Charles De Vaulx from The IVA Worldwide Fund Q4 commentary
The IVA Worldwide Fund Class A (NAV) ended the quarter on December 31, 2013 with a return of 3.80% compared to the MSCI All Country World Index (“Index”) return of 7.31%. This brings our year-to-date return to 16.93% versus the Index return of 22.80% for the same period. We witnessed another quarter of equity markets trending higher, despite news that the Federal Reserve would begin to taper its bond buying program in 2014 and despite unremarkable economic growth around the world. We found a few opportunities this quarter in what we view as reasonably priced U.S. and European stocks, which helped to offset some trimming in equities that we believe are close to full valuation. Therefore our equity exposure was unchanged over the period at 52.8%.
Our underperformance this quarter versus the benchmark was due to our multi-asset class approach with our cash exposure (31.7% at quarter-end) being the largest detractor from relative results. While we believe our exposure to gold bullion (3.0% at quarter-end) is a good hedge against currency debasement in our portfolio, especially with our cautious positioning and cash allocation, it was one of the largest detractors from our return this period as it averaged a return of -9.3% and detracted -0.3% from our performance. Even though our corporate bonds performed well on an absolute basis, averaging a gain of 4.0% led by a few euro denominated bonds, they were among our detractors from relative results along with our sovereign bonds, which averaged a return of -0.4%. Collectively, fixed income added about 0.3% to our return this period, with our corporate bonds representing 6.8% of the portfolio and our sovereign bonds comprising 5.7% of the portfolio at quarter-end. Even though it was our exposure to cash, gold and fixed income that led to our underperformance this quarter in rising markets, it is these assets that we believe help protect the portfolio in down markets and help mitigate overall portfolio volatility.
Over the quarter our equities outperformed the equities in the benchmark (7.6% versus 7.4% 1 ), as we benefited from strong performance by a Japanese health care company as well as good stock picking in France. Our equities there averaged a gain of 10.5% versus the Index at 5.4%, and added 0.8% to our return. Overall, our European equities (ex UK) performed well on both an absolute and relative basis, returning on average, 8.5% vs. the Index at 8.1% and contributed over 1.0% to our performance. The largest contributor to return came from our U.S. stocks, which added 2.3% to our return, due to solid performance from a couple technology holdings. However, on a relative basis, we could have benefited from a larger allocation as U.S. stocks represent almost 50% of the benchmark and added 4.8% to the benchmark return. Conversely, the share price of our one holding in South Africa fell following news it was under investigation, so our exposure to South Africa detracted -0.2% from our return. By sector, our technology and consumer discretionary stocks added the most to our return, collectively 1.9%, versus the benchmark adding 2.3%. While our security selection in these two sectors was strong, our underweight exposure to technology stocks hurt us. The only sector to marginally detract from our return this quarter was utilities, -0.02%.
As mentioned above, we are finding opportunities on a case-by-case basis, some in the U.S. and some in Europe. This quarter we added a few stocks in the U.S. within the energy and technology sectors, and we increased our exposure to a consumer discretionary company in the U.S. that we view as reasonably priced, non-cyclical, and high quality with a strong balance sheet. Our U.S. equity exposure rose to 25.1% from 24.1% last quarter, which has helped to balance reducing other equity positions, specifically in the industrials sector, where our exposure fell to 6.5% at quarter-end from 7.5% on September 30.
Finding opportunities in European equities remains difficult and has been for some time, however, we added one small position in a stock in Finland this quarter as well as one in France. We will continue proceeding cautiously in this region as many of the stocks we view as high quality remain expensive, with a number of them trading at all-time highs, and we still think it remains unclear how stable the economic recovery in Europe is. Our exposure to European equities totaled 13.2% as of December 31. At quarter-end our currency hedges were: 50.0% Japanese yen, 49.9% South Korean won, and 39.2% euro. Collectively they added 0.2% to our return this period.
In times like these it is so important for us to ignore the noise and remain focused on our investment strategy: delivering absolute returns, minimizing losses, always insisting on a margin of safety, and keeping our portfolios well diversified with cash on hand to take advantage of market volatility.
1 The benchmark equity return excludes gold mining stocks.
Past performance does not guarantee future results. The performance data quoted represents past per – formance 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 that an investor’s shares, when redeemed, may be worth more or less than the original cost. To obtain performance information current to the most recent month-end, please call 1-866-941-4482.
Maximum sales charge for the A shares is 5.00%. C shares include a 1% CDSC fee for the first year only. The expense ratios for the fund are as follows: 1.28% (A Shares); 2.03% (C Shares); 1.03% (I Shares). MSCI All Country World Index (Net) is an unmanaged index comprised of 44 country indices comprising 23 developed and 21 emerging market country indices and is calculated with dividends reinvested after de duction of withholding tax. The Index is a trademark of Morgan Stanley Capital International and is not available for direct investment.
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 hold – ings invested in by the portfolio manager(s) or IVA. References to specific company securities should not be construed as recommendations or investment advice.
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