IVA Worldwide Fund Q1 Letter: Artificial pricing in the bond market

IVA Worldwide Fund Q1 Letter:  Artificial pricing in the bond market

IVA Worldwide Fund review for the first quarter ended March 31, 2015.

The IVA Worldwide Fund Class A (NAV) (“the Fund”) ended the quarter on March 31, 2015 with a return of 1.49% versus the MSCI All Country World Index (“Index”) return of 2.31%. Since inception on October 1, 2008, on an annualized basis, the Fund returned 10.32% versus the Index return of 8.09% for the same period.

IVA Worldwide Fund: Global equity markets

Global equity markets delivered a moderate gain this quarter despite some big market developments. In January, the Swiss Central Bank announced they would abolish its peg between the Swiss franc and the euro, which resulted in the Swiss franc appreciating significantly against the euro. Additionally, the European Central Bank announced they would launch a quantitative easing program in March in order to boost the region’s inflation rate. This resulted in the euro falling significantly against the U.S. dollar, at one point to a 12 year low. Lastly, the World Bank cut its forecast for global growth in January, warning that the world economy remained overly reliant on the U.S. recovery.

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For some time now, we have neutralized part of our foreign exchange risk by being partially hedged against several currencies (the euro, Japanese yen, South Korean won, and Australian dollar). This has helped to offset recent losses from the strong U.S. dollar, and this quarter our currency hedges contributed 0.7% to performance, mostly from our euro hedge. We reduced our hedge against the euro from 61.6% last quarter to 30.2% this quarter as we became more agnostic on the euro. As of March 31, 2015, our currency hedges were: 60.4% Japanese yen, 40.7% Australian dollar, 30.7% South Korean won, and 30.2% euro.

IVA Worldwide Fun: Portfolio holdings

Although we underperformed the benchmark this quarter due to our meaningful cash exposure and negative performance of our fixed income holdings, which were impacted by a strong U.S. dollar, we continued to benefit from good stock picking. Over the quarter our equities averaged a gain of 3.2% versus those in the Index* averaging a return of 2.3%. Our Japanese equities added the most to our return, 1.1%, as our stocks averaged a gain of 14.5% compared to those in the benchmark averaging a gain of 10.2%. Our stocks in South Korea also outperformed those in the benchmark and added 0.3% to our return, led by gains from Samsung Electronics Co., Ltd. Conversely, one area that hurt us this quarter was our U.S. stocks. They averaged a return of -1.6%, compared to those in the benchmark which averaged a gain of 1.2%, and detracted -0.4% from our return led by poor performance from DeVry Education Group Inc., a for-profit higher education company in the consumer discretionary sector. We believe this company is suffering unfairly from issues plaguing its competitors and we think many investors fail to recognize the quality of DeVry’s medical and nursing schools, thus we took advantage of the share price weakness to add to our position. Additionally, our stocks in the United Kingdom detracted almost –0.1% from our return. By sector, our health care stocks performed well, averaging a gain of 18.1% and adding 0.6% to our return, due to a solid gain from Astellas Pharma Inc. We also benefited from good stock picking in industrials as our stocks there averaged a gain of 9.6% compared to the Index at 2.0% and added 0.6% to our return. We reduced our exposure to energy over the quarter, from 4.7% to 2.1% at quarter-end, as we sold two stocks and trimmed a few others. Our underweight exposure combined with good stock picking contributed meaningfully to relative results as our energy stocks added almost 0.1% to our return while those in the Index detracted –0.3% from return. On the other hand, performance of our consumer discretionary stocks detracted from absolute and relative results as our stocks averaged a return of -1.3% while those in the Index averaged a gain of 5.7%. Berkshire Hathaway Class A and B weighed on our return this quarter, thus our holding company stocks collectively detracted -0.1% from our return.

We increased our exposure to gold this quarter, from 3.4% to 4.3%, when the price of gold got close to $1,200/ounce in February and March, and as more countries are willing to utilize quantitative easing and let their rates get very low, even negative, either in nominal or real terms. Gold averaged a return of 0.1% this quarter and detracted -0.01% from our return.

IVA Worldwide Fund: Artificial pricing in the bond market

We did not find any opportunities in fixed income this quarter as it remains difficult to find bonds offering “equity-like returns” and we are concerned about the lack of liquidity and artificial pricing in the bond market. Our total fixed income exposure declined to 7.6% from 8.3% last quarter as we sold one bond and tendered another. Our corporate bonds averaged a return of -8.6% this quarter and detracted -0.4% from performance, as our Wendel bonds were hurt by a weak euro. Our sovereign government bonds, mostly of Singapore, averaged a return of -3.8% and detracted -0.1% from our return as they also suffered from a strong U.S. dollar.

Over the quarter we added a small position in China, through a Hong Kong listed stock that operates department stores and owns the majority of the underlying real estate. Besides that we keep looking around the world, one security at a time. In the U.S. we still view most stocks as fully valued; in Europe, we are struggling to find what we consider decent quality stocks trading at attractive valuations; in Asia, we are finding some opportunities in small-cap stocks, specifically in Hong Kong; in emerging markets, we are keeping a close eye on a few names there as some of those stock markets have come down in price, however, many of the companies we think are high quality are trading at elevated valuations. At quarter-end, our equity exposure declined to 50.6% compared to 52.2% last quarter, while our cash exposure rose to 37.3% from 35.8% last quarter, primarily due to selling and trimming some U.S. energy stocks.

In conclusion, we remain cautiously positioned, not just because of the murky economic outlook but more importantly because of valuation. We would rather hold cash today, and pounce when we can identify truly genuine bargains, than overpay for securities. We believe the true return on our cash will be measured a few years from now, based on the bargains we hope to be able to buy with our cash.

*The benchmark equity return excludes gold mining stocks. 


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