International High Dividend ADR Equity Strategy Q Commentary. Market and Economic Review

Transcription

1 S C H A F E R C U L L E N C A P I T A L M A N A G E M E N T International High Dividend ADR Equity Strategy Q Commentary Market and Economic Review Major international equity markets ended the year higher, posting the strongest annual returns since Driving this move upwards was a continued improvement in economic data and a coincident thawing in credit markets. In this environment, the near-term softness in reported earnings from companies was discounted in anticipation of improved prospects in Equities in the developed world outperformed bonds for the sixth quarter in a row, as long-term interest rates rose and the record-wide differential between earnings yields and bond yields continued to normalize from generational highs. By region, Europe was a key area of strength, led by equity markets in Germany and smaller, more distressed countries, such as Spain, Ireland and Italy. Japanese equities, which are up sharply since November 2012, underperformed as did other major markets in Developed Asia, including Australia, Hong Kong and Singapore. Emerging Markets posted modest gains and were held back by the weak performance of countries such as Turkey, Thailand and Brazil, which faced the twin-headwinds of rising political uncertainty and falling currency values. A positive recent development has been the active response by governments globally to engage in addressing structural imbalances, including market-friendly reforms announced in China, continued legislative progress towards a banking union in Europe and an orderly resolution of the budgetary impasse in the United States. During the quarter, while standard measures of equity market volatility such as the VIX, remained muted, there were heightened levels of activity in fixed income, currency and commodity markets, reminding us once again of the extraordinary volatility being experienced in the post-financial crisis, policy-driven world. We believe that our strategy of buying shares in strong companies, at attractive valuations and holding them for the long-term (i.e. 5 years) remains attractive in this environment. In the quarter, we outperformed the strong +5.7% gain in MSCI EAFE, led by the strength of our world-leading companies across both cyclical and non-cyclical sectors, including Industrials, Financials and Healthcare. By style class, value outperformed growth and small caps outperformed large caps. Portfolio Performance The SCCM International High Dividend ADR Composite was +6.2% (net) in the 4th Quarter versus +5.7% for MSCI EAFE. Since Q4 YTD 1 Year 3 Year 5 Year Incept* SCCM Intl High Div ADR (net) MSCI EAFE S&P *June 30, Performance for periods greater than 1 year is annualized Fifth Avenue New York, NY Tel Fax

2 Sector Attribution The largest contributor to relative performance was our superior stock selection across both cyclical and non-cyclical sectors, including Industrials, Financials, Healthcare and Consumer Staples. Outperformance here was led by a diverse set of world-leading companies, including Siemens, Smiths Group, Manulife Financial, Bayer and Reckitt Benckiser, which are continuing to cut costs, introduce innovative new products, gain market share and deliver consistent and visible earnings growth. Our overweight allocation to Telecommunication Services and Healthcare and our underweight allocation to Basic Materials, Consumer Discretionary and Utilities, aided performance. The largest detractor from relative performance was our inferior stock selection in Telecommunication Services and Energy. In Telecommunication Services, the strong performance of our holdings in Europe was held back by the weak performance of our holdings in Asia, as country-specific factors overrode sector-specific factors. While some of our holdings in the Energy sector underperformed, we continue to believe in the deep value characteristics of these companies. Cash was a drag on performance during the quarter. Source: Bloomberg Page 2 of 8

3 Country Attribution The largest contributor to relative performance was our overweight allocation to well-positioned, multinational companies in Germany, Canada and the United Kingdom and our underweight allocation to poorly-positioned, domestically-focused companies in Japan and Australia. Our superior stock selection aided performance in Switzerland and Germany, led by companies experiencing improving prospects for earnings, including Zurich Insurance, ABB, Bayer and Deutsche Telekom. The largest detractor from relative performance was our overweight allocation to Singapore, Switzerland and Russia and our underweight allocation to Spain and Italy. We remain comfortable with these allocation decisions based on valuations and the long-term prospects of our portfolio companies. Stock selection hurt us in France and the United Kingdom, where some of our holdings in non-cyclical sectors, such as Utilities and Consumer Staples, underperformed their relevant local indices. Cash was a drag on performance during the quarter. Source: Bloomberg Page 3 of 8

