For the three months ending June 30, 2022, the iMGP International Fund fell 13.15%, while its benchmarks MSCI EAFE Index and MSCI ACWI ex USA Index lost 14.51% and 13.73%, respectively. The average peer in Morningstar’s Foreign Large Blend category dropped 13.16% for the quarter.
Since its inception December 1, 1997, iMGP International has returned 5.93%, annualized. Over the same time period, MSCI EAFE, MSCI ACWI ex USA Index and the Morningstar Foreign Large Blend category have generated an annualized return of 4.35%, 4.71% and 3.63%, 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.imgptfunds.com. *There are contractual fee waivers in effect through 4/30/2023.
Brief Discussion of Performance Drivers for the Second 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. 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.
Stock selection added value during the second quarter. Selection within the consumer discretionary, consumer staples, industrials and information technology sectors were positive. An underweight to the energy sector and overweight to technology companies were the main detractors from a sector allocation standpoint. Despite the overweight to technology stocks, the majority of the names owned by the sub-advisors fell much less than those in the index.
The fund’s modest overweight to Asia emerging markets (mainly China) was a positive thanks to the performance of Tencent. The fund’s cash position also helped in a market that was down double-digits in the quarter.
Portfolio Breakdown as of 06/30/2022
|By Sector||Fund||iShares EAFE ETF||+/-|
|Health Care & Pharmaceuticals||9.9%||13.8%||-3.9%|
|By Region||Fund||iShares EAFE ETF||+/-|
|Australia/ New Zealand||0.0%||8.0%||-8.0%|
|*Cash is excluded from calculation|
Quarterly Market and Portfolio Commentary from Managers
David Herro, Harris Associates
It was a difficult quarter for equity markets as inflation remained at elevated levels, which caused central banks around the world to raise—or express their intentions to soon raise—interest rates. This situation was made even more challenging by continued lockdowns in China (and the negative impact this had on global supply chains and economic growth in China) and the continued hostilities in Ukraine. Despite this difficult macroeconomic backdrop, our portfolio companies have mostly continued to report acceptable operating results to date. Although some consumer discretionary categories (e.g., apparel) are exhibiting signs of weakening demand, overall, the business environment remains favorable. We remain vigilant for signs of noticeable weaknesses to business conditions but are enthusiastic about our portfolio’s mid- to long-term return potential.
We established a new position in luxury goods maker, Kering. The company is a global leader in personal luxury goods including brands like Gucci, Alexander McQueen, Balenciaga, Bottega Veneta, and Saint Laurent, among others. We think the market’s concern over Gucci’s growth is short-sighted and believe its scale advantage, brand diversification, store productivity and focused management team will improve results and regain investors’ confidence.
Several portfolio companies experienced price weakness on the concerns outlined above. We took advantage of the equity price volatility to re-position the portfolio to optimize expected return among existing holdings. We sold our position in Iveco Group in favor of other portfolio names, that in our view, offer more upside potential. While the coming quarters may experience more mixed fundamental progress, due to tighter financial conditions and ongoing supply chain disruptions, we think the long-term fundamental trend across portfolio companies remains positive over the next 12-24 months and should lead to higher equity prices.
Mark Little, Lazard Asset Management
International markets fell over the course of a volatile second quarter. With no swift end in sight to the war in Ukraine, elevated commodity prices continued to support the growing inflationary narrative, in what now looks like a sustained change in the economic and investment environment. Interest rates and bond yields are rising in response, with the first signs emerging that consumers are feeling a squeeze on their disposable income and confidence from rising costs of essential expenses such as food and energy. China’s decision to impose severe lockdowns in Shanghai and other cities, as it strives to maintain its zero-COVID policy, put further pressure on supply chains and raised growth fears.
In this environment, more defensive sectors such as telecoms, consumer staples, pharmaceuticals, and network utilities outperformed. More cyclical sectors, such as industrial stocks and automotive companies, lagged the market. Technology stocks also underperformed, hurt by the continued rotation out of growth stocks, and by cyclical concerns in semiconductors. In contrast, while energy stocks would usually fall with other cyclical areas, they continued to outperform as the oil price stayed high on geopolitical tensions.
Markets started the year looking forward to a normalization of activity post pandemic, alongside strong inflationary pressures across many economies especially in the US and UK, and a pick-up of credit expansion. Rising rates threatened overall market valuations and performance.
The war in Ukraine has led to a surge in commodity prices, given the expectation of restricted supplies from Russian and Ukraine, driven by war disruption and by sanctions. These rises are so material as to threaten consumer spending power, especially in Europe where household energy costs are highly driven by natural gas. This fuel is very difficult to substitute as it is only portable through infrastructure such as pipelines and LNG terminals, which have long lead times to install. The US is hurt more by the rising price of gasoline, and many emerging markets by both oil and food prices.
