IVA Worldwide Fund annual review for the period ended December 31, 2014.
The performance of global equity markets was dispersed this year with U.S. equities performing well along with indices in China, while other major International markets suffered, especially with their performance measured in U.S. dollars. The Federal Reserve ended its quantitative easing program in October 2014, and in the latter half of 2014 we saw the U.S. dollar strengthen significantly against all major currencies while the price of crude oil fell drastically, sliding to a five year low. Broadly speaking, the global economic recovery is being led by the U.S. while economic conditions in Japan, Europe, and China have weakened. Despite Japan ramping up their quantitative easing program, it is struggling to hit its 2% inflation target and it slipped into a recession in November after two quarters of negative gross domestic product (GDP) growth. Europe continues to struggle with low inflation and slowing growth, thus the European Central Bank seems willing to expand its balance sheet in 2015 in an attempt to boost lending and avoid deflation. And growth in China continues to slow.
It wasn’t a smooth ride for global equity markets as they exhibited quite a bit of volatility this year: from late January to early February 2014, from late July to early August 2014, from the beginning of September to mid-October 2014, and in the first half of December 2014. We capitalized on the market volatility this year by finding some new opportunities and adding to existing positions when their share price fell. Over the year, we built meaningful positions in Samsung Electronics Co., Ltd. (technology, South Korea) and News Corporation (consumer discretionary, U.S.), and also added positions in Henderson Land Development Co. Ltd. (financials, Hong Kong) and Altran Technologies SA (technology, France) in both Funds. Our equity exposure totaled 52.2% in Worldwide and 57.5% in International at year-end.
IVA Worldwide Fund Performance
The IVA Worldwide Fund Class A (NAV) returned 3.20% for the year, marginally underperforming its benchmark, the MSCI All Country World Index with a return of 4.16%. Our solid absolute return this year was largely due to good stock picking, especially in Japan, a smaller allocation to energy stocks, and avoiding some of the benchmark’s losers like stocks in materials, Russia, the United Kingdom, and Germany. Although our high cash position and fixed income holdings muted our return, our equities averaged a gain of 6.6% versus those in the MSCI All Country World Index* returning 4.2%. Our U.S. equities averaged a gain of 13.3% over the year and added 3.3% to our return. A number of our stocks in Japan performed well this year, averaging a gain of 8.8% versus those in the Index which were down -4.1%, and added 0.7% to our return. Conversely, stocks in South Korea detracted -0.3% from our return. Stock picking in Europe (ex-UK) added to relative results as our stocks there only detracted -0.2% from our return versus those in the Index detracting –1.0%. In early July we trimmed some of our energy stocks, which helped mitigate losses later in the year. Our energy stocks only detracted -0.2% from our return year-to-date while those in the Index detracted -1.1%.
The IVA Worldwide Fund’s top five individual contributors to return for 2014:
The IVA Worldwide Fund’s top five individual detractors from return for 2014:
The IVA International Fund Class A (NAV) returned 1.15%, outperforming its benchmark, the MSCI All Country World (ex-U.S.) Index with a return of -3.87%. Our positive return this year was largely due to good stock picking, especially in Japan, avoiding some of the benchmark’s losers like stocks in energy, materials, the United Kingdom, Russia, and Germany, and our cash exposure, which helped to protect the portfolio on the downside. Our equities averaged a gain of 1.0% versus those in the MSCI All Country World (ex-U.S.) Index* returning -3.8%. Performance was fueled by our stocks in Japan, which averaged a gain of 7.3% versus those in the benchmark which were down -4.1%, and added 1.3% to our return. We also benefited from good stock picking in Hong Kong as our equities averaged a return of 10.1% versus the Index at 2.4% and contributed 0.3% to our return. Although France detracted -0.5% from our return due to poor performance from a few industrials stocks, our stock picking in Europe (ex-UK) added to relative results with our stocks only detracting -0.5% from our return versus those in the Index detracting -1.9%. South Korea also detracted -0.4% from our return.
The IVA International Fund’s top five individual contributors to return for 2014:
The IVA International Fund’s top five individual detractors from return for 2014:
A number of our international stocks and bonds were hurt by weakness in their local currency, especially in Japan and France, however, both Funds benefited from being partially hedged, particularly against the yen and euro, as our currency hedges added back 1.5% to the Worldwide Fund return and 2.8% to the International Fund return this year. We increased our hedges against the euro and yen this year. In the Worldwide Fund, our hedge against the euro increased to 61.6% from 39.2%, and our hedge against the yen rose to 60.4% from 50.0%. In the International Fund, our hedge against the euro increased to 56.5% from 29.2%, and our hedge against the yen rose to 70.5% from 60.0%.
Our corporate bonds represented 5.0% of the Worldwide Fund and 5.6% of the International Fund at year-end. A number of our bonds were called away this year as most of our exposure is remnants of our investments from 2008/2009. Our corporate bonds averaged a return of -3.5% and detracted -0.2% from the Worldwide Fund return. In the International Fund, they averaged a return of -6.8% and detracted -0.4% from return.
IVA Worldwide Fund trims sovereign bond exposure
We trimmed our sovereign bond exposure this year in both Funds as we are concerned about a possible hard landing in China and the effect that might have on Asian currencies. We reduced our exposure to the Singapore dollar bonds and eliminated the Hong Kong dollar bond. In the Worldwide Fund, our exposure fell to 3.3% at year-end and in the International Fund, our exposure decreased to 4.9% at year-end. Our sovereign bonds, mostly of Singapore, detracted -0.2% from both Funds’ return this year as they were impacted by the strength of the U.S. dollar.
Since inception of the Funds, gold bullion has been an important part of our portfolios that we view as a hedge against extreme outcomes, inflation or deflation. Over the year, the price of gold declined almost 2%, detracting -0.04% from the Worldwide Fund return and -0.1% from the International Fund return. We remain comfortable with our exposure to gold, 3.4% in Worldwide and 3.9% in International as of December 31, 2014, and added to it this year when the price of gold fell below $1,200 an ounce.
Many asset classes and securities have seen their valuations go up significantly over the past few years driven in part by low rates in developed countries, quantitative easing, and high corporate profit margins. It remains a struggle for us to find genuine bargains, i.e. stocks offering a meaningful discount to our estimate of its intrinsic value. Thus our cash exposure remains 35.8% in the Worldwide Fund and 27.6% in the International Fund at year-end. However, cash can be a powerful tool: it acts as a buffer when markets correct and it provides the ammunition to buy future bargains.
Even though we view many stocks today as fully valued, we believe there are stock picking opportunities for us to uncover. The more volatile markets are, the better we, as active managers, should do. As Charles de Vaulx says, “We are not market forecasters at IVA, not only because one cannot forecast but more importantly because there is no need for it, the market is here to serve us.” What matters to us most at IVA is: valuation, understanding businesses, and recognizing the risks. We will continue to focus on delivering absolute returns through good stock picking, avoiding the losers, and always insisting on a margin of safety. With over six years since inception, the Funds continue to build solid track records, and we thank you for your continued confidence and support.
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