For the three months ending December 31, 2021, the iMGP International Fund returned 3.42%, while its benchmarks MSCI ACWI ex USA Index NET and MSCI EAFE Index NET were up 1.82% and 2.69%, respectively. The average peer in Morningstar’s Foreign Large Blend category rose 2.58% for the quarter. Over the trailing three years, the Fund has generated a 15.26% annualized return, which compares favorably to the above-noted benchmarks and peer returns of 13.18%, 13.54%, and 13.29%.
Since its inception December 1, 1997, iMGP International has returned 7.18%, annualized. Over the same time period, MSCI ACWI ex USA Index NET and MSCI EAFE NET and the Morningstar Foreign Large Blend category have generated an annualized return of 5.69%, 5.39% and 4.63%, 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 and Portfolio Positioning
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.
In the fourth quarter stock selection was the primary driver behind the fund’s outperformance versus the MSCI ACWI ex US index. Sector allocation had a negligible impact on performance. At the country/region level, an underweight to Japan was a positive for relative performance.
Stock selection was strongest in the financials and technology sectors. In financials, Israel Discount Bank (up 27%), discussed below, was the top contributor to performance during the quarter. Within technology, stock selection was driven by two names: Accenture and Sage Group. Both stocks are owned by Polen Capital.Stock selection was positive in the health-care sector, driven largely by strong contributions from Icon PLC and Siemens Healthineers AG. Both stocks were up in the teens. Their positive contribution was somewhat offset by Medtronic, which declined ~17%. The fund continues to have decent exposure to names we expect to do well as the world fully reopens. Covid variants–Delta and then Omicron—though weighed on CAE, Informa, and Ryanair. All three were among the top ten detractors for the quarter and in large part explain negative stock selection effects from the industrial and communication services sectors.
| Sector Weights as of 12/31/2021* | Fund | iShares EAFE ETF |
|---|---|---|
| Communication Services | 9.3% | 4.5% |
| Consumer Discretionary | 14.5% | 12.5% |
| Consumer Staples | 4.4% | 10.3% |
| Energy | 0.0% | 3.4% |
| Finance | 20.2% | 16.8% |
| Health Care & Pharmaceuticals | 12.5% | 12.8% |
| Industrials | 8.9% | 16.2% |
| Information Technology | 17.9% | 9.7% |
| Materials | 2.8% | 7.6% |
| Real Estate | 0.0% | 2.8% |
| Utilities | 5.2% | 3.4% |
| Cash & Other | 4.4% | 0.0% |
| 100.00% | 100.00% |
| Regional Allocation as of 12/31/2021 | Fund | iShares EAFE ETF |
|---|---|---|
| Africa | 0.0% | 0.0% |
| Australia/New Zealand | 0.9% | 7.1% |
| Asia ex Japan | 4.9% | 3.9% |
| Japan | 0.0% | 22.5% |
| Western Europe and UK | 83.0% | 64.4% |
| Latin America | 2.5% | 0.1% |
| North America | 5.4% | 1.2% |
| Middle East | 3.3% | 0.6% |
| 100.00% | 100.00% |
| MSILX Market Cap Dispersion as of 12/31/2021 | ||
|---|---|---|
| micro | Less Than 579 Million | 0.0% |
| small | 579 Million to 5.5 Billion | 4.2% |
| smid | 5.5 Billion to 7.5 Billion | 2.2% |
| mid | 7.5 Billion to 15 Billion | 13.0% |
| large | 15 to 255 Billion | 80.7% |
Quarterly Market and Portfolio Commentary from Managers
David Herro, Harris Associates
Global equity returns were positive in the fourth quarter despite lingering concerns around supply chain disruptions, inflation pressures and the Covid variant’s impact on global growth. The market continues to lean more on the positive longer term narrative surrounding a global growth recovery, still low interest rates (though rising), slowly rising employment, and improving consumer/corporate balance sheets. As we enter the first quarter, we believe the underlying positives will eventually prevail and gradually improving economic conditions ought to create a positive backdrop for global equity prices.
