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Commentary iMGP International Fund Fourth Quarter 2023 Commentary

For the three months ending December 31, 2023, the iMGP International Fund returned 8.46%, underperforming the MSCI EAFE Index, which gained 10.42%. The Fund also lagged the Morningstar Foreign Large Blend category, which returned 9.81% in the quarter.

Since its inception on December 1, 1997, iMGP International Fund has returned 6.27% 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 5.01% and 4.19%, 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 *There are contractual fee waivers in effect through 4/30/2023.

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 was hurt mainly by security selection during the fourth quarter. Security selection was negative in two areas that hurt the Fund—financials and materials. Within financials, Fund positions in Worldline, Aon, and Julius Baer were the main detractors. Hensoldt and CAE detracted from performance within the materials sector. Top contributors during the quarter were Ryanair, ICON, and Coca-Cola Europacific.

Portfolio Breakdown as of 12/31/2023

By SectorFund
Consumer Discretionary17.4%
Information Technology14.7%
Communication Services2.9%
Health Care & Pharmaceuticals19.1%
Industrials 13.0%
Consumer Staples 5.4%
Real Estate 0.0%
By RegionFund
North America4.5%
Asia ex-Japan3.6%
Latin America 0.0%
Australia/ New Zealand0.0%
Middle East2.6%
Other Countries0.0%
*Cash is excluded from calculation
By Region
US Equities1.6%
Developed International Equities94.8%
Emerging Market Equities3.6%
By Market Cap
Small Cap1.1%
Mid Cap12.6%
Large Cap86.2%

Quarterly Market and Portfolio Commentary from Managers

David Herro, Harris Associates

Major global markets generally showed strength during the fourth quarter, despite pressure in October when Hamas, an Islamist political and military organization, orchestrated an attack against Israel, shaking the geopolitical landscape and markets. The U.S. reported its strongest quarter of gross domestic product growth in nearly two years at 4.3% annualized, while economic data throughout Europe and China was mixed and provided reasons for both pessimism and optimism.

The U.S. 10-year yield reached as high as 5% in the quarter before declining and ending the period around 3.86% as investors continue to digest economic data and expectations on interest rates. In November and December, the U.S. Federal Reserve met and held its benchmark interest rate steady at 5.50%. Similarly, the Bank of England held its benchmark interest rate at 5.25%, and the European Central Bank held rates steady at 4.50% at its most recent meeting. Headline inflation in the U.S. and the U.K. declined during the quarter and ended at 3.1% and 3.9% in the most recent release, respectively. The Bank of Japan continued its accommodative monetary policy stance, although it took a step toward reversing the policy when it announced that the 1% cap on its 10-year government bonds would be considered a reference rate going forward. The yen reversed its recent trend and gained value during the quarter, ending the period at approximately 141 USD/JPY.

Regardless of the status of the broader economies across the globe, we believe we are well-positioned for the long term due to our disciplined philosophy and process. We seek to grow our shareholders’ capital over time by selecting companies that we believe are high quality, intelligently managed and priced at a substantial discount compared to our estimate of their true business value. We believe this approach both reduces downside risk and increases upside potential.

Mark Little and Robin Jones, Lazard Asset Management

Equity markets had a strong finish to the year with gains across most sectors. Signs of cooling inflationary pressures, further helped by a reversal in the oil price, drove expectations that restrictive monetary policy could be nearing an end. The sharp rise in yields over the September/October period was reversed in major developed markets, including Europe, North America, and Japan.

In hindsight, the conflict in the Middle East likely drove some of the strength in the oil price as the risk of a conflict across the region could disrupt supply. In contrast, fundamentals do not seem to support a strong oil price with further supply cuts announced by OPEC+ to arrest falling prices.

There is a polarized picture between the strong U.S. economy, which have raised concerns about prolonged restrictive monetary policy, and China’s mounting economic problems that could impact the global economy. A rate cut by the Chinese central bank and several targeted policy interventions have yet to backstop the risk of a deflationary spiral, a real estate crisis, falling export growth, and a weakened yuan. Initially, this played out in the local stock markets and have gradually spread to equities with exposure to the China over the course of the year. Meanwhile, economic growth in Europe remains weak with a decline in real wages across most countries following a period of high inflation.

Japanese yields had been on the rise during the second half 2023 as investors speculate about the end to an easy monetary policy. This has been driving strong gains in the banks and lower-quality stocks in general. This trend began to reverse in November as yields peaked early in the month – though the year-to-date performance gap between low and high-quality stocks in Japan remains significant.

