Positive performance in a number of holdings was overshadowed by double-digit declines in our companies with the highest exposure to emerging markets (EMs). While we have limited direct investments in companies based in emerging markets, top line exposure to these regions impacted several of our businesses. Look-through emerging market revenue is over 40%. Chinese economic fears, amplified by the collapse in the China A-share market and renminbi devaluation in the second half, broadly impacted our companies with direct or indirect exposure.
EM currency weakness relative to the strong U.S. dollar (USD) exacerbated results, as currency translation into USD turned an otherwise positive portfolio return for the year negative. Swiss-based LafargeHolcim (XSWX:LHN, Financial), which suffered as its emerging markets revenues were translated into stronger Swiss francs, was the largest detractor in the year, as the stock’s translation into USD further hurt results. Returns at Malaysian-based gaming and energy company Genting Berhad (XKLS:3182, Financial) and our two Australian businesses that service the natural resources sector were also worsened by the ringgit’s and Australian dollar’s decline. BR Properties (BSP:BRPR3, Financial) appreciated in local currency, but the weak Brazilian real made the company a substantial detractor in USD. Despite a strong rebound across our Macau gaming companies in the fourth quarter, Melco International (HKSE:00200) remained a top detractor for the year. While we believe these portfolio exposures offer more substantial discounts and greater potential upside than the index, the negative performance masked the positive progress across the majority of our businesses in the year. Weak currencies and stocks that are substantially discounted can change direction quickly, and we believe these investments will ultimately provide solid returns.
As mentioned above, Macau casino and hotel operator Melco gained 22% in the fourth quarter but remained among the Fund’s largest detractors for the year, down 31%. The stock benefited from improved sentiment regarding Macau during the quarter among indications that the higher margin mass market is stabilizing. In addition to relaxation of transit visa, the Macau government softened its stance on the smoking ban on the gaming floors. While Beijing will continue its anticorruption campaign (which has hurt VIP business in Macau), the mass-focused infrastructure spending (high speed trains, ferry terminal, bridge from the airport, light rail) continues unabated. More than 90% of Melco Crown’s earnings before interest, taxes, depreciation and amortization (EBITDA) comes from mass business, where margins are 4X that of VIP business. Melco Crown (MPEL, Financial) opened its new mass-focused casino Studio City in late October, which helped increase market share in the all-important mass segment. This $3.2 billion project (relative to Melco’s market cap of $9 billion) has just started generating cash flow. We expect Studio City to receive an additional 50-table allocation in early 2016 in addition to its initial 200-table allocation. With a strong balance sheet, increasing EBITDA and declining capital expenditure profile, the company is well positioned to buy back shares or buy out minority owners of Studio City. Melco International CEO Lawrence Ho bought about $25 million worth of shares in the fourth quarter.
After announcing another strong quarter of double-digit organic growth for its core adidas brand, German-based global sportswear and equipment brand Adidas (XTER:ADS, Financial) returned 22% in the quarter and 43% for the full year. The brand’s strong positions in Europe, China and Latin America drove growth. The company expects 2016 operating income margins to meet or exceed 2015 levels and overall sales to increase at high, single-digit rates in the next year. Despite the stock’s strong performance, we believe Adidas remains discounted due to strong value growth and has significant additional upside. As discussed in previous quarters, we have had constructive engagement with management and the supervisory board and have seen many positive developments. In addition to authorizing a 10% share repurchase program, the company made managerial changes in the U.S. business, sold its noncore Rockport brand at a price above our appraisal value and announced it is exploring strategic options for its golfing brands and hockey division.
Colt Group (LSE:COLT), the British-based provider of business communications and information technology solutions to companies primarily in Europe, was up 40% for the year, making it among the Fund’s largest contributors. We sold the position when the company was acquired by Fidelity Investments in the third quarter. Our investment in Colt, beginning in the second quarter of 2014, produced a 27% annualized return for the International Fund.
Another top performer, CK Hutchison (HKSE:00001), a conglomerate comprised of the nonreal estate businesses from the June merger between Cheung Kong and its subsidiary, Hutchison Whampoa, returned 22% in 2015 when combined with Cheung Kong Property. The corporate transaction helped remove holding company discounts and clarify business line exposures by splitting the property business (Cheung Kong Property Holdings [HKSE:01113]) from the nonproperty business (CK Hutchison Holdings). The transaction is likely to be viewed as a seminal event leading to improved governance and structure for other complex conglomerates in Asia.
In the fourth quarter, Cheung Kong Property was a modest detractor, down 10%, as poor sentiment toward real estate and China lowered real estate prices in Hong Kong. Hong Kong property stocks remained sharply discounted versus the physical property market. Cheung Kong, among the largest property companies in China and Hong Kong, has a large, low-cost land bank in China and a strong balance sheet, positioning the company to exploit short-term market disruptions for the benefit of long-term investors. Chairman Li Ka-shing and his son, Victor Li, have demonstrated a track record of building businesses, compounding NAV at double-digit rates and buying and selling assets at compelling values.
