Charles de Vaulx IVA Worldwide Fund Q3 Letter
The IVA Worldwide Fund Class A (NAV) (“the Fund”) ended the quarter on September 30, 2014 with a return of -1.23% versus the MSCI All Country World Index (“Index”) return of -2.31%. This brings our year-to-date return to 4.04% versus the Index return of 3.73% for the same period.
Global equity markets were volatile this quarter, falling from late July to early August and again in September, as the Federal Reserve prepares to end its quantitative easing program and markets digest the possibility of them raising rates earlier than expected as the U.S. economy slowly improves. Also, a few economic indicators released this quarter signaled growth in China is slowing which rattled markets.
We were pleased with the Fund’s performance this quarter and, more specifically, from July 25 to August 7 when the MSCI All Country World Index fell -3.86%. During this time we demonstrated our resiliency in down markets with our Fund returning -1.64% as our cash position served as a buffer. We are also happy with our performance year-to-date as it highlights that our stock picking has been good enough to offset the dilution from our cash exposure which was 36.0% at quarter-end. As long-term, absolute return investors, cash plays a critical role in the portfolio: it is the ammunition to buy future bargains and it helps protect the portfolio on the downside, as demonstrated this quarter.
Over the quarter our equities averaged a return of -2.4% while those in the Index* averaged a return of -2.3%. Our U.S. stocks detracted meaningfully from performance results. They averaged a return of -2.7% versus those in the Index up 0.8%, and detracted -0.7% from our return, mostly due to weak performance from two top 10 positions (News Corp. Class A; Class B and Oracle Corp.) and our energy holdings, which are mostly in the U.S. After rising about 25% during the first two quarters of the year, our energy stocks fell this quarter, averaging a return of -13.0% and detracting about -0.8% from our return. Although we added to some of these stocks in September when their share prices fell, we mostly trimmed in early July and coupled with depreciation, our energy exposure declined to 5.3% at quarter-end from 6.8% last quarter.
On the plus side, our stocks within the health care sector added 0.5% to our return due to strong performance from Astellas Pharma Inc. in Japan. We also benefited from solid results from Berkshire Hathaway, Inc. Class A; Class B in the holding company sector, and that sector added 0.2% to our return. Conversely, our industrials stocks underperformed those in the Index, averaging a return of -6.9% versus -3.9%, respectively, as a few holdings in France and the U.S. weighed on our return. Our stocks in Japan continue to perform well on an absolute and relative basis. Over the quarter, they averaged a gain of 3.6% versus those in the Index -2.3%, and added 0.3% to our return in U.S. dollars. Also, year-to-date, our Japanese stocks are up 16.9% versus those in the benchmark which are down -1.6%. This really highlights how important individual stock picking can be as only about a third of our Japanese stocks are included in the benchmark. We tend to own small and mid-cap local companies in Japan that we believe are undiscovered or misunderstood. Our stocks in South Korea also outperformed, averaging a gain of 1.1% versus those in the benchmark down -7.3%. On the other hand, our stocks in France underperformed this quarter, averaging a return of -9.4% versus the benchmark at -8.5%, however, we took the opportunity to add to a number of existing positions when their share prices fell.
Our fixed income holdings detracted -0.3% from our return this quarter as our corporate bonds averaged a return of -3.7%, our Wendel bonds tempered gains, and our sovereign bonds averaged a return of -2.5%. We trimmed our Singapore dollar government bond exposure, so our sovereign bond allocation declined to 3.4% at quarter-end and one corporate bond was called, so this exposure fell to 5.4% at quarter-end. Gold averaged a return of -9.1% this quarter, falling over -5% in September as the U.S. dollar strengthened, and detracted -0.3% from our return. Our exposure remains modest, 2.8% at quarter-end, and we continue to view it strictly as a portfolio hedge against extreme outcomes. Our Fund benefited from the appreciation of the U.S. dollar as our flexible currency hedging policy paid off. Our currency hedges added 0.9% to our return this quarter. As of September 30, 2014 our currency hedges were: 60.2% Japanese yen, 45.0% euro, 40.3% Australian dollar, and 30.1% South Korean won.
Given the equity market volatility this quarter, we initiated a few new positions and added to some existing positions when their share prices fell yet nothing fundamentally changed to affect our intrinsic value estimate. We added new positions in the industrials and financials sectors, and significantly increased our exposure to News Corporation Class A; Class B, a U.S. based global media company. Additionally, we increased our exposure to DeVry Education Group, Inc. (DVRY), a for-profit education company in the U.S. As a result, our exposure to the consumer discretionary sector rose to 10.6% at quarter-end from 9.4% last quarter. Although we were active this quarter in adding new securities and adding to existing positions, there were a number of positions we trimmed or sold that were close to or reached our intrinsic value estimate, thus our equity allocation was relatively unchanged, 52.0% at quarter-end versus 52.1% last quarter.
Our view today is that most stocks around the world are fully valued, but we still believe there are stock picking opportunities, especially when markets experience volatility like they did this quarter. At IVA, we continue to stick to our investment approach of striving to preserve wealth in real terms over the long-term, always investing in securities that we believe offer a margin of safety, and keeping our portfolios well diversified with cash on hand to take advantage of market volatility. “When the price is right, we will pounce,” says Charles de Vaulx.
* The benchmark equity return excludes gold mining stocks.
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 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: 1.27% (A Shares); 2.02% (C Shares); 1.02% (I Shares).
As of September 30, 2014, the IVA Worldwide Fund’s top 10 holdings were: Astellas Pharma, Inc. (TSE:4503) (3.9%); Wendel 4.375% (XPAR:MF), 4.875%, 6.75% (3.5%); SIGB (Singapore Government) 2.375%, 2.875%, 3.75% (3.3%); Berkshire Hathaway, Inc. (BRK.A)(BRK.B) Class A, Class B (3.2%); Nestle SA (3.1%); Gold bullion (2.8%); News Corporation Class A, Class B (2.3%); Genting Malaysia Berhad (1.8%); Oracle Corp. (1.6%); DeVry Education Group, Inc. (1.6%).
MSCI All Country World Index