International Small Companies First Quarter 2014 Report
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International Small Companies Equity 2014 Second Quarter Report Composite Performance (%) For Periods Ending June 30, 20141 3 Months YTD 1 Year 3 Years2 5 Years2 Since Inception2,3 HL International Small Companies (gross of fees) 3.13 7.63 28.11 11.96 20.32 10.51 HL International Small Companies (net of fees) 2.86 7.08 26.81 10.74 18.97 9.27 MSCI All Country World ex-US Small Cap Index4 3.79 7.48 26.52 7.28 14.87 4.91 1The Composite performance returns shown are preliminary; 2Annualized returns; 3Inception Date: December 31, 2006; 4The Benchmark Index. Please read the above performance in conjunction with the footnotes on the back 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 (%) Sector HL ISC ACWIxUS SC (Under) / Over The Benchmark Market Review • International Small Companies Industrials 28.4 20.1 posted solid returns, but nevertheless lagged larger-cap Health Care 11.9 5.9 companies in the quarter. Cons Staples 10.7 5.9 • Energy stocks outperformed on Cash 2.7 – fears of rising energy prices amidst Info Technology 12.4 10.4 the turmoil in the Middle East. Telecom Services 3.0 1.2 Portfolio Highlights Utilities 1.0 2.4 • The arrival of an awaited spike in Energy 1.5 6.0 M&A activity has directly affected the portfolio, with three companies Cons Discretionary 11.9 16.9 receiving acquisition offers. Materials 4.9 11.0 • We sold two Industrials holdings Financials 11.6 20.2 during the quarter but maintain our sizable overweight to the sector. (10.0)-10.0 (5.0)-5.0 0.00.0 5.05.0 10.010.0 • We increased our exposure to frontier markets, where we have been seeking relatively Geographical Exposure (%) undiscovered high-quality, Region HL ISC ACWIxUS SC (Under) / Over The Benchmark growing companies at attractive valuations. Europe EMU 23.7 16.5 Cash 2.7 – Table of Contents Frontier Markets5 1.8 – Market Review page 2 Other6 1.4 – Pacific ex-Japan 10.2 9.1 Performance and Attribution page 2 Emerging Markets 21.8 21.2 Portfolio Highlights Middle East 0.0 0.7 page 3 Europe ex-EMU 22.9 24.2 Purchases and Sales page 5 Japan 14.6 19.0 Canada 0.9 9.3 Portfolio Facts & Holdings pages 5 - 7 (10.0)-10.0 (5.0)-5.0 0.00.0 5.05.0 10.010.0 5Includes countries with less-developed markets outside the Index; 6Includes companies classified in countries outside the Index. Sector and region allocations are supplemental information only and complement the fully compliant International Small Companies Composite GIPS Presentation. Source: Harding Loevner International Small Companies Model; MSCI and S&P. MSCI Barra and S&P do not make any express or implied warranties or representations and shall have no liability whatsoever with respect to any GICS data contained herein. © 2014 Harding Loevner Market Review Regionally, returns showed significant dispersion for the quarter. The European Monetary Union (EMU) countries were down 1% International small companies—represented by the MSCI All in the quarter, with the worst performance occurring in four out Country World ex-US Small Cap Index—gained 3.8% in the quar- of the five “PIIGS” countries, whose debt burdens and struggling ter. This solid return nevertheless lagged the larger-cap MSCI All economies caused such concern in 2010–2011. Portugal, Ireland, Country World ex-US Index, which rose 5.3%. Year-to-date, how- Italy, and Greece—now relegated to the Emerging Markets (EM) ever, international small cap companies have continued to outpace division—were each down between 8–11%. Yet Spain, the fifth large caps, with the small-cap Index gaining 7.5% and the large- member of this cohort, delivered a positive return of nearly 2%. cap Index rising 5.9%. At the other extreme were Japan (up 8%), energy-rich Canada (up 13%), and EMs (up 6%). Within EMs, India performed exception- All sectors in the Index were positive, with Energy at the top by ally well, surging 33% amidst investor enthusiasm for the resound- gaining 11% on fears of rising energy prices amidst the turmoil in ing electoral victory of Narendra Modi to the position of Prime the Middle East. There was no clear trend in sector performance, Minister. Many other EMs—including Thailand, Turkey, Russia, however, with Health Care, Materials, Utilities, and Consumer Philippines, and Hungary—were also up double digits despite Staples—a mix of more and less cyclical sectors—all also post- signs of rising political risk in these countries. ing returns above the overall Index. Meanwhile, the Information Technology, Telecom Services, and Consumer Discretionary sec- Performance and Attribution tors underperformed