The IVA Funds celebrated their five year anniversary on October 1, 2013. We have a dual investment approach at IVA. Over the short-term (12-18 months), we try to preserve capital, while over the longer term (i.e. over a full economic cycle, 5-10 years), we attempt to perform better than our equity benchmark. Over this five year period we delivered on both of these goals. This was achieved because of our emphasis on protecting the downside, good stock picking, and our multi-asset class approach. Since inception on October 1, 2008 through September 30, 2013, on an annualized basis, the IVA Worldwide Fund Class A (NAV) returned 11.73% versus the MSCI All Country World Index return of 7.71%, and the IVA International Fund Class A returned 11.44% versus the MSCI All Country World (ex-U.S) Index return of 6.26%.
IVA Funds on a Morningstar risk-adjusted return basis
Additionally, as of September 30, 2013, both Funds performed well on a Morningstar risk-adjusted return basis and compared to their peers as defined by Morningstar. The IVA Worldwide Fund Class A (NAV) delivered a 10.33% risk-adjusted return for the five year period, ranking 2 out of 303 Funds (IVA Worldwide Fund Class I ranked 1 out of 303 Funds) in the Morningstar world allocation category. The IVA International Fund Class A delivered a 10.04% risk-adjusted return over the same period, ranking 6 out of 64 Funds (IVA International Fund Class I ranked 5 out of 64 Funds) in the Morningstar foreign small/mid blend category.
Our ability to protect on the downside was a large contributor to our relative outperformance over this five year period. Minimizing losses is mathematically one of the surest and best ways to compound wealth. As Charles de Vaulx says, "If we succeed at minimizing losses, hopefully the gains will take care of themselves." To illustrate this concept, the largest drawdown for the MSCI All Country World Index over the past five years occurred from October 2, 2008 through March 9, 2009. Over this period, the Index fell -40.95% yet the IVA International Fund Class A fell by only -8.80%. The Index has to gain 69.36% to get back to where it was on October 2, 2008 while the IVA Worldwide Fund Class A (NAV) only has to gain 9.65%. Furthermore, since inception through September 30, 2013, the IVA Worldwide Fund captured 39.55% of the downside yet 65.19% of the upside, and the IVA International Fund captured 32.55% of the downside and 58.35% of the upside.
We know that good stock picking is a crucial part of achieving our goals. Because of our emphasis on capital preservation, we have a bias towards investing in what we view as quality businesses and look for those with strong balance sheets, good competitive positioning, and those with quality management who are good capital allocators. Since we live in such an uncertain world with so many "unknown unknowns," we always ask ourselves "what can go wrong," which is why we not only calculate an intrinsic value but also a worst case scenario. Even though we seek to outperform an equity benchmark over the long-term, it is our multi- asset class approach that helped mitigate overall portfolio volatility and helped protect the portfolio on the downside, especially over the short-term. We like the flexibility to invest across different asset classes, and also sectors and geographies, depending on the opportunity set. To us, constructing a well-diversified portfolio is a risk management tool and we pay very close attention to individual position size as well as overall country and sector exposures. We have the advantage of being flexible in our approach and view cash as a valid asset class that is derived from the bottom up when we can't find enough securities that offer a sufficient "margin of safety." Additionally, cash acts as the ammunition to buy future bargains, in addition to helping to protect the portfolio in down markets.
Investments in gold bullion
We also hold gold bullion, at times, which serves an important purpose in our portfolio by acting as a hedge against extreme outcomes, inflation or deflation. Since inception, gold bullion has contributed nicely to both Funds' returns.
At times, we find opportunities in fixed income that can offer us "equity-like returns" while at the same time helping to minimize volatility. In 2008/2009, we found a number of corporate bonds yielding, on average, over 10% and at their peak they comprised 34.2% of the IVA Worldwide Fund on March 31, 2009 and 22.6% of the IVA International Fund on June 30, 2009.
An important pillar of our investment strategy is the willingness to make big negative bets, i.e. have nothing or little of what has become big in the benchmark. Two examples of this over the past five years would be our avoidance of emerging markets, particularly the BRICs (Brazil, Russia, India, China), and financials. For years now, we viewed most emerging markets as overvalued and we could not get comfortable with the corporate governance in these countries. And as we have seen, high economic growth does not always translate to good stock market performance. We have also, for the most part,