Todd International Intrinsic Value Review
July 17, 2014 | Jack White, CFA | Partner, Senior Portfolio Manager
Please read our latest article, "Why Europe"
Our latest Chart of Interest, "You're Gonna Need a Bigger Boat"
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|2Q14||1 Year||3 Year*||5 Year*||7 Year*|
|International Intrinsic Value (Gross)||5.64%||23.41%||8.79%||14.38%||3.61%|
|International Intrinsic Value (Net)||5.43%||22.40%||7.88%||13.44%||2.74%|
|MSCI ACWI ex-U.S.||5.25%||22.27%||6.22%||11.60%||1.73%|
*Annualized Total Returns. Please refer to the Performance Disclosure at the bottom of this page for futher information.
International markets posted good returns in the second quarter, with the ACWI ex-US index rising 5.25% led by the Emerging Markets. The International Intrinsic Value Strategy outperformed the index during the quarter and is recovering from the underperformance we experienced in the first quarter. Our performance over all other time frames noted above is ahead of the index.
The leading markets during the quarter are noted in the graph in chart 1. Many of the leaders during the second quarter were markets that came under pressure last year. None of the leaders were among the largest markets, and each had specific reasons why investors would have looked to them for recovery from poor performance last year. We think investors have gotten comfortable that this lackluster economic recovery is sustainable. Given that, while rates remain low they are willing to reach for smaller markets. Emerging Markets outperformed EAFE, which also suggests investors are willing to accept more risk. Several items during the quarter have prompted this sentiment. First, the ECB committed itself to further easing measures while the European recovery is progressing. That's why Spain and other peripheral countries (except Greece) are acting better. Also, despite expectations that the Japanese economy would hit an air pocket in Q2 as the consumption tax was raised on April 1, the government there is showing a renewed dedication to spurring end market demand. Policies are actually raising inflation in Japan for the first time in years. Within the Emerging Markets, China is stabilizing . It appears investors do not fully believe it yet. India has surged on the Modi election, and expectations of reforms. Also, the outlook for many Latin American companies has improved based on our disciplines, suggesting better times ahead.
There are some items of concern on the horizon. Russia has been weaker on worries about the Ukraine sanctions biting into economic growth. Also, Iraq could cause concern as the country has effectively dissolved into three factions. Iraq had been expected to show the fastest worldwide growth in oil output between now and 2020, an outcome that seems in jeopardy now. In the developed world, the Fed continues to taper, and the UK has signaled they are closer to tightening as the unemployment rate declines.
We present the factors that added and detracted from performance for the 500 largest international companies traded in the US in the quarter and most recent twelve months below.
Chart 2 shows the trailing twelve month performance while chart 3 illustrates the most recent quarter. Common themes between the two would be the short and long term underperformance of larger market capitalization stocks, and higher beta names. Interestingly, the market preferences have shifted to favor cheap stocks with little debt and higher dividends over the past three months, where those factors have tended to be middle to bottom of the pack over the trailing twelve months.
Our portfolio beat the indexes during the quarter. The best performing sectors within the ACWI ex-US index were the Energy, Utility, Consumer Staples and Technology sectors. The worst performing were the Industrial, Financial and Materials sectors. Most other sectors were fractionally ahead or behind the index. Our largest sector concentrations are in the Financial, Industrial, Information Technology, Health Care and Consumer Discretionary Sectors. We are overweighted versus the index in all of those except the Financial sector. Financial stresses have lessened considerably over the past year, allowing sovereign and corporate borrowers to access debt markets. Rates remain low , and central banks remain committed to spurring better growth. The only region we see facing imminent rate increases is the UK, though some observers expect the US could see rate increases over the next year to eighteen months. These rate increases would be in response to better growth, which is a good outcome. With that economic backdrop, we believe a tilt towards economic sensitivity still makes sense. Also, our multi-factor model continues to point towards those sectors.
Our outperformance was driven by stock selection, where we added value or matched the market in six of the ten GICS sectors. While our stock selection in Industrials and Technology stocks lagged their sectors, we outpaced the indexes in Health Care and Financials by enough to overcome any laggards. Health Care benefitted from takeovers, many of which happened at roughly our computed Intrinsic Value. Within Financials, we significantly downsized our holdings in European Banks, which helped our performance.
Our best five contributors to return in the quarter were Covidien, Schlumberger, Shire PLC, Canadian National Railway and Orix. Two of the five were health care related and rose as takeover speculation drove the group higher. We have trimmed or exited some of these positions to book the profits that have been realized. The five weakest performers in the portfolio were, Chic ago Bridge and Iron, Soufun, Ehouse China Holdings, New Oriental Education, and BNP Paribas. Profit taking in some of last year's highfliers prompted pullbacks in some of these, while regulatory inquiries and fines caused the underperformance for BNP. We have downsized positions in several of our underperforming names during the quarter.
Interesting internationally oriented charts that we saw this quarter
Donít forget the true long term story for worldwide economic growth...
