IVA Funds conference call transcript for the month ended of September 2016.
As of the most recent prospectus, the expense ratios for the funds are as follows: IVA Worldwide Fund: 1.25% (A shares), 1.00% (I shares); IVA International Fund: 1.25% (A Shares), 1.00% (I shares). Maximum sales charge for the A shares is 5.00%.
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As of August 31, 2016, the IVA Worldwide Fund’s top 10 holdings were: Gold Bullion (6.4%); Astellas Pharma, Inc. (4.4%); Berkshire Hathaway, Inc. Class A, Class B (4.1%); Samsung Electronics Co., Ltd. (4.1%); News Corporation Class A, Class B (2.5%); Nestle SA (2.4%); DeVry Education Group, Inc. (1.8%); Oracle Corporation (1.7%); MasterCard Incorporated Class A (1.3%); HSBC Holdings PLC (1.2%). As of August 31, 2016, the IVA International Fund’s top 10 holdings were: Gold Bullion (7.6%); Samsung Electronics Co., Ltd. (4.7%); Astellas Pharma, Inc. (4.4%); News Corporation Class A, Class B (3.0%); Nestle SA (2.7%); Alten SA (2.2%); Genting Malaysia Berhad (1.8%); HSBC Holdings PLC (1.7%); Hyundai Mobis Co., Ltd. (1.2%); Hongkong & Shanghai Hotels Ltd. (1.2%).
MSCI All Country World Index is an unmanaged index consisting of 46 country indices comprised of 23 developed and 23 emerging market country indices and is calculated with dividends reinvested after deduction of withholding tax. The Index is a trademark of MSCI Inc. and is not available for direct investment.
MSCI All Country World Index (ex-U.S.) is an unmanaged index consisting of 45 country indices comprised of 22 developed and 23 emerging market country indices and is calculated with dividends reinvested after deduction of withholding tax. The Index is a trademark of MSCI Inc. and is not available for direct investment.
The views expressed herein reflect those of the portfolio managers through September 13, 2016 and do not necessarily represent the views of IVA or any other person in the IVA organization. Any such views are subject to change at any time based upon market or other conditions and IVA disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for an IVA fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any IVA fund. The securities mentioned are not necessarily holdings invested in by the portfolio manager(s) or IVA. References to specific company securities should not be construed as recommendations or investment advice.
The IVA Worldwide Fund and the IVA International Fund are closed to new investors.
Tara Hannigan: Thank you. Good afternoon, and welcome to the Semi-Annual IVA Funds Update Call. We thank you for joining us this afternoon. I’m Tara Hannigan, the Director of Mutual Fund Distribution. Our goals on this call are to update you on the funds and share our current investment thinking. Our portfolio managers, Charles De Vaulx and Chuck de Lardemelle, will give you prepared remarks explaining what they’re seeing around the world today, and then we will open the call up to questions.
To update you on IVA as a firm as of August 31, 2016, we had approximately $18.5 billion in total assets under management with our two mutual funds comprising just over $12.3 billion of that total. Both funds do remain closed to new investors.
A quick note on performance. As of June 30, 2016, the IVA Worldwide Fund Class I returned -0.92% for the one-year period, while the MSCI All-Country World Index returned -3.73% over the same period. For the five-year period on an annualized basis, the IVA Worldwide Fund Class I returned 3.89% versus the MSCI All-Country World Index return of 5.38%. Since the Fund’s October 1, 2008 inception, it has returned 8.56% on an annualized basis, while the MSCI All-Country World Index has returned 6.27% over the same period. As of June 30, 2016, the IVA International Fund Class I has returned -2.72% for the one-year period, while the MSCI All-Country World ex-US Index has returned -10.24% over the same period. And for the five-year period on an annualized basis, the IVA International Fund Class I returned 4.24% versus the MSCI All-Country World ex-US Index return of 0.10%. Since this Fund’s October 1, 2008 inception, it’s returned 8.44% on an annualized basis, while the MSCI All-Country World ex-US Index has returned 3.17% over the same time period. Year-to-date through Monday, September 12, 2016, the IVA Worldwide Fund Class I has returned 5.82% versus the MSCI All-Country World Index return of 5.73%. The IVA International Fund Class I returned 4.49% versus the MSCI All-Country World ex-US Index return of 4.65%.
I will now hand the call over to Charles de Vaulx.
Charles de Vaulx: Thank you, Tara. Our last conference call was almost six months ago. A few things have changed, of course, since. Equities back then were down a little year-to-date. Today, several months after Brexit, and after the publication of six-month corporate profits that were down for several quarters in a row now, equity markets are up nicely year-to-date.
Meanwhile, value investing remains out of favor. Hedge funds are getting more and /more discredited, and the rise of passive investing continues unabated. Also unabated is the growing distrust of savers, endowments, pension funds, as well as insurance companies and banks that are being more and more squeezed thanks to ultra-low, and in some countries, negative interest rates.
As Angela Merkel from Germany said last week, though in a different context, “The world finds itself in critical condition, and there is no point in painting anything rosier than it is.”
The topics I’d like to cover today are:
- What has changed over the past six months?
- A few thoughts on Brexit and the rise of populism.
- Discuss why our portfolios remain so defensive, both in Worldwide and International.
