Litman Gregory Masters International Fund First Quarter 2018 Attribution

During the first quarter of 2018, the Litman Gregory Masters International Fund fell 1.13% and the MSCI ACWI ex USA Index was down 1.18%. The MSCI EAFE Index dropped 1.53% in the quarter and the Morningstar Foreign Large Blend Category lost 0.84%.1 Since its inception in December 1997, the fund has compounded returns at an annual rate of 7.47% after fees, while MSCI ACWI ex USA, MSCI EAFE, and its blend peers have gained 5.62%, 5.12%, and 4.61%, respectively.

Performance quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance of the funds may be lower or higher than the performance quoted. To obtain standardized performance of the funds, and performance as of the most recently completed calendar month, please visit

Themes, Trends, and Observations from the Managers*

David Herro, Harris Associates
Global equity prices became more volatile last quarter as concerns about a trade war, the possibility of higher than expected inflation, and rising interest rates made investors fearful. These fears in turn pushed global equity markets lower by the end of the quarter after a strongly positive January. Despite a higher level of fear among investors, we believe the outlook for underlying company fundamentals remains on a positive track and should lead to positive equity returns over the medium to long term.

In our portfolio, we’ve been opportunistically re-positioning the portfolio across existing holdings. There were no new positions initiated in the quarter. Geographically, our portfolio exposure remains tilted toward developed markets. We continue to focus our research on unique opportunities across both developed and emerging markets. 

Vinson Walden, Thornburg Investment Management
Following the steady price appreciation and calm of 2017, the early months of 2018 have featured significant volatility—recessionary fears, trade conflicts, and political uncertainty have all played a role. Global equities fell by approximately $5 trillion from February 1 to February 9 and one measure of S&P 500 Index volatility rose about threefold. This hampered our own investing efforts and dragged on all bourses. The first quarter of 2018 was a difficult period and we are working to improve the outcomes. In this effort we remain intent on adapting to market conditions and executing our investment process, which has produced favorable results over the long term.

Today, investors are debating the future direction of the economies of China, Europe, various emerging markets, and the United States. They are considering potential policy actions by the U.S. Federal Reserve (the Fed), Congress, the Trump administration, and foreign government regulatory bodies, including trade policies. Many political and macroeconomic issues remain open. Importantly, overall global consumer spending is growing, along with global industrial production. Most macroeconomic indicators around the world positively surprised in 2017 and the first quarter of 2018, with the United States a relative laggard.

Earnings expectations for developed international stocks for 2018 have improved in recent months, as have global economic growth expectations. These positive trends continue to support a rotation of investor preferences from more defensive debt and equity assets to more economically sensitive assets, though with increasing debate around valuation and the expected duration of the global economic growth cycle. Following passage of significant changes to U.S. corporate and personal income tax laws, it appears that political gridlock will prevail in Washington, DC, in 2018. The Fed has stepped up the pace of federal funds target rate hikes, moving the target from 0.75% to 1.75% over the last five quarters. Most major central banks around the world continue to pursue very easy monetary conditions, which artificially suppress interest rates.

Howard Appleby, Jean-François Ducrest and Jim LaTorre, Northern Cross
During the quarter, the Northern Cross team added British American Tobacco to the portfolio and exited our positions in emerging-market bank Standard Chartered and European insurer AXA. Standard Chartered management has done a good job restructuring the operations, and the shares had recovered modestly, but we are concerned that the bank will have a difficult time building enough scale in its core emerging markets to drive excess returns. AXA shares performed well in 2016 and 2017 as book value and earnings per share continued to grow despite the impact of low interest rates, reflecting the resilience of their diversified life and non-life insurance business. We sold the shares because we see better opportunities for long-term appreciation elsewhere.

British American Tobacco is a leading global tobacco company that the team has known and followed for years. The stock has sold off due to market concerns over a market shift toward reduced-risk tobacco products and concerns over U.S. regulatory discussions on permissible nicotine levels in cigarettes. It now trades at an attractive 7% free cash flow yield and 4.7% dividend yield, a discount to peer Philip Morris International, which has progressed further along the next-generation product shift than has British American. We are confident about growth opportunities for the company from the shift to reduced-risk products, especially heated tobacco products. Long term, we would expect British American to continue to grow earnings and free cash flow even as it invests in the transition to reduced-risk products, which should drive its multiple higher, as the market recognizes the sustainability of long-term cash flow.

