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Commentary iMGP Oldfield International Value Fund Second Quarter 2022 Commentary

The iMGP Oldfield International Value Fund declined 14.07% during the second quarter of 2022, lagging its benchmark MSCI EAFE Value Index (loss of 12.41%), but slightly ahead of MSCI EAFE Index (loss of 14.51%). The Morningstar’s Foreign Large Value Fund peer group fell 11.34%. Since its inception November 30, 2020, the fund is essentially flat with a loss of 0.04%, slightly behind its value benchmark and peers which were up 1.12% and 1.25%, respectively. The MSCI EAFE Index has fallen 4.07% over the same period.

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. Short term performance is not a good indication of the fund’s future performance and should not be the sole basis for investing in the fund. 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.

Quarterly Portfolio Manager Commentary

At the end of June, the Financial Times reported that equity markets had suffered their worst first half performance in more than 50 years after the declines seen so far in 2022, triggered by the Federal Reserve curtailing Quantitative Easing. Risks remain around further de-rating and earnings expectations. At the stock level, companies are facing severe margin pressures across the board owing to rising interest rates, wages, input costs, pricing pressures and concerns around end demand.

In the second quarter, the stocks that detracted from the return, in order of impact were easyJet (-34%, total return in local currency), Siemens (-22%), Embraer (-30%), Samsung Electronics (-18%) and Porsche (-25%).

The global airline sector has been up ended by COVID followed by the oil price increase. We are witnessing the pent-up demand for foreign holidays recover which paradoxically is shown by the chaos at European airports. The recovery in demand is greater than available airport capacity. These issues should be ironed out over the next few months. Delays in giving airport staff security clearance were one of the main reasons highlighted by the industry for continued travel disruption. The UK’s Department for Transport states that the time taken for security clearance is now 10 days, half the time it took in March. Leisure travel is seen as discretionary spend and hence vulnerable in any downturn. However, given the recovery, as we emerge from two years of COVID induced lockdowns, it is evident that consumers are starting to prioritize services over goods in their spending. We hold two of the leading low-cost airlines in easyJet and Southwest who will not only out-compete their legacy rivals but also benefit from consumers trading down.

Portfolio Allocations as of June 30, 2022

By RegionFundiShares EAFE Value ETF+/-
North America 0.0%0.8%-0.8%
Asia ex-Japan17.1%4.4%12.7%
Latin America 3.1%0.2%2.9%
Australia/New Zealand 0.0%7.9%-7.9%
Middle East 0.0% 0.7%-0.7%
Other Countries 0.0% 0.0%-0.0%
*Cash is excluded from calculation
By SectorFund iShares EAFE Value ETF+/-
Consumer Discretionary9.6%8.5%1.1%
Information Technology4.3%2.6%1.7%
Communication Services7.5%6.4%1.2%
Health Care & Pharmaceuticals15.3%10.4%4.9%
Industrials 17.8%10.2%7.6%
Consumer Staples 12.1%8.0%4.0%
Real Estate 0.0%4.6%-4.6%

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. Attribution analysis over a given time period may however show other factors also explain relative performance.

In the quarter, two of the biggest detractors to performance were Siemens and Porsche. Both are German industrials, and the ongoing conflict in the Ukraine threatens the supply of energy to Germany which is heavily reliant on Russian gas which accounted for some 55% of Germany’s gas consumption (40% for Europe as a whole) before the war. This is somewhat of an own goal given Germany’s shift away from nuclear power over the last decade with the final phase of the shutdown of the remaining three nuclear reactors set to be completed this year. A group of leading German academics are calling for an extension in the life of coal and nuclear power plants over the short-term, which they accept is problematic given climate policy principles but that the exceptional security situation means these measures are justified. They are also advocating curtailing gas demand. Half of Germany’s gas consumption is used for heating homes and offices. Ultimately, it is through investment in new infrastructure; building LNG terminals to diversify supplies and ultimately more investment in renewables that Germany will reduce its dependence on Russian gas. In the four weeks since the invasion, Germany has reduced its gas imports from Russia to 40% of consumption. A recent study by a group of German economists estimate that if Germany was to cease all imports of Russian gas its economy would suffer by 0.5-2.2% of GDP. Mr. Putin may well find that his move on Ukraine totally backfires, and leaves Russia’s power and influence greatly reduced over the medium to long-term. In the meantime, Germany will suffer from higher gas prices as they continue to diversify their sources. These concerns were heightened by Russia curtailing supplies through the existing Nord Stream 1 pipeline seemingly to prevent Germany building gas inventories over the summer months. We believe the impact on the fundamentals in Siemens and Porsche has been more than priced into the shares earnings projections for Siemens remain flat over the last 6 months and we note that it is now a global business with only 28% of its workforce based in Germany. If we strip out the current market value of the Siemens Healthineers business which has a separate listing, the forward P/E for the Siemens group is around 8x which is very low for the quality of this business. Porsche SE has a 53% stake in Volkswagen and trades on a low single-digit forward P/E multiple with analysts projecting 10% earnings growth this year. Volkswagen is trading on an EV/sales of 0.23x with its long-term median at 0.49x and has a dividend yield of 7%. It is also planning on spinning out its Porsche business later this year which we think should unlock value.