4 Portfolio Strategy and Changes Purchases None. Sales Israel Chemicals Israel Basic Materials Israel Chemicals owns attractive fertilizer assets which are currently valued at depressed prices. However, changes in regulatory and industry-specific conditions in 2013 have created a large degree of uncertainty in regards to the visibility and sustainability of future dividends, thus warranting a sale Page 4 of 8

5 Outlook As the global recovery matures into its fifth year, investor sentiment is no longer at the bearish levels it was at in March of Equity markets remain moderately priced in absolute terms and attractively priced, relative to bonds. Within equity markets however, pockets of froth and excess have developed which investors need to be mindful of. One way to make reasoned decisions in this regard is by realizing that long-term investment results rely on the satisfaction of both risk and return requirements. Since inception, we have been able to outperform our benchmark, MSCI EAFE, but more importantly we have done so while taking on less risk as measured by standard deviation, beta and downside capture ratio. Thus, while we may have underperformed somewhat in the liquidity-driven, melt-up market we experienced in 2013, we tend to more than make up for this by providing superior downside protection in more mixed and volatile markets which usually follow. The rebalancing away from bond funds towards equity funds, has led to an expansion in price multiples, as investors have poured money into momentum-driven indexed products. Over the longterm however, as seen below in a study from 1970 until present, the two key drivers of equity market total real returns are dividend yield (blue bar) and dividend growth (brown bar), with multiple expansion (grey bar) having a limited role, if any. We remain well positioned on both of these key measures, with our companies on average having a 37% higher dividend yield and having reported nearly twice the 2013 YoY dividend growth, compared to MSCI EAFE. Within equities, valuations differ by region and country. In the Eurozone, equity price multiples have recovered to pre-crises levels, while earnings remain depressed and have room to provide upside. A robust recovery, however, is held back by the need to restructure sovereign and banking balance sheets, coupled with the continuing uncertainty on the regulatory and political fronts. In emerging markets, the tail wind of attractive valuations is met with the headwind of weak near-term earnings trends, especially in the case of state owned and commodity companies. In Japan, Prime Minster Abe s ambitious structural reforms are proving more difficult to implement than initially Page 5 of 8

6 expected, while companies meeting our criteria of paying high and sustainable dividend yields continue to remain few and far between. In the developed markets of the United Kingdom, Scandinavia and Canada, pockets of value are emerging in quality companies selling for reasonable valuations. While geographic diversification did not work in 2013, with Europe and Japan dominating equity market performance, we remain committed to our more broad-based exposure which we believe positions us well over the long-term. Given the overall mixed market and economic backdrop, our portfolio continues to emphasize companies which provide good visibility on earnings stability and growth, across a variety of economic scenarios. In terms of new investments, we favor companies which are taking concrete steps to increase their net worth by cutting costs, monetizing valuable assets and simplifying their corporate structure. We also look favorably upon leading companies which are temporarily out of favor, due to company-specific or industry-specific factors, which we believe either are already well priced-in or are improving. As always, we remain conservative in our investment selection and would note the superior balance sheet strength and earnings sustainability of our portfolio companies relative to the index. This conservatism, along with the low Price/Earnings and high Dividend Yield disciplines should help cushion volatility going forward. In our International High Dividend ADR portfolio, all of our companies have paid dividends in % of these companies have raised their dividend with an average increase of 8.3%. This calculation does not include the sizable special dividends that have been announced this year from holdings including Vodafone, Smiths Group and United Overseas Bank. With strong balance sheets and continued earnings growth, we anticipate that this trend will continue in 2014 and beyond. Best Regards, Schafer Cullen Capital Management, Inc. Page 6 of 8

