CAMBIAR INTERNATIONAL SMALL CAP COMMENTARY 4Q 2018
MARKET REVIEW Global equities hit the brakes in the fourth quarter, with all major averages posting double-digit percentage losses to end the year. Prior pullbacks in the current bull market have often provided an attractive entry point for investors; yet there was a buyer s strike in the fourth quarter. The wall of worry simply became too high for equities to overcome, as investors had to contemplate global growth concerns, ongoing Brexit uncertainty, the continued trade skirmish between the U.S. and China, and tightening measures by central banks. The 4Q drawdown in stocks resulted in negative full-year returns, but equities were not alone in this regard as almost all asset classes finished 2018 in the red. The investing landscape was dominated by geopolitical headlines in 2018 and this theme is likely to continue into 2019. The market hates uncertainty, so some resolution on fronts such as China-U.S. relations and Brexit would be positive for investor sentiment. One way or another, Brexit should reach final resolution in late March. Recognizing that the negotiation process remains very much in flux, Cambiar believes there are three possible scenarios: agreement to terms (a soft Brexit ), exit from the EU without a trade agreement (a hard Brexit ), or a new referendum in which the United Kingdom s decision to leave the European Union is reversed. As central banks are in varying stages of reversing the largest global liquidity exercise in history, there is bound to be a corresponding impact on equities. The U.S. has been normalizing monetary policy over the past eighteen months, while the European Central Bank (ECB) ended its bond purchase program in December. The ECB continues to maintain a relatively accommodative stance, stating that it will keep its key interest rates unchanged through the summer of 2019, and even then be dependent on relevant economic growth data. In Cambiar s view, the investment implication is that selectivity should take on increased importance, vs. the rising tide environment that has been in place for much of the past ten years. INTERNATIONAL SMALL CAP CONTRIBUTORS Top Five Avg. Weights Contribution BTG 1.47 1.16 Zai Lab. 1.86 0.40 Embraer 1.68 0.36 Sohgo Security Services 2.17 0.14 Air France-KLM 2.39 0.12 DETRACTORS Bottom Five Avg. Weights Contribution Boohoo Group 1.10-0.60 LIXIL Group. 0.84-0.64 T. Hasegawa Co. 1.94-0.70 LivaNova 2.99-0.87 Schoeller-Bleckmann Oilfield 1.86-0.92 A complete description of Cambiar s performance calculation methodology, including a complete list of each security that contributed to the performance of the Cambiar portfolio mentioned above is available upon request. Please contact Cambiar at 1.888.673.9950 for additional information. Past performance is no guarantee of future results. 4Q 2018 1 Year 3 Year 5 Year Since Inception Int l Small Cap (gross) -10.2% -12.3% 7.1% 3.5% 6.3% Int l Small Cap (net) -10.4% -12.9% 6.3% 2.9% 5.8% MSCI EAFE Small Cap -16.1% -17.9% 3.7% 3.1% 6.6% International Small Cap Composite Inception Date: 6.30.2013 / See Disclosure Performance 2
Small cap international equities declined in the fourth quarter, as heightened uncertainty surrounding trade tensions and global growth catalyzed investors to move to the sidelines. With all sectors of the international small cap equity market registering a negative return, the 4Q performance discussion for the Cambiar International Small Cap (SMINT) strategy will be a relative exercise. Although the SMINT portfolio was not immune to the selling pressure in the quarter, the strategy provided strong downside protection vs. the passively-managed MSCI EAFE Small Cap Index. Cambiar benefited from positive sector allocation decisions, yet solid stock selection was the dominant contributor to the portfolio s outperformance in the quarter. The strong fourth quarter contributed to Cambiar s subsequent outperformance in 2018, and further bolstered the strategy s longer-term track record. Given the risk off mentality that permeated the markets in the quarter, performance at the sector level was delineated by cyclical/defensive positioning. Investors favored traditional safe-haven sectors such as Utilities and Real Estate, while rotating out of the more economically-sensitive Energy, Technology, and Industrials sectors. The SMINT portfolio benefitted from having a modest defensive tilt to the portfolio during the quarter, as well as a slightly elevated allocation to cash. The higher (~9%) cash balance should not be misconstrued as inactivity; the team executed six purchases and five sales in the quarter and Cambiar continues to maintain a healthy pipeline of investment