Chart 7 illustrates earnings per share for the US, Emerging Markets and Europe. Through 2010, earnings trends between the regions were very similar, but then Europe and the Emerging Markets fell off somewhat as they each faced a unique set of challenges. As we look at Europe, our belief is that there is pent up demand, an accommodative central bank, and better visibility to a recovery. They are working to reduce the value of the Euro and starting to embrace pro-growth fiscal strategies instead of austerity. Our belief is that Europe is likely to see earnings recover, which should lead the European market (and the EAFE index) to break out of the trading range it has been mired in, like the US did last year. The emerging markets are also under earnings pressure, as the commodity cycle helped through 2011 and has hurt since then. We believe Emerging Markets earnings are probably near (or under) the long term trend line and should be able to benefit from volume growth as demand from the new consumer class picks up. In any event, the headwinds from the commodities correction should be behind them.
We are pleased with the outperformance during the quarter, and believe it should continue as the year proceeds. Since the ECB made their June announcements, individual stock picking has come back into favor, and this has benefitted our style. Our sense is this trend will remain in place for some time to come.
Jack White, CFA Curt Scott, CFA Jack Holden, CFA
Todd Asset Management LLC
MSCI ACWI ex-US-292
Refer to Performance Disclosure on the bottom of this page for more information on the performance numbers presented. These notes are an
integral part of this letter and should not be reproduced or duplicated without these notes.
This publication contains the current opinions of the author but not necessarily those of Todd Asset Management, LLC. Such opinions are subject to change without notice. This publication has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy, or investment product. Information contained herein has been obtained from sources believed to be reliable but not guaranteed. No part of this publication may be reproduced in any form, or referred to in any other publication, without express written permission of Todd Asset Management LLC. © 2014.
TODD ASSET MANAGEMENT LLC
INTERNATIONAL INTRINSIC VALUE COMPOSITE DISCLOSURE
Past performance does not provide any guarantee of future performance, and one should not rely on the composite performance as an indication of future performance. Investment return and principal value of an investment will fluctuate so that the value of the account may be worth more or less than the original invested cost.
Specific stocks discussed in this presentation are included to help demonstrate the investment process or as a review of the Composite's quarterly results and are not and were not recommendations for purchase or sale by investors. All or some of the specific stocks mentioned may have been purchased or sold by accounts within the Composite during the period, or since the period, and may be purchased or sold in th e future. Investors should not construe the Composite's performance or any security as predictive of future results. A complete listing of the ho ldings as of the period end is available upon request.
Todd Asset Management LLC ("TAM") is a registered investment adviser. The performance presented represents a composite of tax-exempt fully discretionary intrinsic value accounts, invested primarily in large cap domestic equity securities with the objective t o seek capital appreciation. This goal is pursued by investing in a diversified portfolio of equity securities that TAM believes are trading at a discount to their intrinsic value.
Todd Asset Management LLC, formerly Todd-Veredus Asset Management LLC began operations on June 1, 1998 as Veredus Asset Management LLC (VAM). Effective May 1, 2009, VAM combined with Todd Investment Advisors, Inc. (TIA). TIA (and its predecessors) was founded in 1967 by Bosworth M. Todd. Upon the combination of VAM and TIA in 2009, Veredus Asset Management LLC changed its n ame to Todd-Veredus Asset Management LLC (TVAM). On February 28, 2013, TVAM redeemed ownership units held by individuals who supported the growth products founded under VAM, and changed its name to Todd Asset Management LLC. The firm continues to offer the sa me products and strategies managed by the same individuals and process founded under TIA
The International Intrinsic Value Composite contains fully discretionary, taxable, and tax-exempt accounts that use either the MSCI ACWI ex-US (Gross) or the MSCI EAFE Index (Gross) as the benchmark. Prior to April 1, 2010, this composite was known as the International Equity Composite; no changes in the strategy were made in conjunction with the name change. All fee-paying, fully discretionary portfolios under our management are included in a composite. Accounts are eligible for inclusion in the composite at the beginning of the first calendar quarter after the month of initial funding and upon being fully invested.
TAM claims compliance with the Global Investment Performance Standards (GIPS®). The Firm has been verified for the period January 1, 2008 through September 30, 2013 by Ashland Partners & Company LLP and for the period July 1, 1989 through December 31, 2007 by a previous verifier. TIA's compliance with the GIPS® standards has been verified for the period January 1, 1993 through April 30, 2009 by Ashland Partners & Company LLP. In addition, a performance examination was conducted on the Large Cap Intrinsic Value Composite for the period January 1, 2011 through June 30, 2013. To receive a complete list and description of TAM composites and/or a full disclosure presentation which complies with the GIPS® standards, please contact TAM at 1-888-544-8633, or write Todd Asset Management LLC, 101 South Fifth Street, Suite 3100, Louisville, Kentucky 40202, or contact us through our Web site at www.toddasset.com
The performance information is presented on a trade date basis, both gross and net of management fees and includes the reinvestment of all income. Net of fee performance was calculated using the highest all inclusive annual management fee of .60% applied monthly. Prior to September 2001, the highest management fee applied to the composite was .50%. The currency used to calculate and express per formance is U.S. dollars. All cash reserves and equivalents have been included in the performance.
The composite performance has been compared to the following benchmarks (all shown with dividends reinvested):
MSCI ACWI ex-U.S.(Gross) Index is a float-adjusted market capitalization index that is designed to measure the combined equity market performance of developed and emerging market countries excluding the United States. The ACWI ex-U.S. includes both developed and emerging markets. For investors who benchmark their U.S. and international stocks separately, this index provides a way to monitor international exposure apart from U.S. investments. In August 2008, the MSCI ACWI ex-U.S. held 23 countries classified as developed markets and 25 classified as emerging markets.
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