While we may see some commodity prices revert to normal levels in the event of a resolution of hostilities in Ukraine, the structural move in Europe away from dependence on Russian oil and gas is likely to have long-lasting consequences, as is the change in policy on defense spending. It also seems increasingly likely that general inflation is now here to stay, creating a very different investment environment to that we have witnessed in the 13 years since the financial crisis of 2008/2009.
While the near-term outlook may be difficult, we believe that greater volatility brings with it greater opportunity. Overall, the portfolio team remains confident that, by continuing to focus on stock selection, and seeking to find stocks with sustainably high or improving returns trading at attractive valuations, the strong long-term track record of the strategy will continue. The team is especially delighted to be resuming travel, seeing companies in person, which has historically been an important part of the investment process.
Todd Morris and Daniel Fields, Polen Capital
The Russia-Ukraine conflict, stubbornly high inflation, aggressive central bank measures, and supply chain challenges all contributed to asset valuation reductions in the second quarter. A clear tightening bias from central banks dampened some of the speculative fire that fueled markets in recent years. Overall, the markets on June 30th paid significantly less for a dollar’s worth of earnings than they did on January 1st.
The portfolio experienced significant valuation contractions over the period. Many of our steady and stable holdings, including those we believe provide ballast for the portfolio, were down in step with the broader market. These same companies reported robust results, with long-term growth initiatives continuing briskly and management teams expressing confidence about their business trajectories.
We continue to run the portfolio with a focus on robust and profitable businesses poised to grow their earnings at above-market rates over the next five years. While uncertain and volatile markets can signal slower near-term economic growth, the divergence between business fundamentals and stock prices could create attractive entry points for new investments in companies with outsized long-term return potential. As ever, we are confident in the time-tested philosophy driving our growth investing approach.
Edited Commentary from the Respective Managers on Selected Contributors
|Holding||Weight %||Return %||Contribution %||Benchmark Weight %||Sector|
|Coca Cola European Partners||2.66||4.42||0.11||0.35||Consumer Staples|
|Siemens Gamesa Renewable Energy||1.40||5.34||0.07||0.00||Industrial|
|Carlsberg A/S Class B||1.80||2.36||0.05||0.00||Consumer Staples|
|IVECO Group NV||0.39||-11.53||-0.01||0.00||Industrial|
|Continental AG||1.43||-1.98||-0.03||0.00||Consumer Discretionary|
|Tencent Holdings Ltd||1.14||-5.05||-0.05||0.07||Communication Services|
|Bayer AG||1.54||-12.08||-0.14||0.00||Health Care|
Prosus (David Herro)
Prosus outperformed during the quarter as a result of strong relative performance from its major holding, Tencent. Tencent, as well as other Chinese internet companies, performed well during the quarter as the Chinese government made several announcements supporting the internet sector. There is a growing narrative that the worst of the regulatory pressure for Chinese technology companies is behind them and over time the industry can begin to grow at a more normal pace.
Prosus also climbed toward the end of the quarter following the announcement that the company is planning to sell part of its $134 billion stake in Tencent. Prosus will conduct an open-ended and unlimited program to sell its Tencent shares and use those proceeds to repurchase its own shares until the discount narrows to a level that is satisfactory to management. We welcome this change as it takes advantage of the massive discount in Prosus shares relative to its net asset value.
We believe that an investment in Prosus is the most optimal way to gain access to Tencent, one of the most valuable internet companies in the world. We think Prosus domiciles in a better location (the Netherlands versus South Africa, where Naspers trades), trades in a less volatile currency (EUR versus ZAR) and has a better tax position than Naspers, both of which afford access to Tencent. In our view, management is committed to closing the gap between the company’s current share price and our perception of its intrinsic value.
Tencent (Polen Capital)
Tencent was the top contributor to performance for the portfolio, declining just 5% during the quarter, less than the benchmark. Tencent is one of China’s largest technology companies, with leading positions in gaming, media, and payments within China. It also has strong positions in other growing industries like cloud computing and cloud-based business productivity applications. We believe this portfolio of businesses provides Tencent good opportunities grow its profits and generate good returns on capital in the coming years. Key to the investment case is Tencent’s strong position in people’s daily lives via its WeChat application where the average user spends over 60 minutes daily.
Tencent’s performance during the quarter was boosted by the expectation that recent headwinds should be coming to an end. Signs suggest that as China’s economy has slowed the government’s priority is shifting away from increasing regulation and toward economic stimulus. There is also a hope that COVID infection trends may begin improving, which would allow Chinese businesses to return to more normal operations. Over the long term our expectation is that Tencent should be able to grow earnings at a mid-teens rate, independent of what happens with the economy in the coming years or the COVID infection trends.
