EAFE EQUITY 2020 Year End Report
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EAFE EQUITY 2020 Year End Report COMPOSITE PERFORMANCE (% TOTAL RETURN) FOR PERIODS ENDED DECEMBER 31, 20201 SINCE 3 MONTHS 1 YEAR 3 YEARS2 5 YEARS2 10 YEARS2 INCEPTION2,3 HL EAFE EQUITY (GROSS OF FEES) 14.94 23.89 11.50 13.92 9.54 10.85 HL EAFE EQUITY (NET OF FEES) 14.82 23.26 10.91 13.32 8.92 10.23 MSCI EAFE INDEX4,5 16.09 8.28 4.79 7.96 6.00 6.80 1The Composite performance returns shown are preliminary; 2Annualized Returns; 3Inception Date: February 28, 2010; 4The Benchmark Index; 5Gross of withholding taxes. Please read the above performance in conjunction with the footnotes on the last page of this report. Past performance does not guarantee future results. All performance and data shown are in US dollar terms, unless otherwise noted. SECTOR EXPOSURE (%) WHAT'S INSIDE HL EAFE MSCI EAFE (UNDER) / OVER THE BENCHMARK Market Review › INFO TECHNOLOGY 21.3 8.9 After a turbulent year, and CASH 3.7 — despite an escalation in the global pandemic, international CONS STAPLES 14.2 11.0 stock markets rose dramatically HEALTH CARE 15.1 12.9 following positive results for COVID-19 vaccine trials. INDUSTRIALS 16.8 15.2 MATERIALS 9.4 7.9 Performance and Attribution › ENERGY 1.7 3.1 Sources of relative return by FINANCIALS 14.1 16.3 region and sector. REAL ESTATE 0.0 3.1 Perspective and Outlook › COMM SERVICES 1.3 5.2 We revisit our quaint worries from UTILITIES 0.0 3.9 a year ago about a “world turned upside down” by unsustainable CONS DISCRETIONARY 2.4 12.5 valuations and turn to some (14.0) (7.0) 0.0 7.0 14.0 newer concerns about regulatory threats to Big Tech. GEOGRAPHIC EXPOSURE (%) Portfolio Highlights › In a quarter characterized by HL EAFE MSCI EAFE (UNDER) / OVER THE BENCHMARK dramatic outperformance of EMERGING MARKETS 7.4 — cheaply priced shares of lower- quality companies, our emphasis CASH 3.7 — on the highest-quality should have CANADA 2.1 — dragged us under—but didn’t. MIDDLE EAST 1.8 0.6 Portfolio Holdings › OTHER6 1.1 — Information about the companies FRONTIER MARKETS7 0.0 — held in our portfolio. EUROPE EX-EMU 29.3 30.2 Portfolio Facts › EUROPE EMU 29.4 32.2 Contributors, detractors, PACIFIC EX-JAPAN 7.2 11.7 characteristics, and completed transactions. JAPAN 18.0 25.3 (14.0) (7.0) 0.0 7.0 14.0 6Includes companies listed in the United States; 7Includes countries with less-developed markets outside the Index. Sector and geographic allocations are supplemental information only and complement the fully compliant ONLINE SUPPLEMENTS EAFE Equity Composite GIPS Presentation. Source: Harding Loevner EAFE Equity Model; MSCI Inc. and S&P. MSCI Inc. and S&P do not make any express or implied warranties or representations and shall have no liability whatsoever with respect to any GICS View other reports at data contained herein. hardingloevner.com/library 2020 Year End Report | 1 This page intentionally left blank. 2 MARKET REVIEW MARKET PERFORMANCE (USD %) MARKET 4Q 2020 TRAILING 12 MONTHS International stock markets rose dramatically in the fourth EUROPE EMU 17.7 8.5 quarter despite an escalation in the global pandemic. The starting gun for the run-up was Pfizer’s announcement of bet- EUROPE EX-EMU 13.5 3.2 ter-than-expected results for its COVID-19 vaccine trials and JAPAN 15.3 14.9 was followed in rapid fire by positive reports from Moderna, MIDDLE EAST 19.3 15.2 AstraZeneca, and Sinopharm. Accelerated approvals gave in- PACIFIC EX-JAPAN 20.1 6.6 vestors further hope for some return to normal commerce in MSCI EAFE INDEX 16.1 8.3 2021, even as COVID-19 hospitalizations in the US and Eu- rope soared. The market rally was broad, with all sectors and regions finishing in positive territory, an encouraging cap on SECTOR PERFORMANCE (USD %) a turbulent year. OF THE MSCI EAFE INDEX SECTOR 4Q 2020 TRAILING 12 MONTHS The year began with news of a sinister respiratory illness spreading throughout Hubei province in China. By the end of COMMUNICATION SERVICES 16.5 13.0 March, the virus was raging across the globe, prompting gov- CONSUMER DISCRETIONARY 22.5 16.1 ernments to enact sweeping business and travel restrictions to CONSUMER STAPLES 7.0 6.2 slow its spread. The economic fallout was immediate, and the ENERGY 31.3 -26.9 concomitant stock market decline was swift and severe. FINANCIALS 25.5 -3.4 Economic policymakers, however, were quick to respond with HEALTH CARE 4.0 11.9 unparalleled levels of support aimed at arresting the decline. INDUSTRIALS 15.8 11.3 Central banks in developed countries slashed borrowing costs INFORMATION TECHNOLOGY 16.9 28.7 and rolled out a dizzying array of measures designed to sup- MATERIALS 20.2 21.1 port asset prices and keep liquidity flowing to businesses. Fis- REAL ESTATE 15.0 -6.4 cal branches, for their part, authorized almost US$12 trillion