We established two new positions in the quarter; Bayer and Worldline and received Daimler Truck as a spin-off from Daimler. Bayer’s stock has been under pressure due to the ongoing Round-Up litigation, inherited through Bayer’s acquisition of Monsanto. We believe the likely worst-case scenario has been priced in to the stock while each one of its operating segments have reported solid fundamental results. We think a resolution to their litigation will go a long way towards rectifying the large valuation discount we think exists.
Worldline is the European leader in payment processing and merchant acquiring activities. We believe that Worldline will benefit from the secular movement towards cashless payment and trades at too cheap of a valuation in our opinion.
At a higher level, the portfolio of companies we own have reported largely favorable earnings and cash flows from the depths of the pandemic. 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 overall trend remains generally positive over the next 12-24 months and should lead to higher equity prices.
Mark Little, Lazard Asset Management
The fourth quarter of 2021 saw greater volatility in equity markets, though a surprisingly strong December left markets slightly up for the period after a weak November. In part, this volatility was driven by concerns over Covid, first from a belated seasonal spike in Delta cases in Europe in particular, resulting in restrictions on daily life being reintroduced in some markets. A larger concern was the later emergence of the new and highly transmissible Omicron variant. At the same time, fears grew over tightening monetary policy with inflation proving more persistent than hoped for and expected by central banks.
In this environment, some more cyclical areas such as energy stocks, financials, and European automotive businesses fell, with those companies who would benefit from a full reopening of economies particularly weak. Some unprofitable technology stocks also fell, as paradoxically did some of the winners from last year’s Covid environment. Generally, it was the more defensive areas such as staples, health care and utilities that held up better. However, materials and luxury stocks also rose on hopes of easing policy in China, while semiconductor equipment companies also did well on structural growth hopes.
Greater volatility brings with it greater opportunity. Despite the Covid pandemic likely being in its final stages of great impact, the companies exposed to normalization of activity appear attractively valued. Companies impacted by temporary supply chain issues also look compelling.
Leaving Covid aside, the broader market will be dependent on the scale of monetary support from central banks, and the extent to which inflationary pressures persist, especially in the labor market. Expectations for rising prices have been fueled by the surging cost of many commodities and freight, with supply bottlenecks meeting buoyant demand even before sustainable reopening. The persistence of inflation will depend on the extent to which wages start to rise, and on government fiscal policy. Rising inflation and interest rates are comfortably the biggest threat to buoyant equity markets.
Todd Morris and Daniel Fields, Polen Capital
During the fourth quarter of 2021, steady share price appreciation among companies in the information technology and healthcare industries drove portfolio performance. International markets were volatile, in part reflecting monetary policy normalization from the extraordinary measures enacted post-COVID, a trend gaining momentum globally. In certain markets central banks have already implemented their first interest rate hikes while in November the U.S. Federal Reserve made clearer its plans to normalize in 2022. The Fed’s plans include short term rate hikes, ending quantitative easing and even shrinking its now greater than $8.7 trillion balance sheet. These moves unsettled long duration and high growth investments during Q4. As we move into 2022 monetary policy normalization could be a major factor affecting markets. Long term rates may move higher from where they stand today, but it is difficult to envision a world with rates far higher than they were pre-COVID.
Edited Commentary from the Respective Managers on Selected Contributors
Israel Discount Bank (Mark Little)
Israel Discount Bank performed well in the quarter as the outlook for the Israeli banking sector continues to improve. Loan growth is running at double digits, as the Israeli economy continues to benefit from growth in technology and other export sectors, alongside immigration. Meanwhile, cost growth should be constrained by the continuing opportunity to reduce headcount as the bank moves to digital delivery of services, and credit costs have proved remarkably benign as the government has supported economic players through the crisis. A move towards higher interest rates would also be supportive of margins and profitability. This encouraging picture is not yet reflected in the valuation of the company, in our view.
