The IVA International Fund (Trades, Portfolio) Class A (NAV) (“the Fund”) ended the quarter on September 30, 2015 with a return of -5.15% versus the MSCI All Country World ex US Index (“Index”) return of-12.17% bringing YTD performance to -0.18% versus the Index return of -8.63% for the same period.
The third quarter was marred by swings in global markets as investors became increasingly concerned by the prospect of a slowdown in China and the impact it would have on the rest of the world. These concerns spiked mid-August after China’s central bank devalued the yuan, triggering a market sell-off that was most damaging to commodities and emerging markets. In September, citing recent market turmoil and an uncertain global growth outlook, the U.S. Federal Reserve held interest rates at record lows. Carnage in various commodities - oil, copper, iron ore, platinum and also in many soft commodities continued throughout the quarter. Equities and bonds in emerging markets were also hit hard and many currencies of emerging countries fell precipitously, including the Brazilian real, the Indonesian rupiah and the Malaysian ringgit. We believe that emerging markets are going through a bust after years of capital misallocation in China, coupled with unbridled credit growth. All of these developments highlight the continued importance of investing with caution and discipline.
Throughout the turmoil of the third quarter, the International Fund held up well. Taking July 16th as a recent market peak, the IVA International Fund (Trades, Portfolio) A shares were down -5.42% from July 16 until September 30, while the Index was down -13.26%, which equates to a 41% downside capture. Our resilience was in large part due to the Fund not being fully invested. Our equities were down an average of -7.8% vs. those in the Index* which were down -12.1%. By country, France was the top contributor, adding 0.1%, led by a top 10 technology name, Alten SA. China, Hong Kong and Japan detracted the most, taking away a total of -2.2%. On a relative basis, our names in Japan held up, down -5.3% and taking away -0.7% versus those in the Index which were down -11.8% and detracted -2.1%. Europe ex-UK also outperformed the Index, with our names being flat for the quarter while those in the Index were down -8.1% and detracted -2.7%. By sector, consumer discretionary detracted the most from our performance, taking away -1.7%. This sector was hurt by what we believe are temporary losses in some of our larger positions, including a few of our top 10 names - News Corp (NWSA, Financial) and Genting Malaysia (XKLS:4715, Financial). In the case of Genting Malaysia, it was not down significantly in local terms, but it was hit by the depreciation of the Malaysian ringgit, which brought down its performance in U.S. dollar terms.
Fixed income detracted -0.5% from our return for the quarter, with corporate bonds and Singapore dollar bonds detracting -0.3% and -0.2% respectively. We began to find some opportunities in high yield in the third quarter, making a small investment in gold mining. Our corporate debt exposure was 5.5% at the end of the quarter compared to 5.1% at the end of last quarter and our sovereign debt exposure decreased from 4.4% to 4.1% over the quarter. Our currency hedges added 0.02%, helped by our hedges on the Australian dollar and the South Korean won, but hurt by our hedge on the Japanese yen. We decreased our hedge on the yen by approximately 10% over the quarter. As of September 30 our currency hedges were: 61% Japanese yen, 39% Australian dollar, 30% South Korean won, and 30% euro.
Gold was down -4.6% over the quarter, detracting -0.3% from performance. However, we were pleased to note that after its low on August 5 of $1085, gold went up to highs of $1161 on August 21 and $1154 on September 24 while equities were coming down around the world. In other words, gold “zigged” while the rest of the world “zagged” which is what we want it to do. Our gold exposure was 5.3% at the end of the quarter.
Our cash position increased to 33.2% over the quarter from 30.9% last quarter and our equity position decreased from 54.8% to 51.8%. As commodities came down, we added to our positions in two commodity related names - a Singapore listed palm oil company and a UK listed Chilean copper producer. As mentioned earlier, some of our larger positions came down in price over the quarter, making them even more attractive, and we took the opportunity to add to some of those positions. At the same time, some of our names approached our intrinsic value estimates and in those cases we trimmed and even eliminated positions entirely. These included names in Japan, South Korea and continental Europe.
We still believe that from a valuation standpoint markets have not come down enough to create genuine bargains. That being said, our investment team is doing work on a number of potential investments, including opportunities in emerging markets and high yield. Our cash reserve will allow us to take advantage of bargains as they begin to surface.
Today’s global economic outlook is uncertain at best and murky and worrisome at worst. The US economy appears to be in reasonably good shape, but Europe still seems to have some structural issues to cope with that will result in tepid economic growth for many years to come and the bust we are now seeing in emerging markets will have long-lasting effects. We believe that we are sailing into this storm well-prepared and that our portfolio is properly positioned to protect our shareholders’ capital. Our cash levels reflect that we believe we are still not being well-compensated for risk. We will remain cautious and disciplined and when prices become more attractive we will be ready to pounce!
*Excludes gold mining stocks
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: 1.26% (A Shares); 2.01% (C Shares); 1.01% (I Shares).
As of September 30, 2015, the IVA International Fund (Trades, Portfolio)'s top 10 holdings were: Gold Bullion (5.3%); SIGB (Singapore Government) 0.50%, 1.125%, 2.375%, 2.50%, 3.75% (4.1%); Nestle SA (3.0%); Astellas Pharma, Inc. (3.0%); News Corporation Class A, Class B (2.7%); Wendel 4.375%, 4.875%, 6.75% (2.6%); Samsung Electronics Co., Ltd. (2.0%); Alten SA (2.0%); Genting Malaysia Berhad (1.8%); Hyundai Mobis Co., Ltd. (1.7%).
MSCI All Country World Index (ex U.S.) (Net) 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 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 hold- ings invested in by the portfolio manager(s) or IVA. References to specific company securities should not be construed as recommendations or investment advice.
There are risks associated with investing in funds that invest in securities of foreign countries, such as erratic market conditions, economic and political instability and fluctuations in currency exchange rates. Value-based investments are subject to the risk that the broad market may not recognize their intrinsic value.
An investor should read and consider the funds' investment objectives, risks, charges and expenses carefully before investing. This and other important information are detailed in our prospectus and summary prospectus, which can be obtained by calling 1-866-941-4482 or visiting www.ivafunds.com. Please read the prospectus and summary prospectus carefully before you invest. The IVA Funds are offered by IVA Funds Distributors, LLC.
