Litman Gregory Masters International Fund Second Quarter 2018 Attribution

During the second quarter of 2018, the Litman Gregory Masters International Fund fell 0.40% and the MSCI ACWI ex USA Index was down 2.61%. The MSCI EAFE Index dropped 1.24% in the quarter and the Morningstar Foreign Large Blend Category lost 2.13%.i Since its inception in December 1997, the fund has compounded returns at an annual rate of 7.36% after fees, while MSCI ACWI ex USA, MSCI EAFE, and its blend peers have gained 5.42%, 5.00%, and 4.44%, 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 continued to be volatile last quarter as lingering concerns about a trade war and mixed economic data led to growing concerns about potentially slowing global growth. Foreign equity markets bore the brunt of these fears leading to slightly negative returns across the broad international indexes. Despite a seemingly higher level of caution among investors, we believe the outlook for underlying company fundamentals remains favorable and should lead to positive equity returns over the medium to long term.   

In our international equity portfolio, we took advantage of the volatile foreign markets by 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
If we were to simplify the second quarter’s events into an overarching theme, it would be uncertainty about the future of globalization. A JPMorgan analysis calculates that the first round of the Trump administration’s tariff agenda impacts about 0.1% of US Gross Domestic Product (GDP) and 0.2% of China’s GDP, while enacting all the president’s threats would affect nearly 30% of US imports and around 4% of US GDP.

With Pacific trade relationships strained, Italian, German, and UK domestic politics were also polarized by disagreements about open borders and trade. Italy formed a coalition government that includes a faction that wants to leave the eurozone. Germany’s leadership coalition worked through an agreement to stymie future immigration with new border controls, and the UK government wobbled through its Brexit planning process.

Most macroeconomic indicators around the world have surprised positively for the last 24 months, with the US economy the relative standout in the June quarter. It’s possible that this economic strength combined with uncertainty about Brexit, the eurozone, and globalization is what caused the US dollar to reverse a 14-month trend and strengthen during the quarter. In spite of the uncertainty, global consumer spending continues to grow, and we expect people around the world will still wish to buy goods and services from other countries.

Owing to strong recent data, earnings expectations for many global indexes have improved in recent months, and expectations for strong global growth remain firm. These positive trends support the continued rotation of investor preferences from debt and defensive equity to more economically sensitive assets. The Federal Reserve has stepped up the pace of federal funds target rate hikes, moving the target from 0.75% to 2.00% over the last six quarters. Most major central banks around the world continue to pursue 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 Grupo Sura to the portfolio. Grupo Sura is the largest insurance, mandatory pension, and asset management company in Colombia, with significant market presence in Mexico and other countries in South America. The company also holds strategic stakes in Bancolombia, one of the largest banking groups in Colombia, Grupo Nutresa (packaged food products), and Grupo Argos (cement and infrastructure). The team sees long-term growth potential in the Colombian economy, which has successfully rebalanced its economy following the fall in oil prices in 2015–2016. Grupo Sura’s insurance and pension business is well positioned to capitalize on the long-term trend of rising income and savings levels in Colombia and South America. Its strategic investments are well-run companies in well-concentrated industries, which is why despite its holding company structure, we see Grupo Sura as the ideal vehicle to participate in both the near-term and long-term economic development of the Colombian economy. The recent elections were another positive step forward for the country.

Looking at the portfolio as a whole, we are happy to see the completion of Bayer’s acquisition of Monsanto, which will create the leading provider of agricultural technology (seeds and crop protection) in a consolidated industry. This is a high-growth company trading at an attractive multiple. We remain confident in the long-run growth in mass-market gaming in Macau, which is why Las Vegas Sands (LVS) remains our largest position in the portfolio. We also see opportunities for LVS to win a concession in the very attractive Japanese market. Further, we anticipate that after an extended downturn in oil and gas capital spending, Schlumberger will start to see a material improvement in spending in international basins, where the company has a dominant market position with strong technology leadership. Schlumberger has been a disappointing performer to date, but we believe we are close to an earnings inflection not captured by the current share price.

Mark Little, Lazard Asset Management
International equities were broadly flat in the second quarter, with gains in local currencies offset for US dollar investors by the appreciation of the latter. However, there were some areas of weakness. In Europe, political developments in Italy renewed structural eurozone fears, while fears over protectionist tariffs from the United States added to the auto sector’s woes. In emerging markets, the continued tightening of US dollar liquidity saw pressure on the currencies and markets of weaker countries such as Turkey, Mexico, and Brazil. This environment saw broad pressure on financial stocks, which lagged sharply, as did other cyclical industrial stocks. More defensive sectors such as health care and consumer staples did better, while technology stocks continued to prosper. Commodity stocks generally performed well, helped by continued strength in the oil price.

On the macroeconomic side, the data is still broadly encouraging with sentiment indicators close to highs in the United States and Europe, buoyed by credit growth and the prospect of US tax cuts and French reform. The more benign commodity environment and some increased confidence is feeding into strong industrial demand, and Chinese consumers are still spending, helped by rising personal credit.

