Fears of trade wars and accelerating inflation unsettled international investors in the first quarter of 2018, impacting local returns in most developed regions. The Morgan Stanley Capital Index (MSCI) benchmark for Europe was down 4.35% and the Pacific benchmark was also down 4.14%. Emerging markets were mixed in general, but the MSCI Emerging Market local index was up 0.72%. U.S. investors abroad received some relief from the movement of the U.S. dollar which weakened versus major currencies such as the British pound, the Japanese yen and the euro.

Despite a tough March, Frigate, our international ADR portfolio focused on capital appreciation, yielded a positive net return of 6.27% for the first quarter of 2018 versus a negative 2.63% return for the S&P ADR benchmark. In light of pending steel tariffs, Swiss-based ABB, a global supplier of power and automation parts, detracted from performance. German-based Bayer also had a difficult quarter as it strived to acquire crop-science company Monsanto while calming anti-trust objections. On the positive side, Frigate benefited from its holding in Deutsche Boerse, which experienced good growth in trading volumes and U.K. pay-TV provider Sky PLC, which is being bid for by Fox and Comcast. During the quarter, Frigate experienced only small changes. We added to Dublin- headquartered biopharmaceuticals Shire Plc, which is now being eyed by Takeda, a Japanese pharmaceutical company. In addition we trimmed DBS Group, a Singapore financial company, which had become a larger part of the portfolio due its good performance.

Since inception on July 1, 2013, Frigate has returned a cumulative net 32.2% versus 28.9% for its benchmark through March 31, 2018.

More staid Treasure Harbor, our international ADR portfolio focused on dividend income, eked out a small gain for the first quarter of 2018 – it was up a 1.15%, whereas its benchmark was -1.07%*. The major detractors to performance were in Canada, whose stock market suffered from a slowing economy and tariff concerns. USD performance of Pembina Pipeline and two telecommunications companies Rogers and BCE were exacerbated by the weakening Canadian versus U.S. dollar. On the other hand, Ambev, the 4th largest beer producer in the world benefitted from a rebound in the Brazilian market and a good earnings report. On the heels of good earnings and optimistic outlooks, China Construction Bank outperformed its market, and U.K. drug company Glaxo did well as investors showed appreciation for their acquisition of Novartis’s stake in their consumer joint venture. At the beginning of the quarter we trimmed commodity maker Rio Tinto, which had become a large part of the portfolio and in February, took advantage of market volatility, to reinitiate a position in Swiss chocolate manufacturer Nestle.

Since inception on October 1, 2013, Treasure Harbor has a cumulative net return of 5.6% versus its blended benchmark of 6.02% through the first quarter of 2018.

Yellowtail, our small/medium cap portfolio, was down 2.42% for the quarter and underperformed its benchmark which was up .04%**. Among the detractors were Japanese heavy equipment manufacturer Sumitomo Heavy and German-based Wacker Chemie, both of which gave back some of their 2017 gains. DIA (Distribuidora Internacional de Alimentacion SA) continued its poor performance as sales of its food products improved in emerging markets but did not do as well in its home Iberian markets where it is remodeling its stores. On the other hand, Spanish-based EBRO foods was a positive contributor to performance as was French food catering company Elior. Also in France, dependency care provider Orpea continued to perform well. Certainly, transaction costs were a drag on performance- historically there has been little turnover in Yellowtail, but this year we trimmed 7 positions that grew into large parts of the portfolio. In addition, the entire position of African Food Company Tiger Brands was eliminated following a listeria outbreak, and a position in Minebea Mitsui, a Japanese electronics company, was initiated.

Although this was not Yellowtail’s best quarter, since inception it on 12/1/2014, it has returned cumulatively 40.16% versus the benchmark VSS ETF of 33.47%.

Volatility is accompanying us into the second quarter as geopolitical concerns are layered on top of uncertainties in the directions of inflation, interest rates and legislation. We will try to selectively exploit this volatility by purchasing companies that are temporarily out of favor, while selling those that have exceeded their fair value.

We thank you for your trust in IIM and for taking this journey with us.

– Retz Reeves, CFA

*15% SPDR Emerging Markets Dividend ETF & 85% SPDR S&P International Dividend ETF
**Vanguard FTSE All-World ex-US Small-CAP ETF