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International ADR Strategy Q3 2018 Commentary

Oct. 23, 2018 2:30 AM ET
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| Includes: AAPL, ADDDF, ADDYY, AZN, BABA, BAM, CPA, DASTF, DASTY, GELYF, GELYY, HDB, IDEXF, IDEXY, JD, LVMHF, LXFT, OMRNF, OMRNY, SAFRF, SAFRY, SCHYF, SCHYY, SNE, TCEHY, TSM, WB
by: FieraCapitalUS
FieraCapitalUS
FieraCapitalUS

This commentary reviews the previous quarter and discusses our outlook and investment approach for the International ADR strategy in the coming months.

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3 Quarter 2018 Market Environment In general, international equity markets have been weaker than U.S. markets in Portfolio Management Team recent times. For instance, MSCI ACWI ex U.S. is down 3.09% YTD but was up 0.71% Nitin Kumbhani in Q2, while the S&P is up 10.6% YTD and 7.7% during Q2. Emerging Markets as a group have been particularly weak (i.e. down 7.68% YTD and 1.09% in Q2). Asia was Vice Chairman, Chief of Growth Equity Strategies particularly badly hit, with China and India (the two largest Asian developing economies) registering steep declines of 9% and 9.6% respectively. David Cook, CFA VP, Portfolio Manager While it is not unusual to see emerging market weakness during periods of monetary tightening in the U.S., the tariff action initiated by the Trump Administration against Amit Dugar, CFA Europe and China has compounded matters. We believe the interconnectedness of SVP, Portfolio Manager the global supply chain, and the importance of China to it could be the reason. Exports from many countries in Asia, including Korea, Indonesia, and the Philippines, Michael Kalbfleisch, CFA, CPA SVP, Portfolio Manager reach the U.S. via China, which makes them vulnerable to U.S. tariffs. Since most economies in the Asia-Pacific region are export-driven, they are at risk of becoming Kamal Kumbhani collateral damage in the U.S.–China trade wars. Meanwhile, countries in Europe SVP, Portfolio Manager differ on the question of how to respond to America, with export-driven economies Sunil Reddy, CFA such as Germany being more reluctant to engage in trade wars than more SVP, Portfolio Manager domestically-oriented ones such as France. Needless to say, expectations for strong synchronized global growth, which was consensus at the beginning of this year, have Bhavik Kothari, CFA faded; and this has dragged down markets outside the U.S. In Q3 2018, the market VP, Portfolio Manager was again led by technology which along with utilities had positive returns during James Brown, CFA the quarter. The worst performing areas of the market were energy and materials, AVP, Research Analyst consumer staples, and telecom sectors. From a regional standpoint, Asia, Japan, and Audrey Le, PhD Latin America outperformed the benchmark; and in terms of specific countries, Germany, India, the UK, Canada, and Australia under-performed (the last three AVP, Research Analyst meaningfully so), while Brazil and Russia were the standout performers. Performance The International ADR strategy underperformed the MSCI-ACWI ex-U.S Index by 2.47% gross and by 2.72% net in Q3, and by 1.83% gross and 2.54% YTD. Regional under/over-weighting was a net negative in Q3, contributing -0.33% to performance. Our single biggest regional overweight in the portfolio was Emerging Asia (16.38% vs 12.00%), which we believe accounted for most of that 0.33% miss (approx. -0.29%), followed by the negative impact from our 5.2% underweight in Japan (-0.28%). These were partly offset by gains elsewhere – the U.K. (a +0.19% impact) and the Eurozone (a +0.10% impact), for instance. Broadly speaking, the story in emerging markets was one of Value outperforming Growth – as evidenced by the fact MSCI EM Value outperformed MSCI EM Growth by +3.68% to -5.32% in Q3 (i.e. a whopping 9 percentage point advantage). We were overweight the Consumer Discretionary sector to the tune of 10.17% – a play on the increasing consumerization of Emerging Asia. That overweight detracted from performance to the tune of -0.86%, with -0.46 percentage points of that coming from sector allocation. On the other hand, our second biggest bet in the portfolio (a 6.71% overweight in Information Technology) was a net contributor to performance (a +0.67% impact). Apart from Consumer Discretionary, much of the negative impact in Q3 on the portfolio came from the outperformance of sectors not typically associated with “growth” – namely, the likes of Consumer Staples, Financials, Energy, Industrials, and Materials, all of which we were underweight in. Past performance is not indicative of future results. Inherent in any investment is the potential for loss. All information is as of September 30, 2018 unless otherwise noted. Please see Important Disclosures on page 4. 1 Fiera Capital Inc. | 10050 Innovation Drive, Suite 120, Dayton, OH 45342 | T 937 847-9100
