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Commentary iMGP International Fund Third Quarter 2023 Commentary

For the three months ending September 30, 2023, the iMGP International Fund fell 6.55%, underperforming the MSCI EAFE Index, which lost 4.11%. The fund also lagged the Morningstar Foreign Large Blend category, which dropped 4.49% gain in the quarter. Since its inception on December 1, 1997, iMGP International has returned 6.00% 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 4.66% and 4.01%, 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 4/30/2024.

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 from both sector allocation and security selection relative to the MSCI EAFE Index during the third quarter. An underweight to the top performing energy sector hurt relative returns, as did an overweight to the technology sector. Stock selection within the industrials sector was a meaningful drag on returns last quarter. 

Portfolio Breakdown as of 9/30/2023

By SectorFund
Consumer Discretionary16.9%
Information Technology13.7%
Communication Services5.2%
Health Care & Pharmaceuticals15.9%
Industrials 13.6%
Consumer Staples 6.7%
Real Estate 0.0%
By RegionFund
North America7.0%
Asia ex-Japan3.4%
Latin America 0.0%
Australia/ New Zealand0.0%
Middle East4.8%
Other Countries0.0%
*Cash is excluded from calculation
By Region
US Equities4.0%
Developed International Equities92.6%
Emerging Market Equities3.4%
By Market Cap
Small Cap1.2%
Mid Cap16.2%
Large Cap82.5%

Quarterly Market and Portfolio Commentary from Managers

David Herro, Harris Associates

Major global equity markets trended lower in the third quarter in response to further monetary policy tightening, dwindling AI excitement and declining inflation, albeit at levels above central bank targets. Government bond yields rose during the quarter as investors began to incorporate expectations for interest rates to remain higher for the foreseeable future. WTI Crude hit its highest price of the year as crude inventories fell and production cuts began to take effect.

Most central banks throughout the world continued to tighten monetary policy to combat inflation. The U.S. Federal Reserve increased its benchmark interest rate by 25 basis points in July to reach 5.50%, before leaving it unchanged at its September meeting. The European Central Bank increased its benchmark interest rate by 50 basis points during the quarter, reaching 4.50%, while the Bank of England’s interest rates increased by 25 basis points to 5.25%. The Bank of Japan adjusted its accommodative monetary policy and increased the band for purchases of its benchmark 10-year government bond to 100 basis points, an increase from the prior 50 basis point range. Central bank Governor Kazuo Ueda said the change does not represent a shift toward the end of the yield curve control program, and the Bank of Japan announced a bond-purchase plan to hold rates lower in September. Despite coming off a low base from COVID-19 lockdowns, China’s economy began to show weakness in recent months with second-quarter gross domestic slowing its momentum, expanding only 0.8% sequentially.

Mark Little, Lazard Asset Management

Central banks are yet to declare victory in their fight against inflation, which will keep policy restrictive for the foreseeable future. Meanwhile, the full extent of the damage inflicted on company margins, balance sheets and end-market demand are yet to be fully understood.

Overall corporate profits have remained resilient, but under the surface we have seen pressure in areas of discretionary spending—such as marketing or apparel. After 18 months of significant price increases, we see more examples of material impact on consumer demand, and a series of rate rises are putting pressure on the financial system and real estate. There is a fading confidence that companies can maintain prices as raw material prices roll over in a softer demand environment. This dynamic should separate well-run companies with true pricing power and those reliant on benign economic conditions. Better lead times in supply chains, a higher cost of financing, and a softer environment are driving destocking in a number of end-markets, making underlying demand harder to gauge.

Our experiences with COVID and geopolitical tensions will have lasting implications for us all. The sharp rise in energy prices has made clear the energy transition is not only for the climate, but a geopolitical imperative. A re-evaluation of economics versus certainty of supply is resulting in a shift to more regional supply chains – most notably for the semiconductor industry.

How the relationship between China and the West develops remains as critical as ever now that President Xi Jinping has cemented his position of power. Navigating this geopolitical frontier will remain a focus for businesses and investors in the years ahead. The shift in the cost of capital has exposed the fragile foundation for high growth companies with yet to be proven financials and a reliance on cheap funding. Meanwhile, the demand destruction observed in countries with a rapid rise in energy cost illustrates that commodity booms are hard to sustain.

Central banks determined to reign in inflationary pressures combined with pressure on disposable incomes, and a downward draft in asset prices, contribute to an uncertain outlook for company fundamentals. The ability to balance economic growth with efforts to bring inflation back to target levels will determine the direction of markets in the period ahead. While risks remain, market volatility provides opportunities for stock pickers to invest in great businesses at more attractive prices. The team is optimistic about the investment opportunity set presented in today’s market.

Todd Morris and Daniel Fields, Polen Capital

Most of the world’s economies remain in a slow growth mode which presents a possibility that growth could either inflect higher should a soft landing occur or grind lower still if downward economic momentum continues. With an uncertain backdrop we remain constructive about allocations to services, healthcare, and staples businesses. These holdings grow consistently, and all lend a measure of ballast to the portfolio.