in spending to prevent a collapse in consumption, an amount UTILITIES 13.6 14.8 equivalent to almost 12% of global GDP. Source: FactSet (as of December 31, 2020); MSCI Inc. and S&P. Stock markets rebounded in response almost as fast as they had fallen. Despite the ongoing headwinds, the economic recovery gathered steam over the course of year, and markets continued their upward march. The US dollar was a barometer of investor fear, rallying during the height of the pandemic, as investors sought the safety of the world’s principal reserve currency, only to reverse course ex-Japan also fared well, helped by Australia, which rebounded over the rest of the year. Only a handful of currencies from with a recovery in commodity prices. commodity-exporting countries, like Russia and Brazil, were lower against the dollar for the year. Style effects, having favored fast-growing and high-quality companies most of the year heedless of their high valuations, Companies that benefited from the abrupt shift to remote work also largely reversed in the quarter. Though valuation had rel- and surge in e-commerce, many of them within Information atively little predictive power, stocks of the slowest-growing Technology (IT) and Consumer Discretionary, far outpaced companies, including many cyclicals such as Energy and banks, more cyclical sectors such as Energy, Financials, and Real Es- outperformed the fastest-growing by over 700 basis points. The tate, all of which finished in negative territory. The fourth quar- effect of quality was even more pronounced, as shares of com- ter saw an inversion of this pattern, with Financials and cycli- panies with more leverage and less consistent returns outper- cals benefiting disproportionally from a vaccine-fueled boost in formed those of the highest-quality companies by over 1,300 growth expectations. Non-cyclical sectors such as Health Care, basis points. Consumer Staples, and Utilities lagged. IT, however, continued to outperform despite heightened scrutiny from regulators in Europe, China, and the US. PERFORMANCE AND ATTRIBUTION Similar final quarter flip-flops occurred along geographical The EAFE Equity Composite rose 14.9%, in the quarter, be- lines. The eurozone, after lagging for three quarters on a year- hind the 16.1% rise of the MSCI EAFE Index. For the full year, to-date basis, outperformed in the fourth, particularly coun- the Composite rose 23.9%, well ahead of the benchmark’s tries hit hardest by the virus such as Spain and Italy. Pacific 8.3% return. 3 During the quarter, our stocks within Materials lagged, since SECTOR PERFORMANCE ATTRIBUTION our holdings of industrial gas, fragrance & flavor, and enzyme TRAILING 12 MONTHS producers are less geared to the business cycle than other parts EAFE EQUITY COMPOSITE VS. MSCI EAFE INDEX 8.0 of the sector. Strong stock selection in Financials contributed Total Effect: 15.6 Selection Effect: 13.1 positively. Nearly all of our banks bettered the banks industry 6.0 Allocation Effect: 2.5 group, which in turn led the Financials sector. BBVA, the Span- ish multinational with substantial Mexican and Turkish subsid- 4.0 iaries, outpaced the others following the announcement of the 2.0 sale of its anemic US business for a healthy price. Effect (%) 0.0 Several of our IT holdings also added to performance once again, with good returns from Dutch payments-software devel- -2.0 UTIL INFT oper Adyen, South Korea-based Samsung Electronics (which FINA INDU STPL RLST DSCR HLTH ENER CASH MATS was boosted by improving pricing for its DRAM memory chips), COMM and Infineon Technologies, a German manufacturer of semi- Selection Effect Allocation Effect Total Effect conductors used heavily in autos, especially electric vehicles. SAP shares plunged, however, after the German software mak- er revealed poor uptake of its cloud-based data services. With GEOGRAPHIC PERFORMANCE ATTRIBUTION no holdings in the reviving auto industry to balance the swoon TRAILING 12 MONTHS of suddenly embattled Alibaba—where investors digested EAFE EQUITY COMPOSITE VS. MSCI EAFE INDEX the implications of the company’s withdrawal of its planned 8.0 Total Effect: 15.6 IPO for its Ant Financial affiliate under pressure from banking Selection Effect: 16.9 regulators, and the parent company later was put on notice 6.0 Allocation Effect: -1.3 about the potentially anti-competitive practices of its core e- 4.0 commerce business—our Consumer Discretionary holdings hurt performance. 2.0 Effect (%) From a geographic perspective, lagging stocks in Europe, 0.0 both inside and outside the eurozone, offset good stocks in -2.0 EMs and Japan. Our four ultra-high-quality Swiss holdings— EMU CASH XEMU PACXJ Nestlé, pharmaceutical makers Roche and Lonza, and hearing JAPAN OTHER* CANADA EMERGE aid manufacturer Sonova—lagged the cyclical rally.