Brandes Global Equity Fund commentary for the second quarter ended June 30, 2015.
Brandes Global Equity Fund Commentary
Equity markets worldwide posted mixed results for the second quarter of 2015, as investors continued to navigate the strong cross currents prevalent among economies and markets. In the United States, the S&P 500 Index finished the quarter nearly flat, as investors grappled with growing expectations of an interest rate hike by the Federal Reserve. In Europe, all eyes were on Greece as the country went through tough negotiations over a debt-bailout deal with its troika of creditors, comprised of the European Commission, the European Central Bank (ECB) and the International Monetary Fund. Despite this turbulent environment, investors appeared to have remained relatively calm amid expectations that the Greek crisis may have a limited impact on global markets over the long term. Meanwhile, the ECB raised its forecast for inflation this year, reflecting improving economic conditions, but held its key interest rate steady during the quarter. Elsewhere across the globe, China’s equity markets resumed their upward, yet volatile, trajectory. Investors seemed to welcome the Chinese government’s efforts to boost liquidity and promote stability within the country’s equity markets. Over the past three months, China’s central bank has lowered the amount of cash that banks must hold as reserves and also cut interest rates. After a few difficult quarters, Brazilian equities began to rebound over the last three months. Despite the recent gains, Brandes LP believes valuations for select companies there remain very attractive. For the second quarter, the Brandes Global Equity Fund outperformed its benchmark, the MSCI World Index.
Brandes Global Equity Fund - Performance Contributors
During the quarter, the Fund’s most significant performance contributors were holdings in financials (Switzerland-based UBS AG and U.S.-based Citigroup and AIG), as well as Japanese pharmaceutical Daiichi Sankyo. Daiichi Sankyo rose during the quarter as the company sold its investment in Indian pharmaceutical company Sun Pharma, thus fully exiting its exposure to struggling Indian pharmaceutical business Ranbaxy. In addition, Brazil-based energy company Petrobras helped returns, as its stock price rallied as a result of two positive developments: 1) the company released its audited financial statements during the quarter, which was viewed as a positive move to increase visibility into the business; and 2) the company announced steps to sell off some assets to raise capital and cut capital expenditures to help improve its balance sheet.
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Brandes Global Equity Fund - Performance Detractors
The Fund’s most significant performance detractors during the quarter were primarily holdings in South Korea (conglomerate Samsung, auto maker Hyundai Motor and auto parts manufacturer Hyundai Mobis). The Fund’s South Korean auto holdings declined in the period due to weakness in their home automobile market, as well as decreased growth in emerging markets. However, on the positive side, the Hyundai Motor Group (which includes Hyundai and Kia Motor, as well as Hyundai Mobis) has continued to improve its product quality and brand image over the last several years, according to the J.D. Power 2015 U.S. Initial Quality Study. During the most recent quarter, Hyundai and Kia Motors were ranked in the top four among the top non-premium/luxury brands for the second year in a row. In addition to improving brand quality, we continue to find Hyundai Mobis and Hyundai Motor attractive due to their strong balance sheets, their exposure to attractively growing long term markets, and their attractive valuation multiples.
During the quarter, the Fund sold Japanese automobile manufacturer Toyota Motor. Over the past several years, Toyota has managed to address the recall issue and, consequently, investor sentiment toward the company improved. The company has remained among the global leaders in automobile sales. The yen depreciation has helped the company lower its cost base—enabling Toyota to compete with international peers and improve profitability. The weakening yen, combined with a strong recovery in automobile demand in many markets, especially the U.S. market, led Toyota’s share price to rally significantly over the last year, even outpacing the rise in Japan’s equity market overall. As a result, Toyota appreciated to Brandes LP’s estimate of its long-term intrinsic value and it decided to divest the position during the quarter. However, the Fund continues to hold meaningful positions in several other Japanese (Nissan Motor and Honda) and Korean automobile companies (Hyundai Motor) as Brandes LP views their valuations as considerably more attractive.
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