The International Equity ADR portfolio is designed to identify compelling investment opportunities that possess the desired combination of attractive valuations and potential for multiple expansion. Cambiar’s quality and value bias will result in portfolio overweight to developed markets, subsequent underweight in emerging markets.
The strategy is constructed by Cambiar’s eight-person international investment team.
Jennifer M. Dunne, CFA
Inception Date: 2.28.2006. The performance information depicted above represents Cambiar’s International Equity ADR Composite. Returns are presented gross and net of management fees. Gross and net returns have been reduced by transaction expenses. Net returns are also reduced by actual investment advisory fees and other expenses that may be incurred in the management of the account. The gross returns reflect accounts with both gross and “pure” gross performance. “Pure” gross returns, applicable to SMA portfolios, are not reduced by any expenses, which includes transaction costs, and are provided as supplemental information. Net returns for SMA portfolios are calculated by subtracting actual SMA fees reported by the SMA sponsor. Results are reported in U.S. dollars. Performance results for the International Equity Composite are evaluated against the MSCI EAFE Index and MSCI ACWI ex U.S. Index. The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted, market capitalization weighted index that is designed to measure developed market equity performance, excluding the U.S. & Canada. The MSCI ACWI ex U.S. (All Country World ex U.S. Index) is a free float-adjusted, market capitalization weighted index that is designed to measure developed and emerging markets, excluding the U.S. The indices assume no management, custody, transaction or other expenses. The MSCI EAFE and ACWI ex U.S. Indexes are broadly based indices which reflect the overall market performance and Cambiar’s returns may not be correlated to either index. Cambiar’s performance, the performance of the MSCI EAFE Index and the MSCI ACWI ex U.S. Index include the reinvestment of all income. Benchmark returns are net of withholding taxes. Cambiar typically follows each custodian’s treatment of tax withholding and therefore dividends may be presented as gross or net of dividend tax withholding depending on the custodian’s treatment. Withholding taxes may vary according to the investor’s domicile. Performance is preliminary, please contact us for finalized figures.
|Top 10 Holdings||% Weight|
|Royal Dutch Shell||3.2|
|% of Total||29.6|
|Sector Weights||Cambiar||MSCI EAFE||MSCI ACWI ex U.S.|
|Market Cap Wtd Avg||54.7 B||53.8 B||53.0 B|
|Market Cap Median||26.8 B||8.9 B||7.1 B|
|Sector Weights||Cambiar||MSCI EAFE||MSCI ACWI ex U.S.|
|Top 5 Countries||Cambiar||MSCI EAFE||MSCI ACWI ex U.S.|
|Risk Statistics*||Cambiar||MSCI EAFE||MSCI ACWI ex U.S.|
Market Review (12.31.2016)
Global equity markets posted mixed returns for the final quarter of 2016. U.S. stocks were the bright spot in the quarter, as investors reacted positively to the pro-growth agenda put forth by the Trump Administration. International equities missed the invite to the party put on by their U.S. counterparts, with most non-U.S. markets incurring modest negative returns for the quarter. Emerging Markets was hit the hardest, with the MSCI Emerging Markets Index returning -4.2%. Despite their 4Q setback, EM stocks were one of the top-performing markets (outside of the U.S.) in 2016; top EM contributors were Brazil and Russia. One non-U.S. market that was positive for the quarter was Japan, as a stronger dollar/weaker yen was viewed as supportive for Japanese stocks. Japanese equities have rebounded strongly in the second half of 2016, after struggling for the first six months of the year. Cambiar’s International and Global portfolios have varying allocations to Japan – mostly a function of the opportunity set and relative risk/reward for the underlying investment strategy.
Bottom-Up vs. Top-Down Investing
One takeaway from 2016 was the extent to which stock prices were buffeted by big picture events that took place around the globe – to the point where company-specific fundamentals were a distant second in importance. Examples included the reach-for-yield trade, the Brexit event in June, Donald Trump’s victory in November, and the OPEC production cut in December. Although the market’s response to such events moderated as the year progressed, investment manager performance was impacted (to varying extents) by positioning of one’s portfolio going into these episodes. Given the event-driven year that was 2016, Cambiar’s view on bottom-up vs. top-down investing is a timely discussion.
The Cambiar International and Global Equity strategies are predominantly managed using a bottom-up approach; our analysts seek to identify high- quality businesses that are nearing an inflection point in their business that we believe is not being recognized or properly valued by the market. This ‘beat to the spot’ approach is based on a rigorous in-house research process. As part of this research effort, the Cambiar team will often consider relevant macro variables that may be a part of a top-down discipline. But the key is the order of the process; i.e., the macro is one factor in the Cambiar buy/sell decision, vs. the macro leading the decision. Where relevant, it is Cambiar’s preference for macro factors to have a positive (or neutral) impact to the investment case; e.g., a higher oil price deck will be a positive for the strategies’ energy holdings, just as steepening yield curves will be beneficial for many of our financial positions. A change in the macro can also be a negative leading indicator; the precipitous drop in oil prices during the second half of 2014 was a red flag for a related decline in margins/earnings within the sector.
Perhaps the bigger takeaway for our clients is that Cambiar attempts to take a 360-degree view when evaluating the companies in our portfolio – from both a risk and reward perspective. The bottom-up will almost always trump the top-down, but the objective is to base portfolio decisions on an unbiased assessment on all data that can impact the investment case for our companies.
