Seeking value primarily in the non-US developed markets

The International Value Select portfolio is constructed from an equity universe composed of companies with market capitalizations typically greater than $5 billion located in non-US developed and emerging market countries. The strategy uses our international value equity strategy with two distinctions: the select portfolio has greater liquidity (by way of investing in larger capitalization companies) and fewer holdings. We believe that concentrating the holdings can compensate for the loss of small/mid cap exposure. The investment process comprises three stages: quantitative screening and initial analysis, fundamental research, and portfolio construction.

Strategy overview

The portfolio managers discuss our International Value Select strategy.

Portfolio managers

Chief Executive Officer
Fundamental Portfolio Manager
President
Head of Fundamental Research
Fundamental Portfolio Manager
Fundamental Portfolio Manager
Fundamental Portfolio Manager
Fundamental Portfolio Manager
Fundamental Portfolio Manager
Fundamental Portfolio Manager

Performance

QTD YTD 1 year3 years5 years10 years Since inception
Strategy (gross) 0.8%-16.7%-6.8%-2.7%0.1%5.4%4.9%
Strategy (net) 0.8%-16.8%-7.2%-3.0%-0.2%5.0%4.5%
MSCI EAFE 2.4%-9.0%-1.2%1.1%2.6%5.5%4.6%
QTD YTD 1 year3 years5 years10 years Since inception
Strategy (gross) 0.8%-16.7%-6.8%-2.7%0.1%5.4%4.9%
Strategy (net) 0.8%-16.8%-7.2%-3.0%-0.2%5.0%4.5%
MSCI EAFE 2.4%-9.0%-1.2%1.1%2.6%5.5%4.6%
QTD YTD 1 year3 years5 years10 years Since inception
Strategy (gross) 19.8%-17.3%-9.9%-2.0%0.4%6.3%4.9%
Strategy (net) 19.7%-17.5%-10.3%-2.3%0.1%5.9%4.4%
MSCI EAFE 15.1%-11.1%-4.7%1.3%2.5%6.2%4.4%
QTD YTD 1 year3 years5 years10 years Since inception
Strategy (gross) 19.8%-17.3%-9.9%-2.0%0.4%6.3%4.9%
Strategy (net) 19.7%-17.5%-10.3%-2.3%0.1%5.9%4.4%
MSCI EAFE 15.1%-11.1%-4.7%1.3%2.5%6.2%4.4%
Fund 20192018201720162015201420132012201120102009
Strategy (gross) 21.2%-17.2%29.5%1.5%-1.3%-4.3%27.2%24.7%-9.6%13.2%35.4%
Strategy (net) 20.8%-17.5%29.1%1.1%-1.7%-4.7%26.8%24.3%-9.9%12.7%34.8%
MSCI EAFE 22.7%-13.4%25.6%1.5%-0.4%-4.5%23.3%17.9%-11.7%8.2%32.5%
Strategy (gross)
Strategy (net)
MSCI EAFE
20192018201720162015201420132012201120102009
21.2%-17.2%29.5%1.5%-1.3%-4.3%27.2%24.7%-9.6%13.2%35.4%
20.8%-17.5%29.1%1.1%-1.7%-4.7%26.8%24.3%-9.9%12.7%34.8%
22.7%-13.4%25.6%1.5%-0.4%-4.5%23.3%17.9%-11.7%8.2%32.5%

Portfolio (as of June 30, 2020)

Benchmark: MSCI EAFE
Asset Allocation
Strategy
Stocks 97.4%
Cash 2.6%
Strategy Characteristics
Strategy Benchmark
No. of holdings 63 902
Weighted avg. market cap (US $MM) $56,165 $52,799
FY2 price/earnings 11.9 15.1
Price/book value 1.0 1.5
Dividend yield (%) 3.0 2.8
TOP 10 HOLDINGS
Security Country Percent
Volkswagen AG Germany 4.2%
UniCredit S.p.A. Italy 4.1%
BASF SE Germany 3.7%
ABB Ltd. Switzerland 3.4%
Siemens AG Germany 3.1%
Novartis AG Switzerland 3.0%
Samsung Electronics Co., Ltd. South Korea 2.9%
Takeda Pharmaceutical Co., Ltd. Japan 2.8%
FANUC Corp. Japan 2.8%
Baidu - ADR China 2.8%

A “weighted average” measures a characteristic by the market capitalization of each stock. Price/book ratio is the weighted average of the price/book ratios of all the stocks in a portfolio. The P/B ratio of a company is calculated by dividing the market price of its stock by the company’s per-share book value. The price/earnings ratio is the weighted average of the price/earnings ratios of the stocks in a portfolio. The FY2 P/E ratio is a forward P/E ratio using a next-twenty-four months EPS estimate in the denominator.

Holdings are subject to change.