Looking at the portfolio as a whole, we are happy to see the fundamentals improve within our top holdings—casino operator Las Vegas Sands, Universal Music Group owner Vivendi, agricultural science and pharmaceutical company Bayer, and advanced semiconductor manufacturing equipment provider ASML. Collectively, these companies now account for more than 45% of our portfolio (up from 40% at year-end 2017). While this appreciation has pulled forward some performance, we see considerable runway for growth in each company and believe each sits with a dominant position in their respective industries, which should over time lead to revenue gains and margin expansion not fully reflected in the share prices today. Specifically, we think that Bayer should contribute following the completion of its acquisition of Monsanto. Across the rest of our portfolio, we are optimistic that a gradual improvement in global growth will result in stronger earnings power, as companies such as SAP, Schlumberger, and Diageo take advantage of their market leadership.

Mark Little, Lazard Asset Management
International equities saw increased volatility during the first quarter of 2018. After a very strong January, driven by profit optimism in part from U.S. tax cuts, international equities pulled back in February and March from their extended levels.

Some inflationary U.S. macroeconomic data, rising twin U.S. deficits, and more hawkish rhetoric from the Fed resulted in rising bond yields and fears of overheating. This was followed by rising fears of a U.S.-China trade war following tariff announcements. With equities expensive by most historic standards and volatility at historic lows, the market was vulnerable to any concerns and duly saw a sharp selloff over several days of the quarter. However, with growth picking up and rates still low, the extent of any falls was limited for the moment. Sector returns were volatile during the quarter, with utilities initially falling on fears of rising rates, then rallying for their defensive characteristics. Technology stocks were strong initially on structural themes, before succumbing to profit-taking driven in part by regulatory concerns and other negative headlines.

On the macroeconomic side, the data is broadly encouraging with sentiment indicators at highs in the United States and Europe, buoyed by credit growth and the prospect of U.S. tax cuts and French reform. The more benign commodity environment and some increased confidence is feeding into strong industrial demand, and Chinese consumers are spending again, now driven by rising personal credit. However, many market valuations look stretched leaving overall market direction dependent on a benign combination of reasonable economic growth without material upward pressure on interest rates, or on wages and other costs. We are beginning to see increasing signs of upward pressure on these metrics, potentially impacting margins and asset prices given the overwhelming amount of debt that has continued to pile up on public and private sector balance sheets since the financial crisis. Meanwhile, protectionist statements are clearly unhelpful for the global economy and markets.

Overall, the portfolio team remains confident that, by continuing to focus on stock selection and seeking to find stocks with sustainably high or improving returns trading at attractive valuations, the strong long-term track record of the strategy should continue.

Fabio Paolini and Benjamin Beneche, Pictet Asset Management
At the end of 2017, we noted a palpable change in market conditions after a period of steady, highly correlated appreciation—an increased level of volatility and a fall in the correlation between stocks. Thanks to greater investor concern about the trajectory of global central bank monetary tightening, and the new spectre of trade wars, the first quarter of 2018 has augmented this latter trend. While the portfolio’s holdings remained unchanged over the period, this new environment, if sustained, is likely to start yielding more opportunities (both on the sell and buy side) and is to be welcomed.

Some of our highest-conviction positions have performed poorly recently. The two most significant detractors were Japan Tobacco and Inmarsat (both discussed in more detail below). In both cases we continue to track the key pillars of our investment thesis closely and where appropriate are adding to the positions. In the case of Japan Tobacco specifically, the next six months will be critical as their new “heat-not-burn” product ramps up production. Coupled with the favorable tax treatment of this new product, we see a potential double positive of a sharp recovery in earnings power coupled with multiple expansion from the current 13x.

David Marcus, Evermore Global Advisors
During the first quarter of 2018, global markets saw volatility not seen during the past couple of years. As we have done frequently in the past, we took advantage of the volatility and “nibbled,” adding to many of our existing positions. Despite the volatility and general stock market declines across the globe, our positions held up relatively well in the first quarter.

We recently got back from another trip to Europe, where we had numerous meetings with CEOs of existing and prospective portfolio companies in Oslo, London, and Paris. We also had the opportunity to meet with two of the great value creators in Europe—John Fredriksen and Vincent Bolloré—two men who generally do not meet with investors. With Fredriksen we learned more about not just the marine transport and drilling companies he controls, but the global marine transport and drilling industries as a whole. We own several companies in these industries, which includes Fredriksen-controlled Frontline, so this meeting was invaluable. We also were fortunate to meet again with Vincent Bolloré who controls both Bolloré and Vivendi, two of the largest holdings in our portfolio. All in all, this trip reinforced our belief that special-situation opportunities remain abundant in this region.

* The opinions herein are those of the sub-advisors at the time the comments are made and are subject to change.