We believe the biggest risk to the equity markets today is the possibility of an escalation in trade tensions between the U.S. and China as well as between the U.S. and Europe. This has the potential to change the status quo both for consumers around the world and for Corporate America, with the attendant risk of unintended consequences. Supply chains in the manufacturing sector are relatively inflexible, and it would take time to unwind these long-held relationships. The U.S. economy continues to perform strongly, which strengthens the hands of the Fed as they continue down the path of monetary tightening. As noted previously, rising interest rates in the U.S. have historically been negative for Emerging Market Equities. Given that, we would look to tactically reduce our exposures to emerging markets if we do get concerned about growth prospects there, especially in the Consumer and Technology areas. On the flip side, multiples have compressed in recent weeks. Since our conviction levels on portfolio companies remain high, that would seem to represent a buying opportunity. However, it is important to remember that though the portfolio is relatively more immune to trade tensions, it cannot be divorced entirely from broader market risk. Growth stocks typically outperform mid-cycle and in later-stage bull markets, but the near-term risk comes from the our belief that “value” looks cheaper/less crowded at the moment. All that being said, however, we do believe that our continued emphasis on stability and growth will help us safely navigate our way through this uncertain environment. Past performance is not indicative of future results. Inherent in any investment is the potential for loss. All information is as of September 30, 2018 unless otherwise noted. Please see Important Disclosures on page 4. Fiera Capital Inc. | 3 Quarter Commentary 2
PerformanceReview The composite’s return for the 3 quarter 2018 was -1.76% gross and -2.01% net vs. the MSCI ACWI ex U.S. Index return of 0.71%. Past performance is not indicative of future results. Inherent in any investment is the potential for loss. Gross performance results are presented before management fees, but after all trading commissions. Net performance is shown after the deduction of expenses and management fees of 1.00%. Actual investment advisory fees incurred by clients may vary. Performance results include the reinvestment of dividends and interest. Dividends received from ADRs are included net of foreign withholding taxes. 3 Quarter PerformanceDrivers LEADING CONTRIBUTORS LEADING DETRACTORS AVERAGE CONTRIBUTION TO AVERAGE CONTRIBUTION TO STOCK WEIGHT PERFORMANCE STOCK WEIGHT PERFORMANCE Sony Corp ADR 3.19 0.50 JD.com Inc ADR 1.56 -0.66 Safran SAADR 2.75 0.42 Tencent Holdings Ltd ADR 2.09 -0.49 AstraZeneca PLC 1.98 0.37 HDFCBank Ltd ADR 2.40 -0.40 Taiwan Semiconductor Manufacturing ADR 1.97 0.35 Alibaba Group Holding Ltd ADR 2.48 -0.35 adidas AGADR 2.50 0.31 Copa Holdings SAClass A 1.76 -0.27 Brookfield AM Inc Class A 2.47 0.27 Sands China Ltd ADR 2.67 -0.25 Luxoft Holding Inc A 1.16 0.23 Geely Automobile Holdings Ltd ADR 1.98 -0.25 Dassault Systemes SEADR 3.24 0.23 Weibo Corp ADR Class A 2.85 -0.24 Apple Inc 0.04 0.22 OMRON Corp ADR 1.92 -0.21 LVMH ADR 2.93 0.19 Industria De Diseno Textil SA ADR 2.51 -0.20 The holdings identified do not represent all of the securities purchased, sold or recommended. Information on the calculation methodology and a listing of every holding's contribution to the strategy's performance during the period is available upon request. Positive Impacts • Stock selection in Information Technology and Health Care contributed to performance. Negative Impacts • Stock selection was a negative contributor in Q3, driven by Emerging Asian equities. • Underweight to Japan provided negative contributions to performance. Sector Positioning Regional Positioning Consumer… Consumer Staples Americas Energy Financials Healthcare Industrials Europe/Middle Information… East/Africa Materials Real Estate Communication… Utilities Asia Pacific Cash 0% 5% 10% 15% 20% 25% 0% 20% 40% 60% Fiera Capital MSCI ACWI ex US Please contact us or visit www.fierausa.comif youhave any questions.Please see Important Disclosures on page 4. Fiera Capital Inc. | 3 Quarter Commentary 3
ImportantDisclosures Fiera Capital Inc. (FCI),is an investment adviser registered with the U.S.Securities Exchange Commission (the “SEC”).Registration with the SECdoes not imply a certain level of skill or training. Fiera Capital Inc. is indirectly wholly‐owned by Fiera Capital Corporation (FCC),which is listed on the Toronto Stock Exchange. FCC does not provide investment advisory services in the United States or to U.Spersons. Investment advisory services in the U.S.or to U.S.persons are provided though FCC'sUSaffiliates including FCI.The foundation for the U.S.division was created in 2015,with the combination of Samson Capital Advisors LLC, Wilkinson O’Grady & Co., Inc. and Fiera Capital Corporation’s U.S.institutional business development team. Wilkinson was purchased by FCCin 2013and its name was changed to Fiera Capital Inc. in 2015.Samson was purchased by FCCand became part of FCIin 2015.In 2016,FCIacquired Apex Capital Management and added the team and strategies of Larch Lane Advisors; both of which began operating under FCIas of 2017. This material is confidential and not to be reproduced or redistributed without the prior written consent of Fiera Capital. This document is intended for information purposes only. Some information contained herein has been obtained from third-party sources, including those specifically referenced, and such information has not been