the Index. The International Small Companies Composite rose 3.1% in the second quarter, underperforming the Index, which returned 3.8%. Market Performance (%) The charts to the right illustrate performance attribution for the Market 2Q 2014 Trailing 12 months quarter by sector and region respectively. Year-to-date, the Com- USD USD posite has gained 7.6%, in-line with the 7.5% return of the Index. Canada 12.9 34.0 Our relative performance for the second quarter was hurt by our Emerging Markets 5.7 15.1 underweight in the surging Energy sector. The sector represents Europe EMU -0.9 42.1 nearly 6% of the Index while our single Energy holding, Ezion, gives us a weight of less than 2% in the sector. Europe ex-EMU 0.0 36.6 Japan 8.5 18.6 Poor stock selection in Consumer Staples was also a large detrac- Middle East -1.8 21.5 tor. Singapore-based packaged food maker Super Group reported Pacific ex-Japan 2.2 17.0 disappointing earnings growth due to higher costs associated with its expansion in China, as well as increased labor costs. Shares MSCI ACWxUS Small Cap Index 3.8 26.5 of another packaged food maker, Vitasoy Intl Holdings of Hong Kong, fell after posting good returns early in the quarter despite strong revenue and profit growth. Our holdings in Financials ben- Sector Performance (%) of the MSCI ACW ex-US Small Cap Index efited the portfolio most, especially Kenya’s Equity Bank. The Sector 2Q 2014 Trailing 12 months company’s profits rose because of strong increases in fee income USD USD along with a healthy decline in non-performing loans. Brazilian central securities depository CETIP also performed well as cash Consumer Discretionary 1.4 25.3 generation remained strong, allowing management to raise the Consumer Staples 4.7 16.5 dividend payout ratio to 75%. Energy 11.3 25.8 Financials 4.0 24.3 Viewed geographically, our large underweight to the strong-return- ing Canadian market hurt relative returns in the second quarter. Health Care 5.5 27.9 Industrials 3.6 31.4 Information Technology 1.6 30.5 Bold font indicates companies held in the portfolio during the quarter. Only the Materials 5.4 26.4 first reference to a particular holding appears in bold. The portfolio is actively Telecom Services 1.7 47.4 managed therefore holdings shown may not be current. Portfolio holdings should not be considered recommendations to buy or sell any security. It should Utilities 5.2 28.4 not be assumed that investment in the security identified has been or will be profitable. To request a complete list of holdings for the past year, please contact Harding Loevner. A complete list of holdings at June 30, 2014 is available on Source: Wilshire Atlas (as of June 30, 2014); MSCI Barra and S&P pages six and seven of this report. 2 Harding Loevner International Small Companies Equity The Canadian market is dominated by Energy companies, so this is Portfolio Highlights a direct corollary of our underweight in Energy. We had poor stock M&A Activity selection in the euro zone, mainly in France. Media company Ipsos and petroleum storage facility operator RUBIS were both hurt by We wrote in the third quarter 2013 about our expectations for a the strengthened euro. RUBIS’s growth was also adversely affect- surge in M&A activity due to companies’ limited organic growth ed by lower propane prices and extremely warm weather condi- opportunities alongside the easy-money policies across the world. tions across Europe. Europe ex-EMU was the strongest contributor This year, the surge has finally arrived, with M&A activity hitting a to returns by region, particularly our holdings in the UK market. seven-year quarterly high in June 2014.1 The arrival of this awaited spike in buyout offers has directly affected the portfolio, with three companies receiving acquisition offers. Intl Small Cos Composite 2Q14 Performance Attribution Singapore’s Goodpack controls the world’s largest fleet of Interna- by Sector vs. MSCI ACW ex-US Small Cap Index tional Bulk Containers (IBCs), which are returnable metal shipping crates that provide a substitute for traditional wooden crates and 2.02.0 Total Variance: -0.7 barrels. The company provides delivery, collection, and techni- Total Stock Selection: -0.3 cal support for its IBCs across 60 countries, eliminating the need Total Group Weight: -0.4 1.01.0 for customers to store or dispose of their own shipping crates and containers. On May 27, the well-known private equity firm KKR announced a proposal to buy Goodpack for US$1.1 billion, rep- 0.00.0 resenting a roughly 23% premium to the prevailing share price in March when Goodpack first announced it had been approached by -1.0-1.0 prospective buyers.