Charles de Vaulx's IVA Funds 2020 Semi-Annual Report

May 4, 2020

Dear Shareholder,

Over the first half of this fiscal year (September 30th, 2019 to March 31st, 2020), the IVA Worldwide Class A (no load) was down -14.3% (including reinvested dividends) while the IVA International Class A (no load) was down -17.2% including reinvested dividends. The MSCI All Country World Index (“ACWI”) over the same period was down -14.3%, while the MSCI ACWI (ex-U.S.) was down -16.5%.

The period can be analyzed in two sub segments: the few months leading up to the record set on the S&P 500 on February 19th, 2020, and the period from February 19th, 2020 to March 31st, 2020, where the COVID-19 pandemic hit global markets hard, with one of the quickest ever bear markets on record, as many governments around the world forced most of their populations into confinement, triggering perhaps the deepest global GDP contraction in modern times. As you can see in the following table, while performance had lagged prior to the S&P 500 hitting a record high, your Funds outperformed indices during the rout.

Despite performing better than the indices in the difficult month of March, our equities on a standalone basis captured more downside than the index, and the outperformance since February 20th was due primarily to the large cash and gold (including gold miners) allocation in both Funds. Some of the underperformance in our stock picking was due to a substantial tilt towards consumer discretionary and industrials; cyclicals appeared cheap prior to the outburst of this global pandemic, which triggered a massive global recession. The market was already quite bifurcated prior to COVID-19, with value stocks, as shown in the following chart (MSCI World Value divided by MSCI World Growth, going back to January 1998), having already derated substantially pre-crisis; the trend only accelerated since then, and stands at its most extreme level by historical standards.

Last November, we discussed this long-term outperformance of Growth vs. Value in a Morningstar podcast available on our website: “Charles de Vaulx (Trades, Portfolio): Why Value Investing has Slumped but Will Rebound.”

This pandemic crisis will have lasting and unpredictable consequences on society and the economy, as well as on a number of business models such as travel, hospitality, airlines, catering, retail, or office real estate to name a few. A number of questions relevant to the global economy and the outlook for corporate earnings remain impossible to answer with any certainty at this stage: is this COVID pandemic with us for the next few years? Is the virus going to mutate and become more deadly? Or will it fade into extinction? Are we going to find a reasonably effective cure soon? How is the behavior of consumers going to be affected by this pandemic? Will there be other waves of confinement? Can we develop tests that are cheap, reliable and quick to deliver a diagnostic? Will the pressure of falling incomes and health care costs trigger some social unrest? How fast are taxes going to go up? Will we have a federal sales tax eventually?

This situation makes the valuation of many businesses today quite difficult. This is no ordinary recession.

Even when life normalizes, we could see higher savings rates and therefore less consumption, leading to a difficult and slow economic recovery; companies are slashing capital expenditures across the board; government debt to GDP is soaring to extremely high levels in almost all developed economies; judging by Italy and Japan, this state of affairs seems to lead to anemic economic growth, as households and businesses tend to save more in such circumstances.

Of course bear markets often lead to great buying opportunities; after all one needs to consider price when making investments. How much of the pain and uncertainty is already discounted? Currently the U.S. total market capitalization is roughly 135% of GDP versus the peaks of March 2000 and February 2020 both around 150%. The most recent low in this bear market clocked at 100% market capitalization to GDP, at the end of March 2020, against a low of 60% in 2009. So for now at 135% we believe overall valuations have not reflected the seriousness of the situation.

There are certainly major differences from the Great Financial Crisis of 2009. The Federal Reserve and the European Central Bank are providing ample liquidity. Interest rates are lower today, corporate taxes are lower as well, which pushes the valuations up. Also, the most valuable companies today in the U.S. are global technology companies, and comparing those market capitalizations to the U.S. GDP alone (as opposed to global GDP) may skew the ratio slightly higher than it should be. Nevertheless, even accounting for these changes over time, it remains difficult to argue that markets are cheap on an absolute basis. Certainly we may not reach the lows of 2009 in terms of valuations, as this crisis is much more of an earnings recession rather than a liquidity problem (for now at least). Banks are much better capitalized today versus 2009, especially in the U.S. Interest rates are so low, and liquidity so plentiful, that investors are being pushed into equities, where even low dividend yields easily surpass the income provided by 10-year Treasury Bonds. Some will argue, that in fact, government debt is much more risky than equities today, since the upside of investing in government bonds is so limited, while the downside of owning government debt over time will be large if interest rates ever rise again.

While this may be a valid argument, we note that earnings per share estimates for 2020 and particularly 2021 remain too high in our opinion, both on individual stocks and indices; sell side analysts are reluctant to take their estimates down without ‘guidance’ from companies; executives themselves are unwilling to provide these estimates, leading to seriously flawed ratios. Finally the high quality non-cyclical companies (such as food and beverage, subscription software companies…) offer little upside in our opinion given nosebleed valuations.

So how do we deal with this situation? Forget 2020. We are busy valuing companies on the basis of reasonable multiples of our own 2021 earnings estimates; we model such estimates assuming that the world economy in the year 2021 remains in a severe recession versus 2019. We also make sure to take into account any balance sheet deterioration between now and then. We continue to favor well capitalized companies.

