The IVA International Fund Class A (NAV) (“the Fund”) ended the quarter on March 31, 2015 with a return of 3.23% versus the MSCI All Country World Index (ex-U.S.)(“Index”) return of 3.49%. Since inception on October 1, 2008, on an annualized basis, the Fund returned 10.00% versus the Index return of 5.45% for the same period.
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.
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 1.0% to performance, mostly from our euro hedge. We reduced our hedge against the euro from 56.5% last quarter to 30.7% this quarter as we became more agnostic on the euro. As of March 31, 2015, our currency hedges were: 70.4% Japanese yen, 40.6% Australian dollar, 30.9% South Korean won, and 30.7% euro.
IVA International Fund – Portfolio Review
Although we marginally 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 very good stock picking. Over the quarter our equities averaged a gain of 5.5% versus those in the Index* averaging a return of 3.5%. Our Japanese equities added the most to our return, 2.1%, as our stocks averaged a gain of 13.6% compared to those in the benchmark averaging a gain of 10.2%. Our stocks in France also outperformed those in the benchmark and added 0.6% to our return, helped by a solid return from Alten SA. Conversely, one area that hurt us this quarter was our Hong Kong stocks. They averaged a return of -5.4%, compared to those in the benchmark which averaged a gain of 8.2%, and detracted –0.2% from our return led by poor performance from a telecommunications stock as well as Hongkong & Shanghai Hotels Ltd. Additionally, our stocks in the United Kingdom detracted about –0.1% from our return. By sector, our health care stocks performed well, averaging a gain of 12.7% and adding 0.7% to our return, due to strong results from Astellas Pharma Inc. We also benefited from good security selection in technology as our stocks there averaged a gain of 11.4% compared to the Index at 7.0%, and added 1.0% to our return due to good performance from Samsung. On the other hand, a stock in the utilities sector weighed on our return this quarter and detracted almost -0.2% from our return. Additionally, our telecommunications stocks detracted about -0.1% from our return.
IVA International Fund increased gold exposure
We increased our exposure to gold this quarter, from 3.9% to 5.1%, 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 -0.02% from our return.
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 9.5% from 10.5% last quarter. Our corporate bonds averaged a return of -7.8% 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 -3.9% and detracted -0.2% from our return as they also suffered from a strong U.S. dollar.
IVA International Fund – New positions
Over the quarter we added two new stocks, one in Singapore and one in Hong Kong, however, both positions remain small. Besides that we keep looking around the world, one security at a time. 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 56.0% compared to 57.5% last quarter, while our cash exposure rose to 29.1% from 27.6% last quarter, primarily due to selling and trimming some consumer discretionary and consumer staples 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.