Edited Commentary from the Respective Managers on Selected Contributors

Glencore (Harris Associates)

We like that Glencore is run by smart, hyper-competitive and value-focused managers with a focus on improving asset returns. In our estimation, Glencore differentiates itself from other miners with its trading business that provides high returns and cash flow with low cyclicality and significant barriers to entry. We appreciate the company’s leading market positions in attractive commodities and believe existing mining operations will benefit from normalized prices, higher volumes, lower costs and the move towards a low carbon economy. 

Glencore was a contributor during the third quarter. The Switzerland-based materials company reported first half of 2023 results with the marketing segment performing in line with our expectations, although results were weaker on the industrial side. The company has been using capital to pay down debt, make acquisitions and distributed $5.2 billion of capital to shareholders. We met with CEO Gary Nagle and CFO Steve Kalmin to discuss mergers and acquisitions. Nagle saw the Alunorte acquisition as a unique opportunity to gain a stake in what he views as one of the best assets globally with a reliable partner. In addition, he sees the Mara transaction as an attractive project given its brownfield project pipeline and an opportunistic deal for Glencore to consolidate ownership of the project. Glencore made Teck, a diversified mining company, an offer implying around $8 billion in cash for Elk Valley Resources, which Nagle believes would create significant value for Glencore at the right price due to the operational and marketing synergies. We continue to believe Glencore remains undervalued and that its management team makes smart capital allocation decisions.

Sage Group (Polen Capital)

United Kingdom-based Sage Group is a leading provider of small business accounting software. Effectively employed software benefits customers by making business processes more efficient. When customers integrate Sage’s software into business processes, they often become customers for years. Since 2019, Sage Group transitioned its software offering to an easy-to-use cloud enabled user interface. With this transition largely completed Sage’s business is seeing accelerating growth accompanied by improving profitability. Sage Group’s stock has been solid the past few months on the back of favorable first half 2023 results and higher full-year revenue guidance. The company’s cloud solutions should continue to be a valuable growth catalyst, and we see long-term mid-teens earnings growth on the horizon. Given a steady and predictable growth profile, we feel Sage Group’s mid-20s multiple is reasonable.

Universal Music Group (Lazard Asset Management)

Shares posted strong gains after the company reported second quarter earnings. Revenues grew 9% with strong operating leverage resulting in 19% profit growth for the group. There was a meaningful acceleration in streaming and subscription revenues, which alleviated fears that the business has been losing market share. In our view, there continues to be a long runway for growth in emerging markets with a material pricing opportunity. Management reiterated their commitment to expand margins by 100bps+ for the full year, which was taken well by investors after a slow start to the year.

Edited Commentary from the Respective Managers on Selected Detractors

Carlsberg (Lazard Asset Management)

Shares underperformed in the quarter despite continued solid fundamentals for the business. The premiumization trend remains a strong growth driver in Asia where the business is taking market share. In the half year results, management reported strong topline growth driven by Asia and strong pricing. Guidance for the full year operating profit was upgraded, driven by continued growth in Asia, despite material foreign exchange headwinds. However, concerns around the outlook for Chinese property is weighing on sentiment for international players exposed to that market. These macro concerns combined with the retirement of the well-respected CEO has weighed on the share price. Our meetings with the company, including the new CEO, suggest the fundamental drivers of the business remains strong and new leadership has the right vision for driving shareholder value at the company.

Evolution (Polen Capital)

Sweden-based Evolution AB is one of the world’s leading providers of online gaming solutions for the casino industry. Over the coming generation we believe gaming will transition from an in-person, casino-based experience, to a digital and remote experience. Evolution will enable much of that transition. Share price underperformance this past quarter may be attributable to broad concerns around consumer spending growth as well as more specific concerns around the U.S. market. In the U.S., individual states have been slow to move legislation forward that would legalize online gaming. Still, Evolution’s fundamental performance has been quite strong, in our opinion, and we have yet to see signs of these concerns impacting the business. We will continue to watch and assess these potential risks should they materialize. In the meantime, Evolution’s current NTM P/E of ~17x looks startlingly inexpensive in our view for a business that is currently estimated to grow revenues 20% this year.

Ryanair (Harris Associates)

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.

Ireland-headquartered industrials company Ryanair Holdings was a detractor for the period after management gave cautious forward-looking fare commentary on its latest earnings call. We found the company’s fiscal first quarter results to be solid, as total passengers flown increased 11% year-over-year and management is now targeting a 9% annual increase for the full year. Operating costs increased 23% year-over-year, largely driven by fuel costs, which the company has hedged for 2024. We expect its new Boeing 737’s to aid with fuel costs, while also enabling it to increase passengers. Ryanair later hosted a Capital Markets Day that provided more detail into growth opportunities over the next decade, and we believe the incremental disclosures largely support how we price the business.  We also continue to 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.

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