Coca Cola European Partners (Mark Little)
Coca Cola European Partners (CCEP) is a Coca-Cola bottler. It combines European operations with newly acquired operations in Asia, namely Australia, Pacific, Indonesia (API). We believe the company is exposed to several fundamental drivers—the strategic shift of the Coca-Cola system from volume to value, the sustainability shift towards non-carbonated drinks and better recyclability, the recovery from the COVID-19 pandemic, and the return of trade in the on-premises channel. Recent organic sales growth has surpassed our estimates, which were higher than the market consensus. While the on-trade volumes have recovered close to 2019 levels, the at-home trade continued to show solid growth. Stronger volume growth and pricing have been able to offset cost inflation, such that management reiterated operating profit guidance. Also, the integration of the API business is on track, and we are encouraged by improving commercial execution in Indonesia, which is an attractive long-term opportunity for the business. We see the shares as attractively valued.
Edited Commentary from the Respective Managers on Selected Detractors
|Holding||Weight %||Return %||Contribution %||Benchmark Weight %||Sector|
|Credit Suisse Group AG||2.68||-28.09||-0.78||0.12||Financials|
|Ryanair Holdings PLC ADR||3.30||-22.81||-0.72||0.00||Industrials|
|SAP SE||3.40||-17.61||-0.61||0.70||Information Technology|
|Adidas AG||2.24||-24.16||-0.59||0.24||Consumer Discretionary|
|Siemens Healthineers AG Register||2.76||-18.99||-0.55||0.11||Healthcare|
|CTS Eventim AG & Co. KGaA||2.23||-24.25||-0.54||0.00||Communication Services|
|Israel Discount Bank Ltd Class A||3.27||-16.57||-0.53||0.05||Financials|
|ASML Holding NV ADR||1.81||-28.96||-0.52||1.55||Information Technology|
|Universal Music Group NV||1.91||-24.95||-0.52||0.11||Communication Services|
Credit Suisse (David Herro)
Credit Suisse Group’s first-quarter earnings report showed soft headline figures and numerous one-time items. The results also reflected massive de-risking as the company continues to reallocate capital from the higher risk investment bank into the lower risk wealth management divisions. When coupled with the internal managerial changes, we believe underperformance will continue for fiscal year 2022 but provide a path to a cleaner year in 2023. On the management changes, the departures of long-time CFO David Mathers and General Counsel Romeo Cerutti were expected. CEO Thomas Gottstein indicated that Mathers would stay in the role until a replacement was found and a subsequent general counsel (Markus Diethelm, formerly of UBS) was already secured. Credit Suisse also took CHF 650 million in litigation expenses in the first quarter but is looking to move past its legacy liabilities.
Despite the resignation of CEO Tidjane Thiam in 2020, we believe changes implemented by him and his team made Credit Suisse Group a stronger and vastly improved organization and paved the way for further progress. 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 we believe the company is capable of generating significant free cash flow going forward. Overall, we find that Credit Suisse possesses a high-quality franchise with a solid balance sheet that positions the company to generate significant free capital as conditions normalize. At its current price, we believe that Credit Suisse is trading at a large discount to our perception of its intrinsic value.
Ryanair (Mark Little)
Ryanair is a low-cost airline serving UK and European destinations. We believe that Ryanair’s leading competitive position is strengthening as their own cost base is seeing a structural decrease in terms of airport charges, fleet costs, and fuel efficiency. At the same time, peers are reducing capacity and are seeing structural increases in their cost base. The shares have seen headwinds from higher oil prices driving higher fuel cost and subsequent pressures on consumer spending leading to talk of recession. We believe that pent up demand for travel during the COVID-19 pandemic should offset the pressures they face in this cycle and continue to see the business as a long-term winner in the industry. At current valuation, we see sufficient asymmetry to continue to own the shares.
Siemens Healthineers (Polen Capital)
Siemens Healthineers is a healthcare technology company with a leading position in medical imaging equipment and radiotherapy equipment. It also has a strong position in in-vitro diagnostics equipment. Its scale allows it to spend ~€2b annually on research and development, significantly more than competitors. Its investments in innovation have historically allowed it to be at the leading edge of technology, helping it to win market share from its competitors. During the quarter Siemens Healthineers’ share price declined 19%.
In contrast to the weak share price performance, recent business performance has remained robust. During the first half of 2022, comparable revenues grew ~12.5% year-over-year while margins were stable. Overall financial performance has been consistent with the long-term goal of generating >6% revenue growth and double-digit earnings growth annually. We expect the company to hit that goal this year, next year and for the foreseeable future. The business isn’t immune to supply-chain problems or the looming economic slowdown, but the impacts from these on earnings growth should be relatively small. Recent underperformance seems to be driven more by technical selling pressure than any problems with the business. Indeed, after outperforming the medical technology sector earlier in the year, the recent sell off brings its performance more in line with the sector average.