The IVA International Fund (Trades, Portfolio) Class A (NAV) (“the Fund”) ended the quarter on December 31, 2014 with a return of -2.19% versus the MSCI All Country World Index (ex-U.S.) (“Index”) return of -3.87%. This brings our year-to-date return to 1.15% versus the Index return of -3.87% for the same period.
Global equities continued their selloff from September through mid-October and fell again in the first half of December as expectations for global growth and inflation fell, but markets rebounded at the end of December. The International Monetary Fund cut its outlook for global growth citing persistent weakness in the eurozone and a slowdown in several emerging markets, including China. Japan fell into a recession in November and we continued to see oil prices decline and the U.S. dollar strengthen against all major currencies throughout the quarter. With so many imbalances and unknowns across the globe, our portfolio has remained cautiously positioned. A number of our stocks and bonds were hurt by weakness in their local currency, especially in Japan, however, the Fund benefited from being partially hedged as our currency hedges added 1.5% to our return. As of December 31, 2014 our currency hedges were: 70.5% Japanese yen, 56.5% euro, 40.3% Australian dollar, and 30.2% South Korean won. We increased our hedge against the euro this quarter, from 44.9% to 56.5%.
Our outperformance this quarter was largely due to our multi-asset class approach, especially cash, which helps mitigate overall portfolio volatility and helps protect the portfolio on the downside. Despite the volatility this quarter, which provided an opportunity to initiate or add to a few positions, many securities we own got closer to our intrinsic value estimate over the period, and as disciplined investors, we trimmed or exited these positions, thus raising cash. Our cash exposure rose to 27.6% from 25.0% last quarter.
Over the quarter our equities averaged a return of -4.6% while those in the Index* averaged a return of -3.8%. Stock selection in the consumer discretionary and industrials sectors weighed on relative results as a few of our emerging market stocks underperformed along with some stocks in Japan, however, we benefited from minimal exposure to energy stocks as they detracted the most from the benchmark’s return. Stocks in Hong Kong and the United Kingdom added 0.2% to our return due to good stock picking, while those in the Index detracted -0.6% from return. In particular, our stocks in the United Kingdom averaged a gain of 4.5% while those in the Index averaged a return of -4.2%. Conversely, our stocks in Japan underperformed those in the Index. We tend to own small and mid-cap local companies in Japan which suffered this quarter from a weak yen compared to the exporters, which the Index mostly owns and benefit from a strong USD. Our Japanese stocks averaged a return of -5.9% versus -2.5%, respectively, and detracted -1.0% from our return in USD led by poor performance from Astellas Pharma Inc. (TSE:4503), which was significantly hurt by a weak yen. However, stock picking is still alive and kicking in Japan and on a year-to-date basis, our Japanese stocks averaged a gain of 7.3% versus the Index which was down -4.1%, and added 1.3% to our return in USD. Our stocks in France detracted -0.7% from our return in USD as a couple industrials stocks weighed on performance. We used this opportunity to increase our exposure to a French industrials stock whose share price was hit by a pending transaction. We believe it was trading at a large discount and we have full confidence in the management, particularly their asset allocation skills. By sector, financials and telecommunication services stocks collectively added 0.2% to our return, due to good security selection, versus those in the Index detracting -0.6%. On the other hand, stocks in the consumer discretionary and industrials sectors detracted from our return, together -1.7%, while those in the Index only detracted -0.1%, led by poor performance from Genting Malaysia Bhd (XKLS:4715). News Corp Class A (NWSA) and Class B (NWS) also worked against us, partly due to a weak Australian dollar and their large acquisition of Move Inc., however, we took advantage of the share price weakness to add to the position.
We increased our exposure to gold this quarter, from 3.3% to 3.9%, when the price of gold fell below $1,200/ounce. We still view gold as a reasonable hedge against extreme outcomes, inflation or deflation, and it averaged a return of -2.2% this quarter, detracting -0.1% from our return.
It remains difficult to find attractive opportunities in bonds, thus our fixed income exposure was relatively unchanged over the quarter with 5.6% allocated to corporate bonds and 4.9% allocated to sovereign bonds. This period, our corporate bonds averaged a return of -5.9% and detracted -0.4% from our return as our Wendel bonds tempered gains due to a weak euro along with some bonds in Norway. Our sovereign bonds, mostly of Singapore, averaged a return of -3.6% and detracted -0.2% from our return this quarter as they were negatively impacted by the strength of the U.S. dollar.
On the plus side, the market volatility this quarter presented a few new investment opportunities. We invested in what we consider a high quality company in France that provides a range of consulting services, a copper related stock, and a satellite communication stock in Thailand. Conversely, we trimmed and sold some Japanese stocks that were close to or at intrinsic value, bringing our exposure there down to 15.5% from 17.7% last quarter. We believe the easy money has been made in Japan and we are now looking for stocks in highly fragmented industries with the hope that the labor shortage may encourage greater consolidation and merger activity. Our equity exposure decreased to 57.5% from 60.1% last quarter.
In conclusion, we firmly believe that stock picking around the world is still alive and when markets correct, we take that opportunity to invest in new stocks and add to existing positions. Despite the many volatile periods this year, we remain cautiously positioned as we are still not seeing many high quality global equities at attractive levels and as sentiment has turned negative in major markets such as Europe, Japan, and China even though the U.S. appears to be growing steadily. At IVA, we will continue to focus on delivering a solid absolute return through good stock picking, being very aware of potential risks, and maintaining proper diversification.
*The benchmark equity return excludes gold mining stocks.
Performance Information (as of December 31, 2014)
| Average Annual Total Returns | ||||||
| Class | 3 Months | YTD | 1 Year | 3 Year | 5 Year | Since Inception |
| A (NAV) | -2.19% | 1.15% | 1.15% | 8.81% | 8.03% | 9.85% |
| A (with load) | -7.09% | -3.92% | -3.92% | 6.96% | 6.92% | 8.96% |
| C | -2.41% | 0.38% | 0.38% | 8.00% | 7.21% | 9.02% |
| I | -2.16% | 1.41% | 1.41% | 9.10% | 8.29% | 10.13% |
| MSCI All Country World Index (ex-U.S.) (Net) | -3.87% | -3.87% | -3.87% | 8.99% | 4.43% | 5.09% |
Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. Returns shown are net of fees and expenses and assume reinvestment of dividends and other income. The investment return and principal value will fluctuate so that an investor's 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.
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 December 31, 2014, the IVA International Fund (Trades, Portfolio)'s top 10 holdings were: SIGB (Singapore Government) 2.375%, 2.875%, 3.75% (4.7%); Gold bullion (3.9%); Nestle SA (3.6%); Astellas Pharma, Inc. (3.3%); Wendel 4.375%, 4.875%, 6.75% (3.0%); News Corporation Class A, Class B (2.8%); Genting Malaysia Berhad (2.1%); Samsung Electronics Co., Ltd. (2.1%); Hongkong & Shanghai Hotels Ltd. (1.9%); Toho Co., Ltd. (1.8%).
MSCI All Country World Index (ex U.S.) (Net) is an unmanaged index consisting of 45 country indices comprising 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 Morgan Stanley Capital International 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.
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.