International Equity ADR
The Cambiar International Equity ADR portfolio closed out 2016 on a positive note, posting a modest 4Q gain vs. negative returns for the strategy’s assigned performance indices. The relative outperformance for the quarter enabled Cambiar to narrow the deficit vs. the benchmarks for the year, and we hope to continue this momentum into 2017. Given the strategy’s somewhat benchmark-agnostic approach, the International portfolio should not be expected to perform in lockstep with the market. That said, the objective is for these deviations to generate positive excess returns for our clients over a market cycle. As the longer-term performance numbers illustrate, the strategy has been successful in this regard.
Trade activity was elevated in the quarter – a function of stock-specific developments, reduction of portfolio cash levels, and more closely aligning the portfolio to the team’s in-house view on global growth trends and bond yields. Cambiar was a net buyer in Financials and Industrials, while reducing portfolio allocations to Healthcare, Telecom and Technology. The result of the team’s buy/sell activity in the quarter is a modest cyclical tilt within the portfolio. On a country/regional basis, Cambiar increased the portfolio’s exposure to Japan in the quarter, ending the quarter with an approximate 20% allocation (vs. 25% for the EAFE Index). The Netherlands also represents a meaningful allocation in the portfolio (~20%) – although this is more a function of global companies such as Airbus and Royal Dutch maintaining a headquarters in Amsterdam, vs. a bullish call on the Dutch economy.
Strong stock performance within Financials was a notable contributor to performance in the quarter. Cambiar’s European bank holdings staged an impressive rebound in the second half of 2016 after a challenging first six months of the year. As discussed in our 3Q commentary, coordinated action amongst central banks that began in the summer has contributed to rising yields – a powerful tailwind for the banks. Despite the second half improvement in valuations, Cambiar believes many of the portfolio’s financial companies to be in the early innings of a longer-term investment opportunity. Catalysts include higher earnings, strong capital return via dividends/share buybacks, and incremental multiple expansion.
Cambiar’s holdings in the Industrial sector were another bright spot for the portfolio – both in the quarter as well as on a full year basis. With an emphasis on diversification by way of regional footprint and end market, Cambiar has identified a number of industrial companies that are market leaders in their industry, trade at attractive valuations and are poised to deliver higher earnings over a forward 1-2 year timeframe. Examples include an aerospace OEM, commercial infrastructure contractor, professional staffing company and a global mail/logistics company.
The Energy sector was boosted by the announced production cut by OPEC (and some non-OPEC producers) – a fairly significant moment in the history of OPEC. The combination of solid global demand and compliance of agreed-upon cuts should help to bring equilibrium to the oil markets – and although a significant hike in oil prices is unlikely, it is not necessary for the stocks to work, given the restructuring and related capex/expense reduction initiatives that many of these companies have implemented over the past two years. On a full-year basis, the Energy sector completed a worst-to-first move from 2015 to 2016. The Cambiar portfolio benefited from an overweight allocation to the sector, ending the year with an approximate 9% allocation (vs. 5% for the benchmark).
In a continuation of trend from the third quarter, sectors that are negatively correlated to interest rates underperformed in the quarter; examples here include Utilities, Telecom and Real Estate. Cambiar outperformed in Real Estate via an investment in a Japanese property company; however, the portfolio’s holdings in Utilities and Telecom were a drag on performance. While allocation to these sectors was reduced in the quarter, Cambiar continues to maintain some exposure – as these companies’ more defensive characteristics offer prudent ballast vs. the portfolio’s cyclical holdings.
2016 marks the fourth consecutive year (and six out of seven) in which U.S. stocks have outperformed international equities. This seemingly persistent one-way trade flies in the face of classic diversification tenets, and has likely resulted in a pronounced home country bias in many client portfolios.
Perhaps it is the embedded mean reversion tendencies in us, yet Cambiar is reasonably optimistic about the outlook for international equities in 2017 – on both an absolute basis as well as relative to U.S. markets. While market valuations are approaching cyclical highs in the U.S., international stocks remain reasonably priced relative to forward earnings estimates. Additional tailwinds include improving global growth and steepening yield curves. In our view, the global business cycle has a number of years left to go; if anything, it is probably time for many of the world’s economies to play catch up to the U.S. If we are correct in this outlook, international equity markets should also be poised to outperform.
That being said, we are certainly cognizant of the risks, not only that the global economy disappoints on the growth side and deflationary issues (i.e., falling bond yields) return to the fore, but also that inflation may gather force. This latter scenario would likely require more tightening than expected from the Fed, which together with a strong dollar could cause problems for global equities. It is also important to see some follow-through from international markets on earnings – particularly in Europe. Although Cambiar anticipates solid improvement on this front, a failure to produce a meaningful earnings rebound is an additional risk. As always, we are looking first and foremost for compelling investments to own on behalf of our clients; at this juncture, we continue to find abundant opportunities.
Certain information contained in this communication constitutes “forward-looking statements”. Due to market risk and uncertainties, actual events or results, or the actual performance of Cambiar’s client accounts may differ materially from that reflected or contemplated in such forward-looking statements. All information is provided for informational purposes only and should not be deemed as a recommendation to buy the securities mentioned. There is no guarantee that the opinions expressed herein will be valid beyond the date of this presentation. There can be no assurance that the portfolio will continue to hold the same position in companies described herein, and the portfolio may change any portfolio position at any time. The specific securities identified and described do not represent all of the securities purchased, sold, or recommended by Cambiar and the reader should not assume that investments in the securities identified and discussed were or will be profitable.