Value Investing

GMO 1Q15 Performance Update

GMO’s quarterly performance update for the first quarter ended March 31, 2015.

GMO Global Focused Equity Strategy – Quarterly Attribution

Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction
costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income.
The Global Focused Equity Strategy climbed 2.7% net of fees for the quarter. The Strategy’s reference benchmark, MSCI All Country World index rose 2.3%.

Positive contributions came from holdings in Toll Holdings in Australia, Peugeot in France, and Anthem and Capital Product Partners in the United States. Australian logistics company Toll received a buyout offer from Japan Post at a 50% premium to its previous value, vindicating our long-held position in the company. Toll was slowly restructuring while waiting for a cyclical upswing in business volumes. In addition to investors becoming excited about European recovery, positive auto data, especially out of Spain, propelled the performance of auto makers. This was particularly true for Peugeot, which is geared to Europe. Anthem continues to perform well as regulatory uncertainty around managed care companies subsides, as well as strong demand for their services, and the company’s attractive capital return and reasonable valuation. Capital Product Partners’ exposure to improving volume and pricing power in the product tanker markets as well as its attractive 10% dividend yield helped the name outperform.

Negative contribution came from National Oilwell Varco (NOV) in the United Sates, Bluescope Steel in Australia, and Gran Tierra Energy in Canada. The continued uncertainty facing the oil markets negatively impacted our shares in NOV, an oil services firm, and Bluescope fell with the declining price of steel. Additionally, Gran Tierra, a Canadian based exploration and production company with Latin American assets, sold off on negative well results that prompted a write-down in 2P reserves (proven reserves + probable reserves).

GMO Global Focused Equity Strategy

GMO International Active EAFE Strategy – Quarterly Attribution

The International Active EAFE Strategy gained 5.7% net of fees in the first quarter; the Strategy was 0.8 percentage points ahead of the MSCI EAFE index, which rose 4.9%.

Country and currency allocation was ahead of the benchmark. Our positioning in Europe added returns, particularly because we were less exposed to the United Kingdom than the benchmark. In addition, while our weight in Europe is slightly lower than that of the benchmark, we have an overweight position in the eurozone. In January we hedged the account such that the exposure of the portfolio to the euro was closer to that of the benchmark, and the hedge against the euro was positive in the quarter.

Stock selection also beat the benchmark in the first quarter. Holdings in Europe, Australia, and Hong Kong outperformed.

In Europe, performance was led by Peugeot, Banca Popolare di Milano, and Deutsche Telekom. In addition to investors becoming excited about European recovery, positive auto data, especially out of Spain, propelled the performance of auto makers. This was particularly true for Peugeot, which is geared to Europe. Italian cooperative banks, including Milano, are now required to change their governance structure, which will likely trigger consolidation. The potential benefit to Banca Popolare di Milano drove up the share price. European telecom companies did well, especially Deutsche Telekom. There are several reasons we like these names, among them that that the consolidation of the industry within markets has started, and their regulatory environment has finally become a tailwind after many years of holding them back. These companies stand to benefit from a “market repair” scenario, where a data consumption boom drives a rebound in the ARPU.

Australian logistics company Toll received a buyout offer from Japan Post at a 50% premium to its previous value, vindicating our long-held position in the company. In Hong Kong, Cheung Kong Holdings, historically a holding company for the operating assets of famed investor Li Ka Shing, announced a reorganization that will consolidate all of the property assets into one listed company, and all non-property into a separate listing. This could mean a narrowing of the large discount to NAV at which the stock has traditionally traded.

On the negative side, stock selection in Japan hurt returns. Hitachi Ltd. fell on news that it would buy Italian company Finmeccanica’s rail and signal assets. While the market had anticipated the transaction, the price was a negative surprise.

GMO International Active EAFE Strategy

GMO International Active Foreign Small Companies Strategy – Quarterly Attribution

The International Active Foreign Small Companies Strategy outperformed the S&P Developed ex-U.S. Small Cap index by 2.1 percentage points in the first quarter, gaining 6.5% net of fees while the benchmark rose 4.4%.

Country and currency allocation was ahead of the benchmark. Our positioning in Europe added returns, particularly because we were more exposed to Italy than the benchmark. Less exposure in Canada also helped performance. In addition, while our weight in Europe is slightly higher than that of benchmark, we have a larger overweight position in the eurozone. In January we hedged the Strategy such that the exposure of the portfolio to the euro was closer to that of the benchmark, and the hedge against the euro contributed positively in the quarter.

Stock selection also beat the benchmark in the first quarter. Holdings in Europe, Japan, and Australia outperformed. In Europe, performance was led by Peugeot and Banca Popolare di Milano. In addition to investors becoming excited about European recovery, positive auto data, especially out of Spain, propelled the performance of auto makers. This was particularly true for Peugeot, which is geared to Europe. Italian cooperative banks, including Milano, are now required to change their governance structure, which will likely trigger consolidation. The potential benefit to Banca Popolare di Milano drove up the share price. In Japan, Aoyama Trading used its stockpile of cash to initiate a share repurchase. Australian logistics company Toll outperformed because it received a buyout offer from Japan Post at a 50% premium to its previous value, vindicating our long-held position in the company.

On the negative side, stock selection in Canada hurt returns. Capstone Mining fell as copper prices have been weak due to faltering demand, particularly from emerging markets. Additionally, Gran Tierra Energy, a Canadian based exploration and production company with Latin American assets, sold off on negative well results that prompted a write-down in 2P reserves (proven reserves + probable reserves).

GMO International Active Foreign Small Companies Strategy

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