By Retz Reeves, CFA
Investors in our large cap international Folios were rewarded for their patience in the first half of 2017, while investors in our small-mid cap international Folio continued to enjoy Yellowtail’s performance.
Our International capital appreciation Folio, Frigate, returned 12.1%* net of fees for the first half versus the gross return** of the S&P 500 ADR Index of 10.3%.
From inception on July 1, 2013, Frigate has produced a 22.2% return versus its benchmark return of 19.7%.
Facing competition in proprietary products, both pharmaceutical companies Teva, based in Israel, and Astellas, based in Japan, detracted from performance. Also in Japan, Toyota – facing a stronger yen – reduced 2018 guidance and saw its share price react negatively. Turning in very strong results for us year to date were French luxury goods provider LVMH, the British shares of health and personal care company Unilever and the technology companies Taiwan Semiconductor and German-based SAP.
Treasure Harbor, our international portfolio focused on dividends, returned 11.7% versus 10.9% for its benchmark*** in the first half of 2017.
Since inception on October 1, 2014, Treasure Harbor has returned 3.4% versus -1.2% for the benchmark.
Among the few detractors, it was not surprising that Royal Dutch Shell made the list, but the performance of Australian telecom company Telstra was especially disappointing. Investors are concerned about NBN (National Broadband Network) margins and competition in the mobile market, but for now at least, it appears cost-saving initiates should enable sufficient cash-flow generation to maintain a 7% yield. On the positive side, health and personal care provider Unilever and Spanish Banco Santander were strong performers.
Yellowtail, our small-mid cap international Folio, had a very strong first half, generating a positive return of 18.9% versus its benchmark, the ETF with symbol VSS****, of 15.0%.
Since inception in November of 2014, Yellowtail’s cumulative performance has been 38.5% versus 8.6% for the benchmark.
Detractors from performance included French shares of Societe BIC, the iconic stationary and shaver supplier, and Virbac, an animal health provider. Both of these companies are undergoing some changes in management and we will continue to monitor their progress before making any decisions on our position. London-based generic, injectable and branded pharmaceutical provider Hikma is under a more serious review after the FDA rejected one of their filings and the company downgraded estimates for the year.
On the positive side, shares in French companies Orpea, a European leader in dependency care, and Groupe SEB, a small domestic equipment manufacturer of such brands as Krups and Moulinex, continued their strong performance. Also based in France, in-vitro diagnostic and microbiology testing solutions manufacturer BioMerieux, as well as Nichirei – one of Japan’s leaders in frozen food production and cold-storage warehousing – were very additive.
An improving GDP outlook in Europe and receding risks of sovereign defaults are cited as reasons for increased investor interest abroad. Certainly returns to U.S. investors in international stocks were enhanced by the weakening of the U.S. dollar versus other major currencies. This enhancement risks erosion over time if a contra currency’s strengthening erodes the competitiveness of companies domiciled in its host’s country. I don’t believe this is an immediate threat, however, as many currencies are still way below their respective highs.
Notwithstanding geopolitical concerns, I believe the economic environment, valuations and opportunity set continue to bode well for investing internationally. I intend to keep our international portfolios diversified across industry and country, and I will continue to analyze our current holdings and opportunities with the expectations that stock selection will enhance portfolio returns.
Please don’t hesitate to write or call Cale or myself if you have any questions. In the meantime, thank you for investing alongside your IIM team.
– Retz Reeves, CFA
* All returns for benchmarks, indices and Folios are estimated and unaudited
** Gross returns do not include fees or taxes on international dividends and assume gross dividends are reinvested
*** 15% SPDR Emerging Market Dividend ETF and 85% SPDR S&P International Dividend ETF
**** Vanguard FTSE All-World ex-US Small-CAP ETF
Disclaimer: This post nor any of the material linked to herein in any way constitutes investment advice. Historical performance data above represents performance results as reported by the portfolio identified. Performance results are for illustration purposes only. Historical results are not indicative of future performance. Positive returns are not guaranteed. Individual results will vary depending on market conditions and timing of initial investment. Investing may cause capital loss. The publication of this performance data is in no way a solicitation or offer to sell securities or investment advisory services.