Discussion of Performance Drivers

During the quarter, overall fund performance was largely in line with its benchmark. Stock selection and regional exposures proved to be a benefit to returns during the first quarter. Sector allocation was a modest headwind for the fund. It is important to understand that the portfolio is built stock by stock so the sector and country weightings are a residual of the bottom-up, fundamental stock-picking process employed by each sub-advisor.

Litman Gregory Masters International Fund Sector Attribution

International Fund Sector Attribution

  • The fund’s largest sector overweight continues to be the consumer discretionary sector. Stock selection in this sector was the single largest source of value added relative to the benchmark during the quarter.
  • The utilities sector was the top-performing sector in the quarter. The fund does not have any utility holdings, but this only hurt relative returns very slightly (utilities are less than a 3% weighting in the benchmark).
  • Stock selection within the energy sector was a headwind. Teekay LNG Partners was the main culprit among the fund’s energy positions (more detail on this stock below).
  • Performance in the financials sector was positive for the fund. Exor, a family-owned conglomerate with positions in many public companies, was a strong performer in the first quarter.
  • The Canadian stock market was among the worst performers during the quarter. However, the fund has just one position in a Canadian stock, Bombardier, which was up over 20% to start the year. This was a positive for performance.
  • Strong stock selection within Japan also helped returns in the first quarter. Three of the top five contributors are Japanese stocks. Universal Entertainment (owned by David Marcus), Cyberagent (owned by Mark Little), and Don Quijote (also a Little position) all performed nicely.


Top 10 Contributors as of the Quarter Ended March 31, 2018

Company Name

Fund Weight (%)

Benchmark Weight (%)

Three-month Return (%)

Contribution to Return (%)


Economic Sector

ASML Holding NV 3.11 0.35 10.84 0.35 Netherlands Information Technology
Universal Entertainment Corp. 1.44 0.00 25.45 0.29 Japan Consumer Discretionary
Exor NV 1.69 0.06 12.96 0.27 Netherlands Financials
Cyberagent Inc. 0.95 0.00 27.35 0.25 Japan Consumer Discretionary
Don Quijote Holdings Co. Ltd. 2.43 0.00 9.88 0.23 Japan Consumer Discretionary
Wynn Macau Ltd. 1.62 0.03 14.50 0.23 Hong Kong Consumer Discretionary
Codere SA 1.55 0.00 16.52 0.20 Spain Consumer Discretionary
GlaxoSmithKline PLC 1.36 0.41 11.24 0.15 United Kingdom Health Care
Las Vegas Sands Corp. 2.33 0.00 4.53 0.14 United States Consumer Discretionary
Telecom Italia SpA 1.41 0.05 9.60 0.13 Italy Telecommunications

Portfolio contribution for a holding represents the product of the average portfolio weight and the total return earned by the holding during the period. Past performance is no guarantee of future results. Fund holdings and/or sector allocations are subject to change at any time and are not recommendations to buy or sell any security.

Edited Commentary from the Respective Managers on Contributors

ASML Holding (Howard Appleby, Jean-François Ducrest, and Jim LaTorre, Northern Cross)

A key contributor this quarter was ASML, the global leader in lithography equipment used for the manufacturing of advanced microchips. We invested in the company because of its strong research and development leadership position, which we think will manifest itself in a higher share of semiconductor capital spending in the coming years. The company is by far the leading provider of current generation immersion lithography equipment and is currently in the process of developing a next generation of equipment referred to as Extreme Ultra Violet (EUV). We think the strong performance during the quarter reflects continued robust trends in semiconductor spending, driven by both smartphones, advanced servers, and the growing market for Internet-connected devices. In addition, the company has made progress in moving EUV technology to introduction, which has resulted in early orders from ASML’s core customers. During the quarter, our team met with the ASML’s leadership team in China and came away optimistic about demand growth over the next several years from existing and new customers. We continue to see considerable earnings upside from the company in the coming years, and thus ASML remains a core holding.

Exor (David Marcus, Evermore Global Advisors)

Exor, a family-controlled conglomerate whose shares trade in Italy, appreciated approximately 13% during the quarter. Although reported net asset value (NAV) per share largely remained stable, the stock’s discount to reported NAV contracted by about 10%. Note that roughly 70% of Exor’s reported gross asset value comprises publicly listed investments, notably Fiat Chrysler Automobiles, Ferrari, and CNH Industrial.