ICON PLC (Polen Capital)
Irish contract research organization ICON is a leading provider of high value-added services to the biopharma industry. ICON provides outsourced services involving the planning, enrollment in and efficient execution of drug trials for biotech, pharmaceutical and medical device companies. As it delivers positive trial outcomes to customers, those customers rely on ICON more. ICON continues to experience robust demand for its offerings and is now integrating a sizable acquisition completed in mid-2021. The pandemic created additional demand for ICON’s services, and this trend may persist for a few years. At 23x 2022 earnings, ICON remains the Portfolio’s highest-conviction weighting. We feel the business is poised to grow earnings at a mid-teens rate for the next five years. We made no changes to our position in ICON during the quarter.
CNH Industrial (David Herro)
- As one of the largest agriculture equipment providers in the world, CNH Industrial has significant scale advantages and well-known brands in an agriculture equipment industry that we believe remains structurally appealing.
- Management has worked to fortify the balance sheet while protecting pricing, and we believe the team is driven to create shareholder value through operational enhancements and other initiatives.
- We find that CNH is benefiting from a faster recovery in its end markets than we anticipated and believe that the company executed well through this acceleration, leading to earnings and cash dropping to the bottom line.
CNH Industrial’s share price responded favorably to positive developments throughout the quarter on the demerger of its IVECO (trucks and commercial vehicles) business, which becomes effective on January 1, 2022. In our view, CNH delivered excellent third-quarter earnings results, with 23% organic growth, 100% earnings growth and a 230 basis-point margin expansion. In the agriculture equipment segment, strong industry combine demand across the globe drove 30% local currency growth. Anticipation for supply chain issues in the fourth quarter prompted management to lower its guidance for net sales to come in at the low end of the 24-28% range and for free cash flow to finish around $1 billion, though these figures are largely in line with our forecasts.
Edited Commentary from the Respective Managers on Selected Detractors
Grupo Televisa (David Herro)
- 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 U.S. 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.
Grupo Televisa’s share price declined as investors reacted negatively to its third-quarter earnings report. We found the results of the core cable business to continue to be underwhelming with cable revenues growing 6%. Revenue-generating units increased by 52,000, further decelerating compared to the second-quarter increase of 62,000. That said, conversations with management indicated that the recently announced merger with Univision is proceeding on time and without any issues. The company is looking to release a streaming product in 2022, which will include both paid and advertisement-supported versions. In addition, we find that the content segment is performing well with revenue growth of 13% during the third quarter. Licensing and subscription revenues also grew 17% and advertising sales improved 16%, driven by high demand from private enterprises.
Carlsberg (Mark Little, Lazard Asset Management)Medtronic (Todd Morris and Daniel Fields)
Shares of Ireland-based, global med-tech leader Medtronic underperformed during the quarter on what we see as short-term setbacks in its renal denervation technology and the HUGO robotic surgery platform. Both are pipeline prospects which could be sources of revenue growth if Medtronic can successfully commercialize them. However, they are not generating meaningful sales today. Medtronic uses significant financial scale to develop and acquire new products within its core areas of expertise. Looking ahead, we believe Medtronic’s management is handling this world-leading tech business well and that its growth prospects remain compelling. In time, we believe Medtronic can deliver total returns to shareholders in the low double-digits to mid-teens range. At 17x P/E, Medtronic is compellingly valued for the growth it can produce. We made no changes to our Medtronic position during the quarter.
GCAE (Mark Little)
We believe CAE has very attractive market shares and long-term outlooks in its business providing simulators and pilot training to aerospace and defense customers. It has used the crisis to make valuable acquisitions in both parts of the operation. However, in the short term the business has suffered from the slow return of flights as a result of continued Covid cycles. The company also saw some disappointing margins in its existing defense business, though this division is set to be transformed by the acquisition of L3Harris’ Military Training business.