A number of rate sensitive areas of the market performed better in the fourth quarter—e.g., real estate and information technology stocks. Energy was the worst performing sector on  lower oil prices despite efforts by OPEC to manage supply. Suggestion that the semiconductor cycle has reached a bottom led to strong gains in information technology. Industrials outperformed other cyclicals, banks lagged other financials, while defensive sectors generally underperformed (e.g., consumer staples and health care).

Earnings thus far have showed a mixed picture, with the U.S. proving largely resilient, while Europe’s outlook worsened, and companies faced weakness in China. Improvements in supply chains have helped ease cost pressures built over the last two years, but they have driven new orders lower as lead times improve. Inventory levels are still considered high given the weaker economic backdrop and increasing costs in a higher financing cost environment. Sales cycles have been extending in some sectors as corporates assess the demand outlook for their businesses against a moderating macro backdrop. The reporting season will soon provide a sense of management expectations for 2024.

The last three years have been characterized by some extreme macro conditions, which has severely distorted most sectors. We are increasingly seeing demand and supply conditions normalize and industries returning to a more normal cycle. The team is particularly encouraged by potential for semiconductor equipment spending to return to growth and seeing signs that destocking in the life sciences industry has peaked, while drug approvals continue to look very strong. In contrast, we are trying to avoid areas of the market that we think have more correction ahead, e.g., luxury goods, after a period of extraordinary demand. Our search for inefficiencies in the market are guided by our view of “normalized demand” and companies undergoing change that we expect will improve financial productivity of the company.

Todd Morris and Daniel Fields, Polen Capital

Despite interest rates across much of the world rising from abnormally low levels in the last 22 months, many global economies ground along at positive rates of growth. Pockets of weakness in China and parts of Europe persist today, but in general the world economy seems steady. We typically invest in more asset light businesses which fund growth initiatives with internally generated cash, so rising costs of capital do not create the stress that leveraged operators may face in the coming quarters should interest rates remain elevated.

Heading into 2024, conflicts in western Asia and eastern Europe are front of mind and threaten to disrupt the flow of traded goods. Further geopolitical uncertainty percolates in the background elsewhere, from the western Pacific to the southern Caribbean. Most economies continue to tread a fine line between positive, slow growth or a garden variety downturn. These points cement our view that the best course to take in markets is owning conservatively capitalized companies with faster than average growth potential.

Edited Commentary from the Respective Managers on Selected Contributors

Ryanair (Harris Associates)

Ryanair, a European ultra-low-cost airline, was the top contributor to the portfolio’s performance this quarter. Ryanair released strong results for the first half of fiscal-year 2024 and was accompanied by an even stronger outlook, in our view. The company’s revenue grew 30% year-over-year, and average fares increased by 24% to €58, driven by record demand and constrained capacity at European peers. Total passengers flown expanded 11% year over year to 105.4 million, and management is on track to maintain its target of 183.5 million passengers for 2024, depending on Boeing’s ability to meet its delivery commitments. Management is expecting full-year 2024 net income to be between €1.85-2.05 billion ahead of the €1.82 billion consensus estimate. The company’s strong free cash flow levels and balance sheet allowed Ryanair to reinstate a €400 million dividend (35 cents per share). We spoke with CEO Michael O’Leary about additional uses for its excess capital and were happy to hear about an incremental €1.5 billion return to shareholders starting in 2025. We continue to be optimistic about Ryanair’s future.

We like that Ryanair is the leading ultra-low cost carrier in Europe with a strong management team focused on minimizing costs, and its operational efficiencies allow the company to provide the lowest cost service in the region. Ryanair has strategically taken market share by flying into secondary airports with lower landing fees, undercutting flag carriers. The company’s management team continues to improve Ryanair’s competitive position while de-risking the model via high asset ownership and a strong balance sheet, which has led to strong, resilient returns and free cash flow generation.

Ryanair (Lazard Asset Management)

Ryanair continues to enjoy a favorable cost position in the short-haul aviation market compared to its competition. This advantage has expanded during COVID as the company has been able to invest through a downturn. The financial strength of the business enables them to operate a modern and more efficient fleet, which further enhances their competitive advantage.

The company reported strong results over the course of the year. Demand for air travel continues to be robust with a positive outlook for pricing. Cash flow generation has been strong which helps fund attractive cash returns to shareholders and helps to underpins an undemanding valuation.

