Class Ticker CUSIP
A IVIOX 45070A305
C IVICX 45070A602
I IVIQX 45070A404

The IVA International Fund Class A (NAV) ended the quarter on March 31, 2020 with a return of -23.00% versus the MSCI All Country World Index ex-U.S. (Net) (“Index”) return of -23.36% for the same period.

What a difference one quarter can make! After a strong 2019, markets continued their upward trend driven by further optimism and positive news. Unemployment was at record lows, a trade agreement was signed between the U.S. and China and by mid-February major market indices reached all-time highs. While it was clear that we were in the later stages of an economic cycle, no one could have predicted the unprecedented events to follow. Life as we know it came to an abrupt halt and markets experienced a shock like no other fueled by panic, fear and uncertainty in the midst of a paralyzed economy. March will go down as one of the most turbulent months ever and the coronavirus induced sell-off resulted in one of the worst quarters in history.

While we are encouraged by the swift and massive response by policymakers, there is no doubt that we are now in unchartered territory. The question now is no longer a matter of whether or not we will have a recession, but instead how deep and long of a recession we will incur. Our experienced team has navigated many crises before. While each crisis is different, this one may be the most violent. Coming into this, with stocks and bonds trading at nosebleed valuations in our opinion, we were well positioned with our elevated cash levels and gold as a hedge. This should continue to help mitigate short-term volatility. We also take comfort in the fact that the vast majority of our companies are well capitalized with strong balance sheets. Our analysts have been performing stress tests for the companies in our portfolios with the simple goal of determining whether they survive unscathed. We are finding that most appear to trade at reasonable valuations today in the face of an uncertain outcome on the world economy, and we believe that they would survive in a doomsday scenario.

In terms of performance, the quarter can be summed up by saying that there was nowhere to hide. Nearly every asset class with the exception of cash and U.S. treasuries was pummeled. Our equities were down -30.4% which does not compare well to the MSCI ACWI ex-U.S. return. Why were we not more resilient? One, the last decade has been extremely challenging for value investors. Ultra-low interest rates continued to support growth stocks’ winning streak and conversely add to the headwinds facing value stocks. Second, value stocks tend to be more cyclical in nature and, in a sharp downturn, they take a much more brutal beating. Third, the market remains very bifurcated – the prices of high quality businesses and tech companies have not cracked much. Our performance has been consistently more in line with value indices. For the first quarter, the MSCI ACWI Value ex-U.S. index returned -28.55% and the MSCI ACWI SMID Value ex-U.S. was down -31.75%. Finally, we lagged during the first six weeks of the quarter but since the index peak on February 12th, we have held up better. Since then until the end of the quarter, the IVA International Fund Class A shares were down -21.87% compared to the MSCI ACWI ex-U.S. index return of -23.54%, MSCI ACWI Value ex-U.S. index at -27.25% and MSCI ACWI SMID Value ex-U.S. index down -30.09%.

Over the quarter, all sectors and all countries in the portfolio experienced losses, some steeper than others. By sector, Real Estate and Technology hurt us the least each detracting -0.3%. The two sectors which detracted the most were Consumer Discretionary and Industrials; -5.7% and -4.7%, respectively. Consumer Discretionary detracted through some of our top holdings: BMW, Richemont and Sodexo. BMW is trading well below its ’09 valuation levels despite a better balance sheet. Our worst case scenario, after coming down, remains around the current share price of BMW and the potential upside over two to three years appears attractive to us. We have added to Sodexo recently and provided a detailed investment thesis on our recent IVA Funds Semi-Annual Conference Call (a full transcript can be found at Countries that fared the best were Uruguay and the Philippines which were flat. The two worst performing countries were France detracting -4.1% and South Korea taking away -2.5%.

Fixed Income was down -48.4% this quarter and detracted -1.1%. Our exposure came down from 2.2% to 1.7%. Gold bullion returned 5.2% for the quarter, while miners returned -2.7%, collectively contributing 0.2%. We trimmed our gold bullion position earlier in the quarter when gold prices were hitting new highs. Total gold exposure ended the quarter at 6.5%.

During the first quarter, the U.S. dollar strengthened and our currency hedges helped adding 0.7%. We eliminated our hedges on the Australian dollar and Japanese yen, and initiated a new hedge on the Chinese yuan. Currently, our hedges are: 10% British pound, 75% Chinese yuan, 10% euro, 73% Korean won, and 86% Thai baht.

Perhaps counterintuitively, our equity exposure came down over the quarter from 74.7% to 67.7% at quarter-end and cash increased from 15.7% to 24.1%. Although we have been very active in March, prior to then we had done some trimming in names that reached high valuations. It is important to note that with the violent downturn, our equities also came down thus naturally lowering their percentage weighting in the portfolios. Since the onset of the crisis, we first began nibbling and more recently have selectively added to existing names and are finding some new ones. There are no specific themes; what matters most to us is finding good, quality businesses with very strong balance sheets that are trading at attractive prices. This has led us to both cyclical names in automobile, advertising, aerospace, banking, as well as non-cyclicals in beverage and health care. We have found opportunities across the globe as well in Europe, Japan and some emerging markets – Mexico and Thailand. We are excited about some opportunities we are finding in software-related companies with large recurring revenues and have been doing work on a few cyclical software companies involving travel booking, which have derated substantially. We believe that eventually travel will come back and thrive. We are also in the process of building a position in a well-capitalized airport company.

Some may ask why we have not been buying more. We are struck by how bifurcated the market remains with some higher quality stocks (L’Oréal, LVMH, Legrand and many others) still trading at elevated multiples, not even remotely close to where they traded in previous crises. Furthermore, earnings estimates from sell-side analysts remain way too optimistic, in our opinion, both for this year and 2021. There is still a lot of uncertainty as to the extent of the impact and disruption from this crisis. Bear markets do not last one month; typically they will last six months to two years depending on the financial conditions. Governments may need to take even larger and more drastic measures. We have been measured in our buying because we want to make sure that we fully understand the risk profile and will be adequately compensated. Consequences on government debt worldwide will have ramifications for the private sector as well; perhaps higher taxes down the road; perhaps less appetite by businesses for leverage and buybacks.

While this is a difficult moment for value investors, it is also an opportune time. With a longer-term view, we believe that value is likely to outperform. In our opinion, either some higher quality stocks finally crack and their valuations come down to less overvalued levels, or even become attractive, or cyclical value stocks will outperform strongly when the world economy rebounds after the pandemic is over and the aftershocks are absorbed. We are not sure however, how long the recovery may take from such a massive stroke, or whether the virus may come back, or how virulent it may become. More than ever, individual stock picking matters most, so that our companies survive even the most dire circumstances.

We appreciate your confidence and are very grateful for your continued support.


Performance Information (as of March 31, 2020)

Average Annual Total Returns
Class 3 Months YTD 1 Year 5 Year 10 Year Since
A (NAV) 9.90% -15.37% -11.86% -0.64% 4.14% 5.30%
A (with load) 4.43% -19.63% -16.26% -1.66% 3.61% 4.84%
C 9.68% -15.66% -12.49% -1.38% 3.36% 4.51%
I 9.97% -15.29% -11.62% -0.39% 4.40% 5.56%
MSCI All Country World Index (ex-U.S.) (Net) 16.12% -11.00% -4.80% 2.26% 4.97% 4.01%
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