SECTOR WEIGHTS
Sector Strategy Benchmark
Industrials 22.4% 14.5%
Financials 20.7% 16.1%
Health Care 11.7% 14.5%
Information Technology 10.4% 8.3%
Materials 8.8% 7.3%
Consumer Discretionary 7.5% 11.3%
Communication Services 6.3% 5.4%
Consumer Staples 5.6% 12.0%
Energy 2.8% 3.4%
Utilities 1.4% 4.0%
Real Estate 0.0% 3.2%
TOP 10 COUNTRIES
Country Strategy Benchmark
Germany 23.7% 9.3%
United Kingdom 19.9% 14.1%
Switzerland 10.0% 10.3%
Japan 9.5% 25.4%
France 9.0% 10.9%
Netherlands 4.8% 4.3%
Italy 4.8% 2.3%
South Korea 4.4% 0.0%
Spain 4.0% 2.4%
China 3.3% 0.0%
Regional Allocation
  • Europe – other 79.5%
  • Pacific 9.5%
  • Emerging Asia 7.9%
  • Emerging Latin America 0.6%
  • North America 0.0%

Commentary (As of June 30, 2020)

Highlights

  • Bolstered by enormous monetary and fiscal stimulus policies globally, equity markets continued to ascend from their late-March lows. Although the valuation gap between growth stocks and value stocks grew even wider, global central bank liquidity injections fueled a resurgence of cyclical stocks over defensive stocks during the second quarter.
  • Worldwide, central banks indicated they are prepared to continue supportive policies to maintain abundant monetary liquidity and keep their respective government and corporate borrowing costs low. We anticipate that monetary and fiscal policy responses from major economies will continue until economic data indicate a sustainable recovery has taken hold.
  • Cyclical stocks have traditionally performed best as markets begin to discount a recovery from the lows of recession. We are taking advantage of investor pessimism (and investors’ possible short time horizons) by adding to positions in several competitively well-positioned companies, at valuations we believe imply permanent demand destruction.

Portfolio attribution

The Portfolio outperformed the Index during the month, due primarily to stock selection. Portfolio holdings in the capital goods, materials, media & entertainment, and technology hardware & equipment industry groups, as well as an overweight position in the banks industry group, contributed to relative performance. Holdings in the telecommunication services, pharmaceuticals & biotechnology, food beverage & tobacco, and consumer services industry groups, along with an underweight position in the diversified financials industry group, detracted from performance compared to the Index. The top contributor to return was power & automation technology company, ABB Ltd. (Switzerland). Other notable contributors included diversified chemicals manufacturer, BASF SE (Germany), mail, express & logistics services provider, Deutsche Post AG (Germany), banking & financial services company, UniCredit S.p.A. (Italy), and internet services provider, Baidu - ADR (China). The largest detractor was Takeda Pharmaceutical Co., Ltd. (Japan). Additional notable detractors included low-budget airline, Ryanair Holdings - ADR (Ireland), British American Tobacco plc (United Kingdom), contract foodservice company, Compass Group Plc (United Kingdom), and bank, Sumitomo Mitsui Financial Group, Inc. (Japan).

Investment outlook

With vaccines potentially available by year-end 2020 or early 2021, we believe equity markets have more upside potential. In the latter half of 2020, we expect markets to benefit further from a recovery in both consumption and investment spending. The second quarter of 2020 was the strongest quarter for global equities since 2009, in part thanks to the unprecedented levels of central bank purchases of financial securities and record setting low bond yields. The persistent decline in long term bond yields partly explains the widening gap in performance between growth and value investment styles. However, we believe this valuation disparity will reverse as economies move through the worst of their lockdown-induced recessions. Although the rally in equity markets from late-March lows was primarily driven by liquidity, a nascent economic recovery helped economically sensitive stocks outperform traditionally defensive stocks during the quarter. This suggests, in our view, that cyclical stocks, hardest hit in the first quarter selloff, have further recovery potential. Operating leverage should propel earnings growth for cyclical companies as revenues recover towards pre-pandemic levels and slimmer cost bases boost profit margins. Cyclical stocks have traditionally performed best as markets begin to discount a recovery from the lows of recession. This may be especially true of the recession caused by the coronavirus, given extraordinary fiscal spending and efforts to stimulate the economic recovery. We are taking advantage of investor pessimism (and investors’ possible short time horizons) by adding to positions in several competitively well-positioned companies, at valuations we believe imply permanent demand destruction. We currently expect temporary, not structural, changes to aerospace, aviation, travel & leisure, and a host of cyclical industries such as banking, insurance, and industrials. Strong balance sheets, abundant cash flow, and talented management teams should provide these companies the flexibility to position themselves to prosper when economic growth eventually rebounds.

The market commentary expresses the portfolio managers’ views as of the date of this report and should not be relied on as research or investment advice regarding any stock. These views and the portfolio holdings and characteristics are subject to change. There is no guarantee that any forecasts made will come to pass. The securities identified and described above do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in the securities identified was or will be profitable. Past performance does not guarantee future results. For a description of our performance attribution methodology, or to obtain a list showing every holding's contribution to the overall account's performance during the quarter, please contact our product manager, Kevin Moutes, at 310-231-6116 or [email protected].