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 our investment approach will continue.

Fabio Paolini and Benjamin Beneche, Pictet Asset Management
Our approach to valuation leans upon the concept of normalized free cash flow. “Normal” is of course highly subjective but broadly leads us to question levels of profitability that are significantly above or below historical levels. Recently, we have often concluded that high levels of profitability are not sustainable; parts of the semiconductor supply chain and general industrials come to mind. On the flip side, we have struggled to identify business cycles that appear to be at cyclically depressed levels. As a result, we continue to hold a portfolio that has higher exposure to stable consumer franchises (GlaxoSmithKline, Anheuser-Busch InBev, Japan Tobacco) and secular growth (Softbank, Safran, even though near-term multiples are somewhat higher. We believe, however, that our most recent portfolio addition, OCI, couples a fundamentally high-quality business with a cyclically depressed end market.

OCI is currently the fourth-largest fertilizer producer globally. The company was founded in 2008 by Nassef Sawiris (who still owns 54.5%) and has grown from 1.8 million tons of fertilizer capacity in 2008 to 13 million tons today. By 2019, 70% of OCI capacity will be in the low-cost regions (Algeria, Egypt, and the United States), which should allow the group to generate both positive EBITDA and free cash flow even at the bottom of the fertilizer cycle. OCI is approaching the end of the capital expenditure cycle associated with capacity growth in Iowa, and the new plant has created a high level of operating leverage. Based on only modest assumptions about fertilizer pricing over the next three years, we believe these dynamics will combine to drive a very material expansion of margins and prodigious free cash flow growth.

The position was largely funded by the sale of Hyundai Mobis (HM). Part of the investment case for HM was the belief that a reorganization of the Hyundai group to align the interests of the controlling Chung family with those of shareholders would happen sooner rather than later. At the end of April, the long-awaited move was announced. Hyundai Group proposed an asset swap that involved most of HM’s “crown jewel” aftermarket parts operations transferring to Hyundai Glovis (Hyundai’s domestic logistics business) at a price we felt materially undervalued the asset. After meeting senior management, it was also made clear that rather than getting more generous with dividend payouts, management intended to direct significantly more of the group’s excess capital to research and development. While this proposed restructuring now appears unlikely to proceed as initially planned, we view this as a material change in the investment thesis and have lost confidence in management. We sold the portfolio’s position at a small gain.

Although current market valuations broadly warrant a cautious approach, we continue to feel optimistic about the companies we own stock in, which we feel combine long runways for growth with strong competitive advantages and trade cheaply relative to their normalized cash flows. The recent increase in market volatility has only provided us with more opportunities to purchase the types of business we like at favorable prices; a formula we believe will lead to pleasing results over time.

David Marcus, Evermore Global Advisors
The threat and eventual imposition of tariffs negatively impacted global markets, which in turn impacted a number of our portfolio positions in the first and second quarters of 2018. However, as we always do in volatile/uncertain times, we took advantage of recent declines in share prices by adding to some positions. The special situations nature of our portfolio gives us confidence that our portfolio companies will be able to weather the trade war storm, which we are hopeful will be short-lived.

Confidence in the European recovery once again came into question with the political instability in Italy and concerns that Italy might be next to want to leave the European Union. We don’t believe this will be the case and continue to see tremendous potential for value creation in European companies. We believe an operational and financial restructuring revolution is underway in industrial businesses across the region. The financial crisis gave European companies the opportunity to close or sell non-performing plants and businesses, as well as push back on the unions, which was never possible prior to the crisis. Additionally, European governments stepped up by changing rules and regulations to help companies survive, lower their cost structures, and modernize their operations, which we believe can ultimately lead to dramatic increases in earnings.

We also are seeing positive changes in corporate governance in various parts of Asia, which should significantly increase the set of opportunities for special situations investors in that region over the coming years.

* 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, the fund outperformed its benchmark. Stock selection was the main driver of outperformance in the second 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 added value during the quarter. Strong performers on this quarter’s top-10 contributors list include Altice Europe, Informa, and Grupo Televisa.
  • The worst-performing sector in the benchmark during the quarter was the financials sector (which is the largest sector in the benchmark). The fund benefited from being underweight to this sector. Financial stocks within the fund performed roughly in line with those in the benchmark.
  • Stock selection within the industrials sector was positive in the quarter. The sector performed roughly in line with the benchmark during the quarter, but portfolio holdings in the industrials sector outperformed. Main contributors in this sector were IWG, Bombardier, and Safran.
  • The fund’s largest sector underweight is to information technology stocks. This sector performed marginally worse than the broader benchmark during the second quarter. In aggregate, tech names in the fund were positive, which added value. Positions in Baidu and SAP were contributors.
  • The Latin American region was the worst-performing area of the market during the second quarter (falling more than 17% over the last three months). However, the fund’s position in Grupo Televisa rose more than 17% and this was positive for relative returns.