independently verified by Fiera Capital. No representation, warranty, or undertaking, express or implied, is given as to the accuracy or completeness of such information by Fiera Capital or any other person; no reliance may be placed for any purpose on such information; and no liability is accepted by any person for the accuracy and completeness of any such information. Therecan be noassurance norshouldit be assumedthat futureinvestmentperformancewill conformto any performanceexamplesset forthin this report. The investmentresults and portfoliocompositionsset forthin this reportare providedfor illustrative purposesonlyand maynot beindicative of thefuture investmentresults and portfoliocompositionsofthe investmentprogramsconductedbyFiera Capital. The composition,size of, and risks associated with futureinvestmentportfoliosmaydiffer substantially from theexamplesset forthin this report.Therecan beno assurancethat futureinvestmentswill perform in accordancewith the investmentsdescribedin this reportor that theinvestmentswill be able to avoidlosses. An investmentin anyinvestmentvehicle or securitydescribedin this reportcan lose value. These materials are not intended as investment advice or a recommendation of any security or investment strategy for a specific recipient, investments or strategies described herein are provided as general market commentary, and there may be no account or fund managed by Fiera Capital for which investments or strategies described herein are suitable due to the various types of accounts or funds that are managed by Fiera Capital. Nothing herein constitutes an offer to sell, or solicitation of an offer to purchase, any securities, nor does it constitute an endorsement with respect to any investment area or vehicle. Discussions regarding potential future events and their impact on the markets are based solely on historic information and Fiera Capital's estimates and/or opinions, and are provided for illustrative purposes only. A number of the comments in this document are based on current expectations and are considered "forward-looking statements". Actual future results, however, may prove to be different from expectations. The opinions expressed are a reflection of Fiera Capital's best judgment at the time this document is compiled, are subject to change at any time without prior notice, cannot be guaranteed as being accurate, and any obligation to update or alter forward-looking statements as a result of new information, future events, or otherwise is disclaimed. Furthermore, these views are not intended to predict or guarantee the future performance of any individual investment strategy/style, security, asset class, general markets , nor are they intended to predict the future performance of any Fiera Capital Vehicle or portfolio. Any charts, graphs, and descriptions of investment and market history and performance contained herein are not representation that such history or performance will continue in the future or that any investment scenario or performance will even be similar to such chart, graph, or description. Any investment described herein is an example only and is not a representation that the same or even similar investment scenario will arise in the future or that investments made will be as profitable as this example or will not result in a loss to such any investment vehicles. All returns are purely historical, are no indication of future performance and are subject to adjustment. Composite Description: The International All Cap ADR composite formerly named the International Composite was created on October 1, 2011and includes all portfolios invested in International equities (including ADR’s) with strong earnings and growth characteristics and includes large, mid and small capitalizations whether denominated in foreign currencies or in U.S.dollars. The product is benchmarked against the Morgan Stanley Capital International All Country World Index ex U.S.(“MSCI ACWIex U.S.”).The MSCIACWIEx U.S.is a stock market index made up of approximately 1,859global stocks. The index includes stocks from across 22 of 23 Developed Markets (DM) countries (excluding the US) and 23 EmergingMarkets (EM) countries and covers approximately 85%of the global equity opportunity set outside of the U.S.,as defined by MSCI Index results assume the re-investment of all dividends and capital gains. The strategy’s holdings may differ significantly from the securities that comprise the index. The index is not a projection, prediction or guarantee of performance. It is not possible to invest directly in the index. Investors pursuing a strategy similar to an index may experience higher or lower returns and will bear the costs of fees and expenses that will reduce returns. Typically, the International All Cap ADR portfolio is similar in composition to the benchmark and is expected to have similar performance characteristics due to the international exposure. Portfolios are generally comprised of individual stocks and cash equivalents. Portfolios may have dispersions based on the size of the account and timing of deposit and withdrawals of funds or transfers of stocks. Represents portfolios which are commission based. Fiera Capital Inc. | 3 Quarter Commentary 4
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