International Value Advisers Funds 2014 Annual Commentary

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Jan 02, 2015

Global equity markets delivered solid returns again for this fiscal year ending September 30, 2014 with the S&P 500 Index hitting a record high close on September 18, 2014, but it wasn’t a smooth ride. Global equity markets experienced significant volatility from late January 2014 to early February 2014, from late July 2014 to early August 2014, and for most of September 2014. In December 2013, the Federal Reserve announced they would begin tapering their quantitative easing program in early 2014 with it ending later that year despite continued slow economic growth. Towards the end of the fiscal year, equity markets fell as they digested the possibility of the Federal Reserve raising rates earlier than expected and the outlook for the global economy darkened with growth in Europe and China slowing. Additionally, the U.S. dollar strengthened significantly against most major currencies and crude oil fell sharply in the third quarter 2014.

Over the fiscal period, our equity exposure was relatively unchanged in the Worldwide Fund, 51.9% on September 30, 2014 versus 52.8% on September 30, 2013, while it increased in the International Fund, to 60.0% from 54.3%, respectively, as we found some new opportunities, specifically Henderson Land Development Co. Ltd. (HKSE:00012, Financial) (financials, Hong Kong) and APT Satellite Holdings Limited (HKSE:01045, Financial) (telecommunications, Hong Kong), and added to some existing positions, such as Hongkong & Shanghai Hotels Ltd. (HKSE:00045, Financial) (consumer discretionary, Hong Kong) and Springland International Holdings Ltd. (HKSE:01700) (consumer discretionary, China). Thus, our exposure to China (through Hong Kong listed equities) and Hong Kong rose to 7.2% from 3.4% this fiscal year in the International Fund.

We view most equity markets as fully valued, so a number of our stocks reached or are close to our intrinsic value estimate, thus we sold or trimmed them, especially in the Worldwide Fund within the energy and industrials sectors. Our exposure to those two sectors declined to 11.3% on September 30, 2014 from 14.4% a year prior in the Worldwide Fund. However, we believe there are still stock picking opportunities, especially when markets experience volatility like they did this fiscal year. Over this period we initiated a meaningful position in Samsung Electronics Co., Ltd. (XKRX:005930) (technology, South Korea) in both Funds and added significantly to our position in News Corp. Classes ‘A’ and ‘B’ (consumer discretionary, U.S.) in the Worldwide Fund while this was a new position for the International Fund. Although this company is U.S. based, we believe the majority of its value comes from what we consider good businesses in Australia. We also added to some existing positions, such as Astellas Pharma Inc. (TSE:4503) (health care, Japan), Toho Co., Ltd. (TSE:4409) (consumer discretionary, Japan), Alten SA (technology, France), and Eutelsat Communications SA (consumer discretionary, France) in both Funds. In the U.S., we increased our exposure to DeVry Education Group Inc. (DV) (consumer discretionary) and Berkshire Hathaway Inc. (BRK.A)(BRK.B) Classes ‘A’ and ‘B’ (holding company), in particular.

Over the period, gold averaged a return of -9.0%, and detracted about -0.3% from the return in both Funds. We continue to view gold strictly as a hedge against extreme outcomes and because we view it as a hedge, we like to see it inversely correlated to equities, as it was this fiscal year. Our modest exposure was relatively unchanged in both Funds, 2.8% in the Worldwide Fund and 3.3% in the International Fund as of September 30, 2014.

Our corporate bond exposure declined to 5.3% on September 30, 2014 from 6.8% on September 30, 2013 in the Worldwide Fund as a few bonds were sold or called, while our exposure in the International Fund fell slightly, 5.7% versus 6.2%, respectively. For the most part, we did not find new opportunities in this area, which we view as fully valued, if not overvalued in some segments. Our sovereign fixed income exposure declined in both Funds over the period, to 3.4% on September 30, 2014 from 5.9% on September 30, 2013 in the Worldwide Fund and to 4.8% from 8.0%, respectively, in the International Fund. We trimmed exposure to the Singapore dollar government bonds and sold the Hong Kong dollar bonds. We are concerned about China and devaluation of the Chinese currency, the renminbi, and how that could potentially affect the Hong Kong banking system and ultimately the Hong Kong dollar peg. Therefore, we believed there was more downside than upside in holding the Hong Kong dollar government bonds.

Our cash exposure remains elevated in both Funds: 36.3% in the Worldwide Fund and 24.8% in the International Fund as of September 30, 2014. It was the largest detractor from relative results in both Funds over the period, however, our good individual stock picking helped to offset the dilution from our cash exposure. As long-term, absolute return investors, cash plays a critical role in the portfolio: it is the ammunition to buy future bargains and it helps protect the portfolio on the downside, as demonstrated a few times this fiscal year.

As always, we remain focused on individual stock picking, absolute returns, and staying disciplined with our investment approach.