candidates. The SMINT portfolio s holdings in Industrials represented the largest contribution to outperformance in the quarter. Although Industrials was one of the leading detractors in the quarter, Cambiar was able to largely sidestep the weakness in the sector via positive stock selection. One individual highlight in the quarter was Embraer, a Brazil-domiciled aerospace OEM. Embraer benefited from an announced joint venture with Boeing, which gave Boeing approximately 80% of Embraer s commercial airliner business. The subsequent gain in the stock led to the decision to liquidate the position in the quarter. To be clear, not every name in the sector added value in the quarter; Lixil Group and BEST, Inc. were two laggards for the portfolio. Lixil was sold from the portfolio upon review, and although BEST is not exactly living up to its name at present, we continue to stay the course with this position. A longstanding benefit of investing in small cap companies is the potential for an outsized gain in response to merger/acquisition activity. The SMINT portfolio was a beneficiary of such an event in the quarter, as specialty pharmaceutical company BTG plc received a buyout offer from Boston Scientific, which represented a 37% premium to the stock s prior close. Cambiar closed the position in response to the news. Cambiar generated strong stock selection in Healthcare (in addition to BTG) over the course of 2018; the sector was the top contributor to performance on a full year basis. As previously discussed, defensive sectors were relative outperformers in the quarter. For the SMINT portfolio, an overweight allocation to Consumer Staples is one of the strategy s defensive allocations. While holdings in this sector may tend to lag in more cyclical growth markets, their more acyclical business models are embraced in volatile drawdowns such as the fourth quarter. Cambiar s Staples positions contributed positively to 4Q results, led by Britvic Plc. Britvic, the UK based producer of non-alcoholic beverages, was able to shrug off the political uncertainty surrounding its home country by posting a strong earnings report. After posting strong gains in 2017, banks and related financials lost ground in 2018. While some of the retracement can be attributed to broad market weakness for the year, financials were additionally impacted by economic growth concerns and a combination of low interest rates/low loan growth. Representing approximately 15% of the SMINT portfolio, Cambiar s financial holdings (banks, asset management and related services companies) comprised a drag on both the quarter as well as a full-year basis. Despite the recent performance lag, Cambiar remains constructive on the portfolio s exposure in the sector. Italian bank Azimut is one such example of the trade-off between short-term pain in the journey toward long-term gain (hopefully). Azimut s decline in the quarter was primarily in response to political tensions in Italy. The stock is now trading at 9x 2019 earnings, with a dividend yield of 10%. As the sovereign macro headwinds in Italy subside, we anticipate improved performance in the stock. Cambiar s lower allocation to Utilities and Real Estate detracted from performance in the quarter, as these 3
sectors posted only modest losses vs. other areas of the market. Cambiar s has historically had an underweight to Real Estate, given the sector s more unique investment attributes and high sensitivity to interest rates. Over the course of a market cycle, Cambiar believes that client capital will be better served in sectors where there are more tangible catalysts/self-help options for a given investment. We are confident that this low valuation/low expectation profile that has been assigned to many of our companies can translate into improved performance for our clients as market fears ease. We appreciate your continued confidence in Cambiar Investors. Positioning at the sector and country/regional levels continue to reflect Cambiar s bottom-up approach. The SMINT portfolio continues to maintain a meaningful allocation to Europe/UK, as well as an approximate 20% weight in Japan. It is worth reminding clients of Cambiar s maximum 25% country weight, which will result in a consistent underweight allocation to Japan (Japan is ~32% of the index). And although the strategy will have a developed market skew, Cambiar can selectively participate in Emerging Markets; EM comprised approximately 11% of the SMINT portfolio as of quarter-end. LOOKING AHEAD Given the challenging last three months of the year, investors are likely eager to move on from 2018 and look ahead to the New Year. While market corrections are never pleasant, one positive takeaway from