- Expand further on a topic that is dear to us- is value investing still relevant today?
- I’ll rehash once again why we do not believe that today’s low rates would truly justify higher valuations, nor would they warrant accepting lower discounts.
- I’ll offer a few thoughts on the rise of passive investing and what the implications might be for active managers.
- I’ll have a quick update on DeVry on one hand and Astellas Pharma on the other.
What has changed over the past six months?
Now, we do not have much new to say today since our views have not changed much over the past few years, but also because we’ve had a chance recently to discuss some of those views, both in our recent Semi-Annual Report that came out late May, and in our interviews with Value Investors Insight as well as Barron’s. If you have not had a chance to read any of those documents that I just mentioned, I would encourage you to do so. They are available on our website.
So, what has changed over the past six months? Well, among the positives, I would note that credit spreads, which had widened significantly during the fall and earlier this year, including in industries other than energy and mining, have contracted quite significantly. So, the “Nervous Nellies” that manage bond funds have concluded, rightly or wrongly, that we are not on the eve of major and widespread defaults. Also encouraging is that commodity markets, emerging market equities, emerging market bonds, and many emerging market currencies have bounced back.
In China, which has been and remains by far our biggest worry- the economy, foreign exchange reserves, and the Chinese stock markets appear to have stabilized as well, at least for the time being.
Brexit was clearly a surprise, but can be construed, we believe, either as a negative or a positive, long-term, so I’ll discuss that in a few minutes. Among the negatives, I’ll mention that corporate earnings both in the US and outside the US are coming down, due to either:
- more competition
- more and more industries being disrupted
- low interest rates that are hurting many banks and insurance companies while enticing many other companies to increase their buyback programs, often incurring debt to do so, on the basis that, with 0% interest rates, most buybacks optically seem to be accretive on an earnings per share basis.
Also negative from a stock market standpoint, though probably a positive from a societal standpoint, is that antitrust authorities are finally getting tougher, whether recently nixing the Staples/Office Depot merger or the Halliburton/Baker Hughes one, and probably soon also nixing deals among healthcare insurance providers. Also, regulators and tax authorities seem to be cracking down on tax inversions, and now we’ve seen the recent EU case against Apple.
Another negative in the aftermath of Brexit was the reminder that the European banking system remains very fragile and under-capitalized in Italy and Germany in particular.
A few thoughts on Brexit and the rise of populism.
Based on the polls just before the referendum, Brexit was clearly a surprise. Our view is that Brexit does create a big uncertainty, but only on a long-term basis. Paradoxically, on a short-term basis, Brexit appears to have been a tempest in a teapot, almost a non-event. That is so in my opinion because it is impossible at this stage to handicap the odds of what might happen and what kind of an arrangement the UK and the EU will be able to come up with, i.e. will it be an agreement similar to the one between the EU and Switzerland, the EU and Norway, the EU and Canada, et cetera.
It’s also encouraging that the conservatives have picked Mrs. Theresa May as the Prime Minister, considering that she appears at heart to be a pragmatist, not to mention that her personal preference was to vote for the Remain option. We at IVA Funds, and before that at First Eagle and at SocGen, have always felt that the EU, and even more so the euro, was structurally unsound and had flawed constructs.
Mervyn King, former governor of the Bank of England, wrote a thoughtful essay recently for the New York Review of Books, where he lays out some of the same arguments we’ve been making for decades now, that the EU has pressed political union both too far and not far enough, that it has created half a political union with a single currency, yet without a collective fiscal policy. It has been a case of putting the cart before the horse, setting up a monetary union before a political union.
It appears at this moment that voters in Europe do not want a political unionthe French, the Germans, and probably many others. And forcing such a political union today without a strong popular backing might test Europe’s democracies to destruction. Mervyn King, and I would agree, believes that the UK cannot and should not guide the EU in solving its existential problem because it has already detached itself, in the past, that is, from the EU core. It chose not to join the single currency, nor did it participate in the Schengen Plan for borderless travel by retaining border controls and checks, though of course citizens from other EU countries have the right to live and work in Britain, and vice-versa. Thus, the UK is not, and isn’t seen as, a full member of the club.
How then could it provide leadership?
The Brexit vote does create huge long-term uncertainty. The long-term consequences could be either very negative if this leads to the gradual disintegration of the EU, or conversely, very positive if it pushes the current leaders of Europe to return to the more gradualist and empirical approach of the founding fathers of the European economic community.
A lot has been written both in Europe and in the US about the rising tide of populism expressed in the popularity of a Marine Le Pen from the extreme right in France, or the somewhat surprising popularity of a Donald Trump in the US. In our view, those trends result from many fears (fears of terrorism, the refugee crisis, globalization, lack of job opportunities), but they also are probably a consequence of record-high levels of corporate profitability in the world, and the US in particular, as over the past 20 years so many of the goodies have accrued to the owners of capital, while real incomes and wages have gone nowhere.
Herbert Stein’s law states that, “If something cannot go on forever, it will stop.” We do not believe that corporate profits, which have already started to decline, can stay that high forever, nor do we believe central banks may continue their policies that strike us as ineffectual, forever. Although we admit that they may try even more of those before trying something else.
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