Finding conglomerates that trade at a discount to the market value of their respective listed assets is not all that uncommon. These discounts are often deserved due to (1) overvalued market prices for underlying investments; (2) illiquidity of underlying investments; and/or (3) unfavorable asset management arrangements that benefit company insiders at the expense of minority shareholders. In the unique case of Exor, however, each of its major listed investments is liquid and appears inexpensive. Our independent valuation of Exor’s constituent pieces leads us to an estimate of intrinsic NAV significantly greater than that of today’s reported figure. Further, the company is capably run by John Elkann, the great-great grandson of Giovanni Agnelli, the founder of Fiat, one of Exor’s core holdings. Elkann, a Warren Buffett disciple, has proven to be a savvy capital allocator and has the utmost respect for minority shareholders.

Cyberagent (Mark Little, Lazard Asset Management)

Cyberagent is a Japanese digital media firm. Its successful game and digital advertising businesses have been obscured in recent quarters by start-up losses at its mobile TV business Abema, presenting, we believe, an investment opportunity. In the first quarter of 2018, investors started to warm to the prospects for Abema, while a new game has shown very encouraging early results.

Wynn Macau (Vinson Walden, Thornburg Investment Management)

Owned by Wynn Resorts, Wynn Macau controls and operates Wynn’s properties in Macau. Wynn Macau constitutes the majority of the value of U.S.-listed Wynn Resorts. Wynn Macau maintains particularly strong brand equity with VIP gamblers in China. This also makes the properties aspirational destinations for mass market gamblers visiting Macau. Consequently, the company has generally maintained an outsized share of gambling revenue and profits compared to its share of tables or hotel rooms. Steve Wynn was the chairman of the board and chief executive officer of Wynn Macau until resigning in February 2018.

In 2013 (following the 2012 Party Congress), China began a crackdown on corruption that spilled over into a general decline of “conspicuous consumption.” Affluent Chinese reduced their travel to Macau, and although overall visitation continued to increase with mass market visitation, there was a negative “mix shift” as VIP and premium mass market visitation stagnated. By mid- to late 2016, it appeared that there was light at the end of the tunnel, as the general mass market’s consistent growth had helped it become a larger mix of Wynn’s overall business and higher-end visitation was stabilizing.

In late 2016, Wynn Macau opened its newest property, the Wynn Palace on the Cotai Strip, and consequently the company had the opportunity to grow market share in addition to benefiting from a healthier overall market. In 2017, Wynn Macau’s EBITDA grew well over 40%, although it is still below 2013’s peak. Moreover, following the 2017 Party Congress, there is more visibility into how affluent Chinese can behave, as well as market comfort with the durability of Chinese economic stability. The company’s 2017 fundamental performance and outlook, along with the improving macro picture, supported the share’s price performance last year, and first quarter trends remained strong.


Top 10 Detractors as of the Quarter Ended March 31, 2018

Company Name

Fund Weight (%)

Benchmark Weight (%)

Three-month Return (%)

Contribution to Return (%)


Economic Sector

Inmarsat PLC 1.37 0.00 -23.49 -0.35 United Kingdom Telecommunications
Altice NV A 1.20 0.02 -21.56 -0.31 Netherlands Consumer Discretionary
Teekay LNG Partners L.P. 2.46 0.00 -10.54 -0.28 Bermuda Energy
Vivendi SA 5.37 0.16 -4.07 -0.23 France Consumer Discretionary
MGM China Holdings Ltd. 1.45 0.00 -14.71 -0.23 Hong Kong Consumer Discretionary
Japan Tobacco Inc. 1.80 0.15 -10.56 -0.20 Japan Consumer Staples
Grupo Televisa SAB 1.12 0.00 -14.52 -0.18 Mexico Consumer Discretionary
OCI NV 1.81 0.00 -8.66 -0.17 Netherlands Materials
Bayer AG 1.48 0.47 -9.61 -0.15 Germany Health Care
Shire PLC 2.27 0.19 -4.43 -0.15 United Kingdom Health Care

Portfolio contribution for a holding represents the product of the average portfolio weight and the total return earned by the holding during the period. Past performance is no guarantee of future results. Fund holdings and/or sector allocations are subject to change at any time and are not recommendations to buy or sell any security.

Edited Commentary from the Respective Managers on Detractors

Inmarsat (Fabio Paolini and Benjamin Beneche, Pictet Asset Management)

Inmarsat (U.K. satellite services provider) is a provider of global satellite-based communications from two generations of satellite arrays in geostationary orbit. As it completes a period of very high fixed asset investment in the newest array (GlobalXpress), the group is now in the unique position of being able to offer seamless high-bandwidth data services globally. During the first quarter, Inmarsat stock continued a period of weak performance that also made it a negative contributor to the portfolio in 2017; the reasons for this ongoing weakness are the same as they were last quarter.