Under these assumptions, opportunities appear scarce. We believe that, with a three-year view, many cyclicals we own are substantially undervalued today, and may provide attractive absolute returns compared to more fully valued defensive or growth equities as the world economy comes out of the funk sometime in the future; yet this is no classic recession, with so many unknowns. We are therefore treading carefully.

Finally, bear markets typically do not last one month. Powerful rallies tend to lure investors back in; bear markets can even trough at low multiples of depressed earnings. It is possible however, that the combination of extremely low interest rates and a clear focus by central banks to avoid deflation, could lend support to the multiples of trough earnings. We stand ready to take advantage of investment opportunities when they present themselves.

Your Funds remain cautiously positioned with cash and gold (including miners) representing 40.7% of assets for Worldwide and 30.1% of assets for International as of March 31st, 2020.

We appreciate your continued confidence and thank you for your support.

Charles de Vaulx (Trades, Portfolio), Co-Chief Investment Officer and Portfolio Manager

Chuck de Lardemelle, Co-Chief Investment Officer and Portfolio Manager

IVA Worldwide Fund

The IVA Worldwide Fund Class A, at net asset value, returned -14.28% over the six-month period ended March 31, 2020 compared to the MSCI All Country World Index (Net) (the “Index”) return of -14.33% over the same period.

The Fund was flat versus the Index for the period. Our gold and gold mining stocks had a positive 5.6% return for the period and our allocation to cash helped dampen the impact from equities which were down -24.0% over the period, compared to those in the Index* which were down -14.3%. Our names in the United States and France detracted -5.5% and -2.4% from performance, respectively. Japan and China contributed a total of 0.6%. Our names in industrials and consumer discretionary detracted a total of -7.2%. Health care was the only positive contributing equity sector, adding 0.1%.

The top five individual equity contributors to return this period were: Z Holdings Corp. (Japan, communication services) (TSE:4689, Financial), Samsung Electronics Co., Ltd. (South Korea, technology) (XKRX:005930, Financial), Astellas Pharma, Inc. (Japan, health care) (TSE:4503, Financial), Clear Media Ltd. (China, communication services) (HKSE:00100, Financial), Goldman Sachs Group Inc. (U.S., financials) (GS, Financial). The top five individual equity detractors were: AIB Group Plc (Ireland, financials) (LSE:AIBG), Airbus SE (Netherlands, industrials) (XPAR:AIR), Astronics Corp. (U.S., industrials) (ATRO), Sodexo SA (France, consumer discretionary) (XPAR:SW), Cimarex Energy Co. (U.S., energy) (XEC).

Fixed income detracted -0.9% whereas gold and gold mining stocks contributed 0.2%. In an effort to neutralize part of our foreign exchange risk, we were partially hedged against several currencies over the period which contributed 0.2%. We eliminated our hedges on the Australian dollar and Japanese yen, and initiated a new hedge on the Chinese yuan. At the end of the period, our currency hedges were: 11% British pound, 70% Chinese yuan, 10% euro; 74% South Korean won, and 86% Thai baht.

IVA International Fund (Trades, Portfolio)

The IVA International Fund (Trades, Portfolio) Class A, at net asset value, returned -17.19% over the six-month period ended March 31, 2020 compared to the MSCI All Country World Index (ex-U.S.) (Net) (the “Index”) return of -16.52% over the same period.

The Fund lagged the Index for the period due to poor results for several of our larger equities. Our gold and gold mining stocks had a positive 6.1% return for the period and our allocation to cash helped dampen the impact from equities which were down -23.0% over the period, compared to those in the Index* which were down -16.5%. Equity performance was hurt the most by our names in consumer discretionary and industrials, which together detracted -8.1%. France, Ireland, and the Netherlands detracted -6.8% while China and Uruguay contributed a total of 0.5%.

The top five individual equity contributors to return this period were: Clear Media Ltd. (China, communication services), Samsung Electronics Co., Ltd. (South Korea, technology), Z Holdings Corp. (Japan, communication services), Astellas Pharma, Inc.(Japan, health care), Springland International Holdings Ltd. (China, consumer staples) (HKSE:01700). The top five individual equity detractors were: AIB Group Plc (Ireland, financials), Airbus SE (Netherlands, industrials), Sodexo SA (France, consumer discretionary), Compagnie Financière Richemont SA (Switzerland, consumer discretionary) (XSWX:CFR), Kangwon Land Inc. (South Korea, consumer discretionary) (XKRX:035250).

Collectively, Fixed Income detracted -1.1% whereas gold and gold mining stocks contributed 0.4%. In an effort to neutralize part of our foreign exchange risk, we were partially hedged against several currencies over the period which contributed 0.4%. We eliminated our hedges on the Australian dollar and Japanese yen, and initiated a new

Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. Returns are shown net of fees and expenses and assume reinvestment of dividends and other income. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed may be worth more or less than the original cost.To obtain performance information current to the most recent month-end, please call 1-866-941-4482.