Dear Shareholder,
Over the period under review October 1, 2014 to September 30, 2015, your Funds delivered slightly negative absolute returns (-4.21% for the IVA Worldwide Class A and -2.37% for the IVA International Class A), albeit ahead of their respective benchmarks (-6.66% for the MSCI All Country World Index and -12.16% for the MSCI All Country World [ex-US] Index).
Even though many markets and individual equities have come down some over that period, we have not been able to find many opportunities. That is because many non-U.S. stocks have not come down much if any, in local currency terms; instead it is the U.S. dollar that has appreciated against their local currency. It is also because the stocks of better quality companies (companies with good businesses and solid balance sheets) have been a lot more resilient than the stocks of lesser quality companies.
Why do both Funds have pretty low equity exposures (51.5% in Worldwide and 51.8% in International) and fairly high cash levels (35.2% in Worldwide and 33.2% in International)? For the exact same reasons we articulated in last yearâs Annual Report:
Because over the past five and a half years, many asset classes and individual securities have seen their valuation go up significantly, driven in part by very low interest rates in developed countries and by a huge rebound in corporate profits for many companies around the world. Looking at thousands of individual securities globally (stocks and also corporate bonds), we are struggling to find genuine bargains, i.e., stocks offering at least 30% discount to their intrinsic value estimates. The âVâ in IVA Funds stands for âValueâ and we are willing to let the cash levels of your Funds remain at elevated levels as long as we are not able to find what we consider enough cheap new investment securities. The idea that because rates are low we should use higher multiples to value businesses and also accept modest margins of safety than otherwise, has no appeal to us. That idea, frankly, strikes us as being a trap.
The fact that over the past year low rates have not prevented equity markets from coming down should expose the fallacy of the âFed Model,â whereby high market multiples observed over the past few years are justified by low interest rates. Anyone involved with Japanese equities from 1990 until 2012 could attest to the fact that low interest rates not only do not justify high valuations but also can be accompanied by a brutal and long lasting bear market. Instead of fantasizing that low rates could justify high multiples, investors should ask themselves: Why are rates so low today? Why do so many Central Banks around the world practice âQuantitative Easingâ and âFinancial Repression?â The Bank for International Settlements' most recent Annual Report says it best:
The key sign may be the buildup of financial imbalances. This also means that rates are low today, at least in part because they were too low in the past. Low rates beget still low rates. In this sense, low rates are self-validating given the sign of financial imbalances in several parts of the world. There is a troubling element of dĂŠjĂ vu in all of this.
It has been interesting to even see interest rate sensitive sectors, so called âyield plays,â like Master Limited Partnerships (MLPs) or Real Estate Investment Trusts (REITs), actually fall sharply over the past year without interest rates rising at all. We have also seen the price of many commodities (oil, natural gas, copper, iron ore, etc.) collapse over the past year; low rates have made it possible for energy and mining companies to borrow huge amounts of money to expand their capacity thus resulting in additional supply that exceeded the demand for said commodities. The Bank for International Settlements very recently came out with a statistic whereby total public and private debt relative to GDP for the entire world economy now stands at 265%, up from 219% at the peak of the prior credit cycle (2007), and all this while the rate of economic growth is decelerating. In other words, ever larger incremental amounts of debt are needed to produce less and less economic growth. That is not a healthy omen.
Besides worrisome macro-economic imbalances, another risk lies with the fact that corporate profit margins have remained high in many industries around the world, although that is rapidly changing for companies in China (State-Owned Enterprises in particular) as well as energy and mining companies. We believe margins are still at risk of reverting to more ânormalâ (by historical standards) levels, especially with all the disruptive changes that are altering the competitive landscape in so many industries. Not only in energy (with fracking), but also retail with e-commerce (Wal-Mart is feeling the squeeze), media with streaming and cord cutting (Viacom is losing share), technology (the cloud may be hurting software companies), banking (with greater regulation and higher capital requirements).⌠So even if one felt justified in using a lower than normal risk free rate (based on low interest rates globally), we believe a higher than normal equity risk premium is required today to value many businesses in the midst of all these changes.
We discussed last year the distinct possibility that ââGlobal Markets Catch the Chinese Fluââ (The Wall Street Journal article by Ruchir Sharma, October 17, 2014). It is disturbing today hearing commentators argue that the U.S economy is a relatively âclosedâ economy (amounts of imports and exports relative to GDP) yet not acknowledge that should the U.S. dollar continue to rise as it did under President Reagan, big chunks of the U.S. economy would suffer (steel, capital goods, paper, automobile, etc.) while earnings generated by American companies overseas would suffer as well (translation impact from a higher U.S. dollar) as 43 percent of the revenues from S&P 500 companies are generated beyond U.S. borders. What happens outside the U.S. and to the U.S. dollar matters enormously for U.S. stocks.
To repeat what we wrote last year, âWe do not intend to be âlong term owners of cashâ (Dylan Grice) but we are happy to wait patiently for genuine bargains to surfaceâŚ. Cash is a perpetual call option on every security in the world, small or large, stock or bond, which would qualify as being, at the appropriate price, a good investment.â
We have welcomed the recent bout of market volatility. Please read the âManagementâs Discussion of Fund Performanceâ on the following pages to get a flavor of where we have been buying or adding and where we have been trimming.
We still believe that over the next five years, financial assets will deliver modest returns based on their elevated valuation levels today and a challenging global economic outlook. We still believe that a continued pick up in volatility (âfinally, markets are being markets againâ) with good stock picking should enable us to post respectable performance numbers as we keep following time-tested rules.
More than ever, we will keep on following our holistic approach to investing, with a focus on value and a quest for returns that are as absolute as possible.
We appreciate your continued confidence and thank you for your support.
Charles de Vaulx (Trades, Portfolio), Chief Investment Officer and Portfolio Manager
Chuck de Lardemelle, Portfolio Manager
The views expressed in this document reflect those of the portfolio manager(s) only through the end of the period as stated 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.
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 investorâs 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.
As of the most recent prospectus, the expense ratios for the funds are as follows: IVA Worldwide Fund: 1.26% (A shares); IVA International Fund (Trades, Portfolio): 1.26% (A Shares). Maximum sales charge for the A shares is 5.00%.
As of September 30, 2015, the IVA Worldwide Fundâs top 10 holdings were: Gold Bullion (4.6%); Berkshire Hathaway, Inc. Class A, Class B (3.5%); Wendel 4.375%, 4.875%, 6.75% (3.4%); Astellas Pharma, Inc. (3.3%); SIGB (Singapore Government) 0.50%, 1.125%, 2.375%, 2.50%, 3.75% (3.2%); Nestle SA (2.9%); DeVry Education Group, Inc. (2.5%); News Corporation Class A, Class B (2.4%); Hyundai Mobis Co., Ltd. (1.9%); Samsung Electronics Co., Ltd. (1.8%). As of September 30, 2015, the IVA International Fund (Trades, Portfolio)âs 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 (Net) 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.) (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.
Mutual fund investing involves risks including possible loss of principal. 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 fundsâ 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.
Effective February 22, 2011, the IVA Worldwide Fund and IVA International Fund (Trades, Portfolio) are closed to new investors.
This disclosure page must accompany the October 25, 2015 Letter from the IVA Funds Portfolio Managers
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