IVA Worldwide Fund 3rd Quarter Commentary

GuruFocus.com
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- By Holly LaFon

The IVA Worldwide Fund Class A (NAV) ("the Fund") ended the quarter on September 30, 2016 with a return of 3.73% versus the MSCI All Country World Index (Net) ("Index") return of 5.30% bringing YTD performance to 5.70% versus the Index return of 6.60% for the same period.

Despite bouts of volatility throughout the quarter, primarily related to anxieties over Central Bank actions and inactions, the markets were relatively quiet. The last few weeks were an exception, when Deutsche Bank concerns hit a crescendo, dragging down European bank shares and igniting fears about their overall health. We have expressed these same concerns for some time now and have therefore largely avoided European banks in our portfolio. Our cautious positioning continues to reflect our other concerns, including large credit excesses in China and prolonged Central Bank manipulations. We will expand upon this later on in our update.


The Fund lagged the Index for the quarter. Performance was diluted by our elevated cash position. Our equities did well (up 7.6%) compared to those in the Index* (up 5.4%). Within equities, our U.S. names contributed the most to performance, adding 1.9%. In the U.S., our Consumer Discretionary names added the most, including two top ten names: DeVry Education Group (DV) and News Corporation (NWSA). South Korea contributed 0.8%, led by Samsung Electronics (005930.KS) (Technology) which was the best performer in the portfolio for the quarter. Continental Europe contributed 0.6%, helped by our French Technology names. South Africa and Thailand detracted a total of -0.1% from our performance. In South Africa, our Technology holding was down over 14% for the quarter and in Thailand our Telecommunications holding was down over 2%.

Our corporate high yield debt was up 7.5% for the quarter, contributing 0.2% to performance. Our total fixed income exposure ended the quarter at 3.3%. Currency hedges detracted -0.2%, hurt by our hedge on the JPY as it appreciated over the quarter. Our hedge on the euro increased from 10% to 25% over the quarter. We made this change after Brexit, as weakness in European banks (Italy in particular) again became evident. Our other hedges remained relatively unchanged, ending the quarter at: 43% Australian dollar, 25% Japanese yen, 30% Korean won.

Gold was down -0.6% this quarter, detracting -0.04% from performance. Our gold exposure increased slightly from 6.3% to 6.4%. We still believe gold provides a good hedge against extreme outcomes, and in particular benefits from negative real interest rates. Gold may not be income-producing, but at least no payment is required to own gold (except modest storage fees) and there is no counterparty risk.

We added some new positions during the third quarter, including names in China, France and Japan. In Japan, the appreciating JPY opened up opportunities for us, specifically in Consumer Staples and Health Care. At the same time, as we saw some of our names approach and in some instances reach their intrinsic values, we had to trim and even eliminate positions entirely. Our equity exposure decreased slightly over the quarter from 52.6% to 52.1% and our cash position increased from 37.6% to 38.3%.

During the IVA Funds Semi-Annual Update Call held on September 13th, Charles de Vaulx (Trades, Portfolio) addressed why our portfolio remains so cautiously positioned. He quoted the Funds' Semi-Annual Report dated March 31, 2016:

"The combination of nosebleed valuations, a well-advanced economic cycle in the US, unsustainably high profitability by many listed corporations in the developed world, and extremely low manipulated interest rates in many countries are the main reasons why we remain cautiously positioned."

Our commitment, as always, is to our clients. We believe it is in their best interests for us to remain vigilant in our disciplined investment strategy, which focuses on trying to preserve capital over the short term and trying to beat equity indices over the long-term. We will not let this ultra-low rate environment push us to accept lower margins of safety. We will continue our eclectic and time tested approach to value investing, searching the world for opportunities, with a focus on controlling risk with reasonable position sizes, good balance sheets and acceptable discounts at time of investment.

We appreciate and thank you for your continued support.

* Excludes gold mining stocks

The views expressed in this document reflect those of the portfolio manager(s) only through the end of the period as stated on the cover and do not necessarily represent the views of IVA or any other person in the IVA organization. Any such views are subject to change at any time based upon market or other conditions and IVA disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for an IVA fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any IVA fund. The securities mentioned are not necessarily holdings invested in by the portfolio manager(s) or IVA. References to specific company securities should not be construed as recommendations or investment advice.
This article first appeared on GuruFocus.


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