the retrenchment in global equity markets is improved valuations. At current multiples (and dividend yields, where applicable), stocks offer a relatively attractive risk/reward profile. Obviously, the key assumption to this statement is that the E in the market s P/E ratio is accurate. On a regional basis, Europe/UK continues to trade at a steep discount to the U.S. primarily a function of uncertainties surrounding Brexit, the fiscal budget in Italy, a stronger dollar, and lower growth rates in Europe. Some resolution on these macro overhangs would certainly be a good start to closing the valuation gap. The Cambiar discipline continues to place primary emphasis on company-specific fundamentals and industry trends/cycles. That said, we remain vigilant on monitoring exogenous risks that could negatively affect our investment rationale. While there is no shortage of geopolitical overhangs that must still be resolved, these uncertainties are known and in our opinion more than priced into the market at this point. 4
DISCLOSURE Performance: The performance information represents the respective Cambiar strategy composite and may be preliminary. Returns are presented gross and net of management fees and include the reinvestment of all income. Gross and net returns have been reduced by transaction expenses. Net returns are also reduced by actual investment advisory fees and other expenses that may be incurred in the management of the account. Net returns for SMA portfolios are calculated by subtracting actual SMA fees reported by the SMA sponsor. Net of fees performance reflects a blended fee schedule of all accounts within the relevant composite. Cambiar clients and mutual fund investors may incur actual fee rates that are greater or less than the rate reflected in this performance summary. Please refer to our Form ADV Part 2A for additional information regarding our investment management fees. Results are reported in U.S. dollars. Index returns include the reinvestment of all income, and assume no management, custody, transaction or other expenses. One cannot invest directly in an index. Cambiar s past results do not necessarily indicate Cambiar s future performance and, as is the case with all investment advisors who concentrate on equity investments, Cambiar s future performance may result in a loss. The top/bottom contributors is for a representative portfolio in the strategy. A complete description of Cambiar s performance calculation methodology, including a complete list of each security that contributed to the performance of the portfolios, is available upon request. Please contact Cambiar at 1-888-673-9950 for additional information. International Small Cap Benchmark: The MSCI EAFE Small Cap Index is a free float-adjusted, market capitalization weighted index that is designed to measure small cap representation across developed market equity performance, excluding the U.S. & Canada. The index assumes no management, custody, transaction or other expenses. The MSCI EAFE Small Cap Index is a broadly based index that reflects the overall market performance and Cambiar s returns may not be correlated to the index. Cambiar s performance and the performance of the MSCI EAFE Small Cap Index include the reinvestment of all income. Benchmark returns are net of withholding taxes. Cambiar typically follows each custodian s treatment of tax withholding and therefore dividends may be presented as gross or net of dividend tax withholding depending on the custodian s treatment. Withholding taxes may vary according to the investor s domicile. Certain information contained in this communication constitutes forward-looking statements. Due to market risk and uncertainties, actual events or results, or the actual performance of Cambiar s client accounts may differ materially from that reflected or contemplated in such forward-looking statements. All information is provided for informational purposes only and should not be deemed as a recommendation to buy the securities mentioned. There is no guarantee that the opinions expressed herein will be valid beyond the date of this presentation. There can be no assurance that the portfolio will continue to hold the same position in companies described herein, and the portfolio may change any portfolio position at any time. The specific securities identified and described do not represent all of the securities purchased, sold, or recommended by Cambiar and the reader should not assume that investments in the securities identified and discussed were or will be profitable. Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used to create indices or financial products. This report is not approved or produced by MSCI. 5