Charles de Vaulx's IVA Worldwide Fund 2nd Quarter Commentary
The IVA Worldwide Fund Class A (NAV) ended the quarter on June 30, 2019 with a return of 2.07% versus the MSCI All Country World Index (Net) ("Index") return of 3.61% for the same period.
The Second Quarter was a tale of two market moods. While generally happy in April, in May the market was depressed and volatile, nervous about slowing economic growth and irritated by multi-front trade tensions. Most every asset class saw a significant slide. In June, the mood quickly shifted when the Federal Reserve showed up with the long promised cavalry. They turned words to action with a rate cut that, again, made markets happy. In concert, the ECB continued its rhetoric, supportive of low rates and additional stimulus if need be. Stocks and bonds all rallied in June reversing the weakness in May and resulting in most asset classes having a good first half of the year. We continue to watch in amazement at the Central Bankers' willingness to prescribe more and more opioids to satisfy the addicted market. We keep wondering what will happen when the drug is no longer strong enough or the supply runs out?
Though we are keen observers of the markets and economies, we are not forecasters, and have been at this long enough to know forecasting is pointless. Rather, we are looking to assess risk and try avoid it whenever possible or at least stack the risk vs. reward in our shareholders' favor. We do this by 1) valuing businesses one at a time and looking for those (usually) good businesses that are trading at prices we think offer a discount and 2) keeping an eye on the macro picture and attempting to keep the portfolios away from areas that look particularly poised for trouble. Typically this has resulted in smoother sailing, however over the past 6-9 months results have been mixed.
During the quarter, the fund's equity only results in both April and June were roughly in line with the index performance. In May however, our equities did worse than the index (-7.9% vs. MSCI ACWI -5.9%). Underperforming on the downside is not something we expect. Quite a few of our top holdings were weak, especially in May - including AIB Group, Astellas Pharma and BMW. The good news is that in most cases we consider these price drops to be temporary, and are still happy to hold on to them. When we analyze performance, we are struck by the dichotomy between both value vs. growth and also small vs. large stocks. Our benchmark index is the MSCI All Country World Index, but when we look at a broader range of indices on the chart below you can see a pretty wide gap. The market momentum is clearly being driven by expectations of low rates and stimulus to continue. This makes value investing especially difficult. We are finding more and more valuations being pushed up by low rates. Those securities that appear cheap most likely have warts - either they are heavily cyclical, their space is being disrupted, or the business is in bad shape. Thus, we remain cautious, patient and ready to pounce when good value presents itself.
Performance Information (as of 6/30/19)
Our equities failed to keep up with the benchmark returning 2.7% for the Quarter vs. 3.6% for the Index. Our Consumer Discretionary names contributed the most to return by sector adding 0.9% led by high end watch and jewelry company Compagnie Financiere Richemont, followed by Industrials adding 0.6%. Our Energy exposure hurt the portfolio by -0.4% with two of our larger holdings Cimarex Energy Co. and Schlumberger NV having a bad quarter. Health Care also detracted slightly from results by -0.2%. Switzerland was our top performing country adding 0.7%. Despite continuing Brexit worries, the U.K. contributed 0.5% as we received good news on Millennium and Copthorne Hotels. City Developments substantially raised its bid to take the company private, thus more in line with our assessment of the company's value - resulting in the stock price to rise by over 46% during that quarter. Our China exposure hurt the portfolio by -0.3%, as did our exposure to Ireland, -0.2% due to a difficult quarter for AIB Group.
In terms of asset class contribution, Gold showed some sparkle contributing 0.6%, as real interest rates remain low and new expectations of the Federal Reserve cutting interest rates arose, resulting the in US Dollar showing some weakness. Our gold exposure increased slightly to 6.2% through appreciation. The fixed income portion of the portfolio remains small 2.3% and detracted slightly during Q2 at -0.04%. These bonds are primarily high yield energy related names.
Due to a weaker U.S. Dollar, our hedges detracted -0.04% over the quarter. The biggest changes in the currency hedges are that in mid-May we initiated a hedge 50% vs. the British Pound to protect the portfolio from currency swings as we wait for the transaction on Millennium and Copthorne to finalize. We also increased our hedge vs. the Korean Won from 40% to 52%. The rest of the hedges remain largely unchanged: Australian Dollar 40%, Euro 10%, Japanese Yen 25%.
Our equity exposure came down from 61.1% at the start of the Quarter, to 59.8% as of June 30, 2019. This is due to some trimming of top quality names that have reached our assessment of their intrinsic value. Names like Mastercard, Bureau Veritas, Airbus, Sodexo, and Nestle have had great performance and we are happy to hold on to some of our position, but for risk control purposes we think it's prudent to keep position sizes in line. As such the cash position inched up to 31.8% about a 1% increase from the end of Quarter 1.
Today's investment landscape certainly does not make it easy to be a value investor! The gap between value and growth reminds us more and more of the late 1990's. Of course, history does not repeat itself but often rhymes. As we look over the holdings in the fund we do believe there are genuine discounts which should be eventually recognized. We continue to believe that caution remains in order - though we acknowledge that the party could certainly go on for an unspecified amount of time. With China remaining as worrisome as ever, valuations continuing to be pushed up, and signs of economic weakness starting to percolate we think relying on time tested analysis one company at a time still makes the most sense. As we are shareholders too, we are most concerned with seeing wealth continue to compound over the long term, rather than worry about relative results in the short term. We thank you for your patience and continued support.
The views expressed in this document reflect those of the portfolio manager(s) only through the end of the period as stated on the cover and do not necessarily represent the views of IVA or any other person in the IVA organization. Any such views are subject to change at any time based upon market or other conditions and IVA disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for an IVA fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any IVA fund. The securities mentioned are not necessarily holdings invested in by the portfolio manager(s) or IVA. References to specific company securities should not be construed as recommendations or investment advice.
This article first appeared on GuruFocus.