7 Appendix: Portfolio Exposure And Characteristics As Of 12/31/2013 Portfolio Exposure Sectors % Asset Regions % Asset Consumer Discretionary 0.0 Developed Asia Pacific 13.3 Consumer Staples 18.1 Continental Europe 47.5 Energy 9.5 United Kingdom 26.5 Financials/ REITs 14.7 North America 1.9 Health Care 16.1 Asia Pacific Emerging 2.0 Industrials 16.8 Latin America 0.0 Information Technology 0.7 EMEA 5.7 Materials 1.6 Telecommunications 17.0 Developed Markets 89.3 Utilities 2.5 Emerging Markets 7.7 Cash 3.0 Cash 3.0 Total Total Top 10 Countries United Kingdom Germany Switzerland France Japan Singapore Netherlands Russia South Africa Canada Top 10 Holdings Novartis AG Deutsche Telekom AG Deutsche Post AG Vodafone Group PLC Nestle S.A. Unilever N.V. Total S.A. Siemens AG British American Tobacco Nippon Telegraph & Tel. Portfolio Characteristics Forward Forward Q4 13 Est. Est. Q4 13 Price / Dividend LT Debt / LT DPS LT EPS Market Earnings Yield Capital Growth Growth Cap SCCM Intl High Div ADR $86,707 MSCI EAFE ETF $68,378 Source: SCCM Research, BCA Research, Bloomberg Page 7 of 8

8 Disclosure: Schafer Cullen Capital Management (SCCM or the Adviser ) is an independent investment advisor registered under the Investment Advisers Act of This information should not be used as the primary basis for any investment decision nor should it be considered as advice to meet your particular investment needs. The portfolio securities and sector weights may change at any time at the discretion of the Adviser. It should not be assumed that any security transactions, holdings or sectors discussed were or will be profitable, or that future recommendations or decisions will be profitable or equal the investment performance discussed herein. Investing in equity securities is speculative and involves substantial risk. Past performance is no guarantee of future results. Market conditions can vary widely over time and can result in a loss of portfolio value. Individual account performance results will vary and will not match that of the composite or model. This variance depends on factors such as market conditions at the time of investment, and / or investment restrictions imposed by a client which may cause an account to either outperform or underperform the composite or model s performance. A list of all recommendations made by SCCM within the immediately preceding period of not less than one year is available upon request. The strategy depicted in this report has been managed in accordance with the investment objectives of the strategy as determined by the Adviser. The Adviser has selected benchmarks, which in their opinion closely resemble the style of the securities held in the composite or model portfolio of the strategy (e.g. large cap value, small cap value, international, etc.). The securities held in the composite or model are actively managed while the benchmark index is not. Investors should be aware that the Adviser makes no attempt to match the portfolio securities, or the security weightings of the benchmark. The composite or model s performance will be affected greater by the price movements of individual securities as the composite or model is more concentrated, generally less than 100 securities, while a comparative benchmark will generally have between 500 and 2,500 securities where individual security price movements have a lesser affect. An individual cannot invest directly in an index. In the case where this report displays model results, please be aware that such results do not represent actual trading and that results may not reflect the impact that material economic and market factors might have had on the Adviser's decision-making if the Adviser were actually managing clients' money. Model and actual results reflect the deduction of advisory fees, brokerage or other commissions, and any other expenses that a client would have paid or actually paid (Net of Fee performance) and reflect the reinvestment of dividends and other earnings. Schafer Cullen Capital Management, Inc. makes no representation that the use of this material can in and of itself be used to determine which securities to buy or sell, or when to buy or sell them; SCCM makes no representation, either directly or indirectly, that any graph, chart, formula or other device being offered herein will assist any person in making their own decisions as to which securities to buy, sell, or when to buy or sell them. For comparative purposes, the adviser uses the ishares MSCI EAFE ETF. All opinions expressed constitute Schafer Cullen Capital Management s judgment as of the date of this report and are subject to change without notice. Page 8 of 8