To restate our thesis, we continue to believe that the company operates within an oligopoly of global satellite service providers that is characterized by high barriers to entry and strong returns. Also, Inmarsat has significant opportunities to grow revenues (at high incremental margins) as shipping fleets make greater use of broadband, airlines offer more passenger data services, and military/government use of satellite bandwidth increases. However, the realization of the potential upside we identified for the stock has been delayed by slower-than-expected adoption by airlines and marine fleets, a failure to monetize legacy U.S. cellular spectrum assets, and a higher capital expenditure requirement in the short term. Whilst the latter point is disappointing, we believe that the increase in capital expenditure is necessary to pave the way for higher revenues. The market is undoubtedly nervous about both Inmarsat’s debt levels and its lack of cash flow generation in the short term. Another quarter of weakness suggests investors need to see solid evidence of a turn in the cycle before what we assess to be material upside potential will be realized. We are monitoring the situation closely but remain holders.

Teekay LNG Partners (Vinson Walden, Thornburg Investment Management)

Teekay is an international provider of marine transportation services for liquefied natural gas (LNG), liquefied petroleum gas (LPG), and crude oil. Teekay LNG Partners operates through two segments: its liquefied gas segment and its conventional tanker segment. The liquefied gas segment consists of LNG and LPG or multigas carriers, which generally operate under long-term, fixed-rate charters to international energy companies and Teekay Corporation. The conventional tanker segment consists of Suezmax-class crude oil tankers and one Handymax product tanker. The company's fleet, excluding newbuilds, consists of around 29 LNG carriers.

Teekay has an industry-leading, young, and technologically advanced fleet of specially designed LNG and LPG carriers and has secured long-term charters for its active LNG fleet with an attractive set of global oil/gas customers, most of which are Blue Chip counterparts. This should insulate the company from what could be a difficult spot market over the coming years and should make for more predictable EBITDA/earnings in what is still an oversupplied LNG shipping market.

We bought the stock long after the company cut their distribution in late 2015 (it was bought in the fund early 2017). We analyzed the actions they’d likely have to take to get through a liquidity crunch to fund their growth and upcoming debt expirations. Our expectation was they’d be able to significantly raise their distribution once new construction capital expenditures decline and the balance sheet is clearly stable, and with a far higher dividend, the shares would appreciate to drive a more “normal” yield on the higher payout. Management’s actions to date have largely shored up the liquidity needs, and we’re starting to see the light at the end of the tunnel, so to speak, around their ability to get through their remaining cash needs and raise the distribution. Although somewhat volatile during 2017, the share price appreciation during the fourth quarter reflects the market’s growing confidence in the outlook for LNG markets and Teekay’s ability to refinance debt maturities and fund its remaining capital expenditures. First quarter share-price performance reflected a more volatile equity market environment, but we remain constructive on the stock and our overall thesis is unchanged.

Vivendi (Mark Little, Lazard Asset Management)

Vivendi is a French media and telecom conglomerate. The shares were hurt in the first quarter of 2018 by a profit outlook that disappointed investors, driven by pay TV business Canal+ and newly acquired advertising agency Havas. However, the music business that is the key driver of our investment in Vivendi continues to perform strongly.

Japan Tobacco (Fabio Paolini and Benjamin Beneche, Pictet Asset Management)

Japan Tobacco (Japanese cigarette manufacturer) is the world’s fourth-largest international cigarette producer. In 2017 it made approximately 40% of its earnings through tobacco sales in its domestic market, where it has a 60% share of conventional cigarette sales. Its stock fell in February on the announcement of a further three-month delay to the national rollout of Ploomtech, its response to Philip Morris’s iQos (heat-not-burn) cigarette alternative in the Japanese market. The launch and ramp up in Ploomtech volumes has been dogged by production difficulties and has been the principal cause of a prolonged period of stock price weakness. Japan Tobacco announced that by the end of this year production capacity is likely to be only half of the annualized 20 billion “cigarette” level that they had previously guided to. While these problems are a frustration, we stand behind our thesis that although they are under the spotlight now, alternative cigarette-like delivery systems will rapidly commoditize to leave brand and distribution capability as the key tobacco-industry revenue drivers. Most compelling in the longer term is the industry’s ability to grow cash flow by continuing to raise prices (alongside tax increases) to an extent that offsets declining volumes. With high exposure to Japan and Russia (two of the lowest price/tax markets for cigarettes), the runway for Japan Tobacco to do this is longer than for its major competitors.