The share price of Embraer, the Brazilian aircraft manufacturer and leading global producer of regional jets, has been weak given the month-long shutdown in production announced earlier in the year. This is due to a final re-integration of the commercial aviation unit after the aborted bid by Boeing. In addition, the collapse of investor appetite for Special Purpose Acquisition Companies, or SPACS, has also impacted Embraer’s SPAC for its EVE unit. EVE is developing a short range electric vertical take-off and landing ‘flying taxi’ seating five people that will aim to replace helicopters and some taxi routes primarily in urban settings. While we acknowledge that this remains a somewhat speculative endeavor it has more chance of success than most with Embraer’s excellent engineering track record, a €5bn order backlog and targeting commercial operations by 2026. We do not include this in our valuation and yet some analysts are valuing this well in excess of the entire market value of Embraer. Embraer continues to recover from its COVID induced collapse, and we see its intrinsic value as significantly higher than today’s level.

The stocks with the largest positive impact on the strategy’s relative performance were, in order of their impact, Mitsubishi Heavy Industries (+18%, total return in local currency), Sanofi (+8%), Alibaba (+0%), BT Group (+2%), and KT&G (+2%).

Mitsubishi Heavy Industries, the Japanese industrial conglomerate covering sectors such as energy, aviation, and logistics, is the biggest contributor to fund performance year to date, providing a total return of +81% in local currency terms and, despite the weakness of the Yen, +54% in US dollar terms. Its energy business is one of the world’s largest suppliers of power installations, ranging from gas turbines to nuclear. Clearly in a world where energy security concerns will be elevated, it has numerous businesses which are highly relevant. It is also a leader in the growing areas of hydrogen and carbon capture technologies that will be needed to reach Net Zero targets. At the end of December last year, Seiji Izumisawa, the Chief Executive of MHI briefed reporters that the group could require a sweeping overhaul and restructuring to focus the group on businesses with the strongest opportunity set. We have been engaging on this issue with the company since we bought the shares in 2017. MHI’s shares were strong from the start of 2022 on the back of the CEO’s comments but since the war in Ukraine began investors have also noted that MHI is Japan’s largest defense contractor.

In the quarter, we added to the positions in easyJet and LG Household & Health Care. We have now taken a third bite in easyJet and hence have reached our limits in adding to that position, with the second bite being the participation in the rights issue. LG Household & Health Care, the Korean beauty products supplier continues to be impacted by the continued lockdowns in China. On any relaxation of the COVID-related travel restrictions between China and Korea, we expect the revenues to increase. Shares have more than halved in price since their January 2021 peak. We view fair value at 50% above the prevailing price on a two-year view.

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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.

The MSCI EAFE Index measures the performance of all the publicly traded stocks in 22 developed non-U.S. markets

The MSCI EAFE Value Index captures large and mid-cap securities exhibiting overall value style characteristics across Developed Markets countries around      the world, excluding the US and Canada. With 482 constituents, the index targets 50% coverage of the free float-adjusted market capitalization of the MSCI EAFE Index.

The MSCI World Growth Index captures large and mid-cap securities exhibiting overall growth style characteristics across 23 Developed Markets countries.

The MSCI World Value Index captures large and mid-cap securities exhibiting overall value style characteristics across 23 Developed Markets countries. With 848 constituents, the index targets 50% coverage of the free float-adjusted market capitalization of the MSCI World Index.

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