Charles de Vaulx IVA Worldwide Fund Quarterly Review
Over the quarter, our USD cash position rose to 21.1% from 16.8% on December 31, reaching its highest level since April 2010, while our equity exposure fell to 57.9% from 61.5% last quarter. We trimmed or sold a few stocks where the price had gotten closer to or met our intrinsic value estimate and we believe our equity exposure today consists overwhelmingly of well-capitalized, well-managed, high quality companies with many positioned to benefit from pricing power in an inflationary environment. While our exposure to cash is a detractor from relative results in rising markets, we view cash as a valid asset class and a residual of the investment process when discounts narrow on our holdings and we cannot find enough fairly valued securities. Additionally, cash gives us the option to pounce when the time is right. In January 2010, we began buying government bonds of Singapore, which now represents 5.3% of the portfolio (our largest position) at quarter-end, and is a way to diversify our cash exposure. While the yield is low, we hope to over time get an "equity-like" return from these bonds (due to the appreciation of the Singapore dollar). Since we bought them in January 2010 through March 31, 2013, they averaged an annualized return of 4.4% (in USD). While our exposure to gold and fixed income, 5.0% and 16.1% respectively, together detracted almost -0.5% from the return, it is this multi-asset class approach (including cash) that we believe at times protects the portfolio in down markets and helps reduce overall portfolio volatility. And even though gold bullion averaged a return of –4.6% over the quarter, we still view gold favorably as a hedge against the equities in our portfolio and against currency debasement. Given that we reduced our exposure to gold mining stocks over the quarter, from 0.7% to 0.1% at quarter-end, we marginally added to our gold bullion position. Our exposure to gold totaled 5.0% on March 31, down from 5.2% on December 31.
Japanese equity markets have been rising since mid-November 2012 when it became likely that Shinzo Abe would be reelected as Prime Minister and he would pursue aggressive monetary policies to weaken the yen and engineer inflation in an attempt to bring Japan out of almost two decades of deflation. From midNovember 2012 through quarter-end, the Japanese yen weakened about -15% versus the U.S. dollar. Since we acknowledge that the Prime Minister is eager to weaken the yen, we increased our Japanese yen hedge in January 2013 and as of March 31 our hedge was 40.8% versus 29.5% on December 31, adding about 0.3% to the return over the quarter. Our Japanese equities also performed well this quarter, averaging a return of 14.7% versus those in the Index at 11.6%. Despite this rally, we believe the Japanese equity market remains attractively priced (trading at around 1.1x price/book value as of April 1) and we have favored Japanese equities since the inception of the Fund due to their strong balance sheets with excess cash, compelling valuations, good return on capital employed (ex-cash), and reasonable dividend yields, historically in the 2-5% range. While we would like to see an economic recovery in Japan, the game changer for us as investors is not the new Prime Minister or Central Bank Governor and their policies, but rather the growing evidence that capital allocation (increased dividends and share buybacks) is improving among companies there. Our Japanese equity exposure totaled 10.5% at quarter-end. For more about our thoughts on Japan, please read our newsletter from March 2013 titled "The Real Game Changer for Japanese Equities" that can be found on our website.
We continue to have moderate exposure to Europe, 13.7% at quarter-end, down from 15.1% on December 31. Over the quarter, we reduced our position in a few companies that we believe were mainly supported by a
high dividend yield even though their capital allocation and top line growth vis-à-vis GDP was questionable. Stock picking in the region remains difficult because what we view as high quality stocks remain expensive (and we think more expensive than U.S. high quality stocks), while what we consider the more mediocre companies are less expensive. We believe the banks there remain thinly capitalized, so despite their possibly attractive valuations, we have not added any financials stocks in Europe recently. Additionally, we reduced our hedge against the euro over the quarter, from 50.8% on December 31 to 40.3% on March 31.
Finding opportunities in emerging markets has been challenging for some time now, specifically in China, India and Brazil, but after the poor performance of some of these markets over the last few years, we finally bought stock in a large bank in Brazil this quarter that we think is well managed and reasonably priced. However, the position size remains small. The rest of our emerging market exposure is primarily in South Korea and Malaysia, which together represented 4.1% of the portfolio at quarter-end. However, our South Korean equity exposure has consistently declined over the past two years as we have not found many new opportunities there. Our South Korean won hedge was 28.9% on March 31.
Even though the global economic outlook remains grim and we believe we will be in a low return world for some time, we think equity markets are acting rationally and logically. The best phrase to describe the current market environment is "rational exuberance," says Charles de Vaulx, "with interest rates at very low levels and high quality bonds yielding almost nothing, a stock does not have to be that cheap to compete against those poor alternatives." Not to mention that many companies are increasing dividends, buying back stock, and improving their balance sheets, making stocks even more attractive. At IVA, we remain focused on compounding wealth over the long-term and we believe the best way to do that is to refuse to own fully priced stocks, to avoid the losers, and to worry a lot about what can go wrong.
Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. Returns shown are 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.
Maximum sales charge for the A shares is 5.00%. C shares include a 1% CDSC fee for the first year only. The expense ratios for the fund are as follows: 1.28% (A Shares); 2.03% (C Shares); 1.03% (I Shares).
MSCI All Country World Index (Net) is an unmanaged index comprised of 45 country indices comprising 24 developed and 21 emerging market country indices and is calculated with dividends reinvested after deduction of withholding tax. The Index is a trademark of Morgan Stanley Capital International and is not available for direct investment.
The views expressed in this document reflect those of the portfolio manager(s) only through the end of the period as stated on the cover 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.
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