Charles De Vaux’s IVA Worldwide Fund Q2 Letter
The IVA Worldwide Fund Class A (NAV) (“the Fund”) ended the quarter on June 30, 2014 with a return of 2.85% compared to the MSCI All Country World Index (“Index”) return of 5.04%. This brings our year-to-date return to 5.33% versus the Index return of 6.18% for the same period.
Global equity markets continued to move higher this period with the S&P 500 Index reaching a record high close in mid-June despite a still murky economic picture. Towards the end of the quarter, it was announced that U.S. GDP growth fell -2.9% in the first quarter of 2014 and the Bank for International Settlements (BIS) warned in its annual report published in June that “buoyant financial markets are out of sync with the shaky global economic and geopolitical outlook.”
IVA Worldwide: Discovering new securities
Discovering new securities to buy remains difficult because we view equity markets as fully valued; however, we continue to search stock by stock. Over the quarter we found a few opportunities in equities, namely in South Korea, the U.S., and in technology, which brought our equity exposure up to 52.1% on June 30 from 51.3% on March 31. Since a few securities reached or are close to what we view as their intrinsic value, we trimmed or sold those, mostly in U.S. energy names as these stocks were up 25% year-to-date. Our cash exposure totaled 34.7% at quarter-end. We remain comfortable with our cash position despite rising markets and we believe that to see the real return on our cash, one will have to see how we put it to work years from now. Only then can the true return on cash be fully understood and measured.
IVA Worldwide: Stock picking
This quarter, we continued to benefit from good stock picking as our equities averaged a gain of 5.9% versus those in the Index gaining 5.0%1. Our stocks have also outperformed year-to-date, up 11.1% versus the Index up 6.1%1. Stocks in the U.S. added the most to our return this quarter, 1.5%, by averaging a gain of 6.2% versus those in the Index up 5.1%. We benefited from good performance from a number of energy stocks, in particular, a top 10 position. In addition, our energy stocks were the top performing sector this quarter and collectively contributed 1.1% to our return by averaging a gain of 15.6% versus those in the Index that were up 11.7%. Our energy exposure (6.8% at quarter-end) is comprised of oil and gas companies, primarily based in the U.S., involved in exploration and production. The next top sector contributing to our return was industrials, which averaged a gain of 8.2% and added 0.5% to our return, helped by solid performance from a Japanese stock. Overall, the Fund’s holdings in Japan were also key contributors to return. Our Japanese stocks added almost 1.0% to our return this quarter as they averaged a gain of 11.8% versus those in the benchmark at 6.7%. A couple countries marginally detracted from our return this quarter. Together, Belgium, China, Finland, and Germany detracted about four basis points (-0.04%) from our return. There were no sectors that detracted from our return this period; however, some positions in the technology sector worked against us making this group the largest detractor from relative results (average return of 0.2% versus 6.1% respectively). Specifically, one of our holdings announced in May that it sees fiscal year (FY) 2014 revenue and earnings per share to be at the lower end of its previous range which had a negative effect on the share price. We took advantage of this short-term setback and added to our position as we believe their software business appears very stable with high market share and customer loyalty.
IVA Worldwide: Gold bullion performance
Over the quarter, especially in June, gold bullion performed well by averaging a return of 3.6% and adding 0.1% to our return. We remain comfortable with our gold allocation of 3.1% at quarter-end and believe it continues to serve as a good hedge against extreme outcomes (inflation or deflation).
We did not find any new opportunities in fixed income this period, therefore our corporate bond exposure totaled 6.2% and our sovereign bond exposure totaled 4.0% at period end. Collectively fixed income added 0.1% to our return this quarter.
Over the period our technology exposure rose to 10.9% from 10.0% on March 31. We added a new position in a technology company in South Korea. We believe this company has a strong competitive position along with a low cost structure. Furthermore, the company has a substantial amount of cash and financial investments on the balance sheet, currently has a high return on equity, and trades at low multiples of our estimated normalized profits. The rest of our technology exposure is comprised of a number of uncorrelated companies that operate in a variety of business lines: search and advertising, payment processing, personal computers, software, outsourcing and IT services. So while our exposure to this sector may seem high, we believe it is well diversified.
IVA Worldwide: Japanese equity markets
In Japan, equity markets are having a slower start to this year, following the Nikkei 225 Index rising over 50% (in Japanese yen) in 2013. We are pleased with our stock picking in Japan year-to-date as our stocks there averaged a gain of 12.9% versus those in the Index at 0.7%. We think this is mostly due to the types of companies we own; small and mid-cap, local companies that are undiscovered or misunderstood, and exposed primarily to the local economy, not exports. Despite the strong equity market performance last year, we still think some companies remain reasonably priced in Japan and over the quarter we added to a few existing positions that we think are still attractively valued, bringing our Japanese equity exposure up to 8.8% from 8.0% last quarter. In the U.S., we think large and mega-cap stocks are more fairly valued than small and mid-caps, which we believe are overvalued. We bought two equities in the U.S. this quarter and added to a couple existing positions, but since we sold or trimmed a few others, our exposure declined to 24.7% at quarter-end. As of June 30, 2014 our currency hedges were: 60.1% Japanese yen, 46.0% euro, and 28.6% South Korean won, and collectively they detracted about -0.1% from our return this quarter.
Even though this investment environment (low interest rates, high corporate profit margins) might tempt some portfolio managers to change their investment thinking, at IVA, we continue to stay true to our discipline. Our primary focus is to preserve capital and attempt to deliver a solid absolute return, in excess of nominal GDP growth, by only investing in securities that we believe offer a sufficient margin of safety. We believe too many imbalances still exist in the global economy and there is a reason why interest rates around the world are so low today. 1The benchmark equity return excludes gold mining stocks.
IVA Worldwide: Investment returns
Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. Returns shown are net of fees and expenses and assume reinvestment of dividends and other income. The investment return and principal value will fluctuate so