ICON (Polen Capital)

ICON shares appreciated as the business continued seeing improving trends. ICON remains a global leader in contract research organization services to biopharma companies. Declining interest rates in the quarter may have prompted investors to better view the biotech space. Biotechs had been beset by tightening monetary policy in recent years, which diminishes the marginal early-stage biotech’s ability to fund drug trials. While early-stage drug trials are only 15% of sales for ICON, the company’s shares appear to move around with biotech sector sentiment. With our long-term view, we focus instead on the company’s ability to continue gaining market share in the years ahead through sound execution and sharp drug trial administration. ICON appears poised to grow earnings at a high teens rate. Trading at 18x forward consensus earnings, and with a long runway to continue growing steadily, in our view,  ICON is attractively valued.

MercadoLibre (Polen Capital)

Latin-American e-commerce platform MercadoLibre experienced stellar profit growth in recent years after the pandemic accelerated e-commerce adoption. Profits also grew through market share gains, as weakened competitors failed to keep pace, and new financial products took hold. Core e-commerce marketplaces platforms in Brazil, Mexico, and Argentina serve tens of millions of consumers goods warehoused and shipped by MercadoLibre’s own fulfillment network. Financing and credit products facilitated by the company’s Mercado Pago e-wallet have grown rapidly and been a significant profit driver. In aggregate, company earnings per share grew more than 10x in the last two and half years. Exciting trailing growth is noteworthy, but the future is bright too. With underpenetrated e-commerce, banking and fintech adoption across Latin America’s more than 650 million residents, we believe MercadoLibre remains well positioned to grow its earnings at a 25% clip for many years into the future.

Edited Commentary from the Respective Managers on Selected Detractors

Worldline (Harris Associates)

Worldline, a European merchant acquirer and payment processor, was the top detractor for the quarter. The company’s third-quarter earnings missed consensus and our own expectations, and management cut its full-year 2023 and 2024 guidance. The implied 2024 adjusted earnings guidance is around 16% below consensus expectations. This resulted in a 60% sell-off in the stock, an amount that we do not think is proportional to the impact to the company’s fair value. In our view, the negative guidance revision derives from two causes. First, due to evolving regulatory requirements around cybercrime in Europe, Worldline cut ties with certain online merchants that would have required excessive investment to be fully compliant with regulatory standards. Second, Worldline highlighted weak macroeconomic trends in Germany, where it is the market leader, and these are driving spending shifts toward non-discretionary categories that produce less revenue and profit from merchants for Worldline. Collectively, Worldline’s actions impact €210 million in annualized revenue (sub-6% consolidated revenues), reset margins down by 250 basis points, and will burden near-term cash generation due to restructuring charges. The negative impact should start to ease by the second half of 2024. We’ve spoken to management, former Worldline employees, and payment industry competitors. In our view, Worldline’s negative share price reaction is disproportional to the likely impact on its long-term prospects. The fundamentals of the business are still intact. The European payment market is cash heavy and still largely operated by legacy banks that are ceding share to pure acquirers like Worldline. The company’s scaled pan-European footprint, capital light and cash-generative operating profile, strong medium-term growth potential, and washed-out valuation make it an attractive holding.

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 U.S. 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.

Israel Discount Bank (Lazard Asset Management)

Israel discount bank has been gaining share in the mortgage market over the past decade. In our opinion, the bank is very focused and efficiently run, which allows them to offer competitive prices to customers and generate good returns. The banking market is very disciplined in general with high ROEs generated by the main banks. Loan growth is strong, driven by a growing population and investment into sectors such as technology and healthcare. Financial regulation is very stringent with high capital requirements, which makes the ROEs more resilient compared to other markets.

The shares pulled back in response to the armed conflict between Israel and Hamas. The events mark the most significant military escalation in the region since the Yom Kippur War (1973). Investors fear an extended conflict, or involvement of other actors in the region, could have significant consequences for the economic outlook in Israel with negative consequences for loan growth and margins. The valuation of the shares is inconsistent with the high ROE and growth outlook, which suggests investors currently expect a sustained deterioration in fundamentals due to the conflict, which is not our assessment based on the current outlook.

Aon (Polen Capital)

Aonis an outsourced services provider helping businesses of all sizes locate cost effective insurance and risk management solutions via scaled global distribution networks. Aon is one of the world’s leading insurance brokerage houses, distributing insurance policies to businesses on a recurring basis. Aon’s stock price underperformed during this past quarter following the announcement of the company’s acquisition of NFP, a middle market insurance broker, for $13bn. The NFP deal complements Aon’s current business, but it is expected to be dilutive to earnings in the near term, and thus prompted a sell-off in the shares. We will continue to assess the merits of the NFP transaction, but it does not currently change our long-term view of Aon, which we view as a steady, durable low-teens earnings compounder.   

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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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