Also contributing to performance, Italian holding company EXORÂ (EXORF) appreciated 5% in the quarter, taking full-year returns to 12%. Over the course of the year, Chairman and CEO John Elkann, together with Fiat Chrysler Auto (FCA) CEO Sergio Marchionne, took numerous steps to drive value growth. The company sold or spun assets at a strong price, including an $893 million initial public offering of Ferrari—well above expected value, the sale of Cushman and Wakefield to DTZ for $2 billion—a more than 30% premium to our carrying value for the business, and the recently announced sale of its 17% stake in Banijay for €60.1 million—a €25 million premium to book value. Management reinvested proceeds into high quality assets at a fair price. In the second half, EXOR announced the acquisition of Bermuda reinsurer PartnerRe to be completed in the first quarter of 2016 and increased its long-held stake in The Economist. At FCA, Sergio Marchionne publicly called for auto industry consolidation, potentially positioning EXOR for discussions to merge FCA with another key player.
Among detractors to the Fund’s performance, ALS declined 12% in the quarter, taking full year returns to -34%, after announcing a rights issue at a discount to the market price. Given the balance sheet strength and expected earnings growth in the next two years, we believe the rights issue was unnecessary, and it negatively impacted our appraisal. Despite management’s poor capital decision, the competitively entrenched Life Science business remains attractive.
Our position in the convertible bonds of CEMEX declined 12% in the quarter and 21% since we bought the position in the third quarter. The price declined due to weak Latin American currencies, challenged trends in some emerging markets, and a general sell-off across the entire non-investment grade bond sector. We believe CEMEX’s assets are worth roughly twice the debt, which provides generous asset coverage. In addition, we receive a yield component and the opportunity of longerterm upside over par value through the convertible feature as EBITDA growth and debt reduction drive the underlying equity value higher.
Global cement, aggregates and ready-mix concrete producer LafargeHolcim declined 2% in the quarter and over the year. During the quarter, CEO Eric Olsen presented his three-year operating plan with an intense focus on free cash flow generation, internal growth and returning cash to shareholders. The plan should enable debt to return to investment grade and a dividend payout ratio near 50%. With only modest volume and pricing assumptions, combined with realizing synergies from the LafargeHolcim merger, we believe the plan is achievable. We are excited to own a company with a collection of geographically advantaged assets at less than approximately 8x normalized FCF earnings power and strong cash generation that should be allocated to maximize value per share.
Genting Berhad was one of the largest detractors for the year, declining 53%. Malaysia macro/FX was a big headwind, and the company’s development of its sizable oil and gas assets is likely to be delayed given the weakness in energy prices. The company’s Singapore duopoly casino, publicly listed Genting Singapore, is led by CEO Hee Teck Tan and was down after reporting four quarters of unusually poor hold (2.0% to 2.5%) in its gaming business, as well as some equity investment writedowns. Since opening the casino, the cumulative win rate at Genting Singapore has been close to the theoretical average of 2.85%, and we believe win rates should normalize over time. In the quarter we added Genting Singapore in addition to our Genting Berhad position. The stock’s deep discount was largely due to a slowdown in Chinese VIP visitors as a result of the Chinese anticorruption campaign. Genting’s core mass market business has been steady and more than justifies our appraisal. The duopoly position in the stable Singapore jurisdiction represents a significant sustainable competitive advantage. The simple P/E multiple misses the sizable cash and investment portfolio on the balance sheet and minimal maintenance capex requirement (capex is much lower than depreciation). The company engaged in a value-accretive share buyback in recent months.
Mineral Resources returned -51% during 2015 driven largely by the collapse of iron ore prices. The crushing services business maintained steady volumes and strong margins but was not enough to appease market concerns of continued iron ore price declines. The company surprised the market with its ability to reduce costs in the iron ore mining business at a pace that maintained positive cash flow margins. During the fourth quarter, the company announced a $30 million stock buyback (4% of outstanding shares), higher EBITDA guidance and a new EPC (engineering, procurement and construction) contract for a crushing plant for Rio Tinto’s Nammuldi mine. The company continued to take costs out of its mining operations to ensure that every ton of iron ore produced is sold at positive cash flow margins.
Over the year, we took advantage of increased market volatility to upgrade the portfolio. We sold four positive performers that reached our appraisals in the first nine months. In the fourth quarter, we sold our small stake in DSM to fund more discounted positions. New purchases were more heavily weighted to Asia, which provided more discounted investments, but we also found interesting company-specific opportunities in Europe. In addition to Genting Singapore mentioned above, we bought British power systems company Rolls-Royce.
Although the 2015 performance was disappointing, we believe the International Fund is well positioned for a strong rebound. The broader currency pressures as well as EM weakness that impacted results could reverse course quickly. Additionally, the Fund’s price-to-value (P/V) ratio is in the low-60% range. The four largest detractors are highly discounted selling below 57% of value, and the four largest positions, which were among top contributors for the year, remain discounted with solid value growth prospects. Beyond these discounts, the high quality of our businesses and the caliber of our management partners, who are pursuing available avenues to drive value recognition, make us confident in future results. We appreciate your continued partnership. We are confident that the Fund should reward your patience and ours with strong future performance.
