell by AUD 49 million from a year ago. Even so, the drop was partially offset by a net benefit of AUD 25 million, mainly from increasing commodity prices. Conversely, the fertilizer business achieved a revenue advance of 1.9%, and first-half earnings reached AUD 20 million, which was a material reversal from the loss of AUD 10 million in the first half of 2020. While Incitec continues to work through these near-term challenges, we believe the company is well positioned to realize stronger fiscal second-half performance.

Nexon (Mark Little, Lazard Asset Management)

Nexon is a Korean video games company listed in Japan. The stock fell after announcing disappointing operating results and outlook for the year. The mobile version of its Chinese PC game, Dungeon & Fighter, has been delayed and there is uncertainty regarding the launch date. The Korean market did very well for Nexon in 2020, but the company is now guiding to some weakness there also. Nexon’s stock price took a substantial hit soon after this guidance. From here the valuation and longer-term outlook still look very attractive for Nexon. The company has been buying back its stock. Other positives include the company is less reliant on PC gaming or one game, with optionality around its large cash pile and its Embark team developing games for the Western market. We expect to speak with management soon to discuss our questions, including gaining some clarity on the launch of Dungeon & Fighter.

S&T AG (SANT GY) (David Marcus, Evermore Global Advisors)

S&T was a detractor from performance in the quarter, having fallen 7.55% during the period. News flow was light on S&T, though the company announced a strong first quarter, with a bolstered outlook for the remainder of 2021 backed by record order intake (at a 1.37x book to bill ratio). The company continues to repurchase shares and insiders continue to purchase stock on the open market.

While a bit difficult to assess from the outside, S&T provides a collection of mission critical technology solutions—both hardware and increasingly software-based—to customers in high-cost-of-failure verticals, such as rail transportation, aviation, telecommunication systems, factory automation, and smart grid/metering. Coming through COVID stronger and leaner than prior to the pandemic, the company solves increasingly complex problems for its customers, and thus has seen its topline grow organically with commensurate margin expansion. However, the company, which is led by serial entrepreneur Hannes Niederhauser has also been an astute dealmaker—acquiring a number of previously under-managed businesses at great prices. We expect this accretive M&A track record to continue as S&T has a pristine balance sheet with which it can make further tuck-ins.

For 2021, the company expects to do at least €140 million in EBITDA (which takes into account the current chip shortage), pegging the company at approximately 10x current year EBITDA. With the company’s ambition to achieve 2023 EBITDA of at least €220 million (implying 25% annual growth, which the company just re-affirmed on its Q1 2021 update call), we see absolutely no reason why S&T should trade at less than half the EV/EBITDA multiple of its peers.

In terms of catalysts, in our recent discussions with management, we believe S&T’s higher-margin and higher-growth Internet of Things (IoT) businesses have gotten to the point where they can stand on their own. We believe a sale or spin-off of S&T’s more mature traditional IT services assets could thus be plausible over the next 12 to 18 months. In such a scenario, the remaining pure play IoT business may see the multiple re-rating we certainly believe the shares deserve. 

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Mutual fund investing involves risk. Principal loss is possible. Past performance does not guarantee future results.

The fund will invest in foreign securities. Investing in foreign securities exposes investors to economic, political and market risks and fluctuations in foreign currencies. Though not a small-cap fund, the fund may invest in the securities of small companies. Small-company investing subjects investors to additional risks, including security price volatility and less liquidity than investing in larger companies. Investments in emerging market countries involve additional risks such as government dependence on a few industries or resources, government-imposed taxes on foreign investment or limits on the removal of capital from a country, unstable government and volatile markets. A value investing style subjects the fund to the risk that the valuations never improve or that the returns on value equity securities are less than returns on other styles of investing or the overall stock market.

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