Top 10 Contributors as of the Quarter Ended June 30, 2018

Company Name

Fund Weight (%)

Benchmark Weight (%)

Three-month Return (%)

Contribution to Return (%)


Economic Sector

IWG PLC 1.75 0.00 29.10 0.57 Switzerland Industrials
Inmarsat PLC 1.28 0.00 46.15 0.56 United Kingdom Telecommunications
OCI NV 2.72 0.02 14.50 0.35 Netherlands Materials
Frontline Ltd. 1.00 0.00 32.51 0.30 Bermuda Energy
Shire PLC 2.42 0.23 10.35 0.26 United Kingdom Health Care
Altice NV A 0.76 0.01 54.76 0.24 Netherlands Consumer Discretionary
Informa PLC 2.32 0.01 9.45 0.22 United Kingdom Consumer Discretionary
Bombardier Inc. B 0.70 0.00 31.94 0.20 Canada Industrials
Grupo Televisa SAB 1.16 0.00 17.34 0.19 Mexico Consumer Discretionary
Safran SA 1.66 0.15 11.40 0.18 France Industrials

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

IWG (David Herro, Harris Associates)

IWG’s share price soared following news it had received separate indicative takeover proposals from Lone Star, Starwood Capital, and TDR Capital. The three prospective buyers had until June 8 to announce a firm intention to make an offer. Lone Star withdrew its offer, but IWG was also approached by two other companies. At the request of IWG, the deadline for offers from these remaining firms has been extended by the U.K. takeover panel twice and the current deadline is July 21. Although the company issued a profit warning late in the second quarter, our discussions with management on the matter translated this as a non-material impact on our estimation of IWG’s fair value. We continue to monitor the takeover situation closely and find the company to be a compelling opportunity, even with the recent share price increase.  

We like that IWG is the leader in the flexible office space industry and is subsequently best positioned to capitalize on the structural shift that is resulting from the secular growth of the flexible workspace business. We believe IWG is building up a highly scalable operating structure and economic moat that smaller players will find extremely difficult (if not impossible) to emulate. In our view, IWG runs a capital-light business model, which lends itself to attractive returns on capital and free cash flow generation.

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

Inmarsat saw some of its recent weakness reverse in early June when management announced that they had received, and rejected, a preliminary (and undisclosed) offer from US rival Echostar to buy the company. Echostar raised its offer (to GBP 5.32 per share), but this too was unanimously rejected by the Inmarsat board. Just after the period end, Echostar announced that it would not be making a formal bid and cannot now approach Inmarsat again within six months (unless another party makes a bid). While there is some satellite industry logic to the deal (primarily capex savings), much of its merit relates to US cellular spectrum rights owned by Inmarsat. Although potentially interesting to other bidders, for Echostar it has the added benefit of consolidating the position that it and DISH (both companies have the same controlling shareholder) have in mid-band US spectrum. Given its hitherto weak stock price performance, we are surprised that it has taken so long for a potential acquirer of Inmarsat to surface, but we agree that Echostar’s bid undervalues Inmarsat’s unique assets. Principal among these is Global Xpress, a recently completed high-throughput satellite array. It is, and will be for some time, the only service capable of delivering seamless broadband-like data rates to customers in movement (mainly marine, aviation, and military) anywhere on the planet.

The weak stock price performance (outside of the second quarter) is a product of two factors. First, Inmarsat’s core marine market is in a cyclical trough, which means that a customer shift to the faster service (requiring some investment on their part) has been slower than hoped. Second, establishing a platform for revenue generation in the newer aviation market is requiring a greater than expected up-front spend by Inmarsat on aircraft-mounted hardware. Collectively these factors have disappointed shareholders and delayed the point at which the group’s prize asset becomes a powerful engine for cash generation. While this delay has been frustrating (and not helped by Inmarsat management overpromising on progress) we retain our view that the group’s intrinsic value is significantly above even the partially recovered stock price. There are now two clear routes to this value being realized: prove it as a stand-alone business, or be acquired. We remain holders.

OCI (Vinson Walden, Thornburg Investment Management)

We initially purchased OCI in the portfolio in late December 2016. OCI produces and distributes natural gas-based fertilizers and industrial chemicals, and is based in the Netherlands. Its portfolio of nitrogen fertilizers and industrial chemicals includes hydrous ammonia in liquid and gaseous form, granular urea, urea ammonium nitrate, calcium ammonium nitrate, methanol, and melamine. It also distributes crystalline and granular ammonium sulphate. The company's subsidiaries include, among others, Biomethanol Chemie Nederland, which focuses on methanol and bio-methanol production, and Iowa Fertilizer, a producer of fertilizers. It serves mainly agricultural and industrial customers and operates production sites in the Netherlands, the United States, Egypt, and Algeria. The company's distribution network spans the Americas, Europe, Asia, Africa, and Australia.

Our investment thesis can be distilled into these points:

  • OCI is a top-five global nitrogen fertilizer producer with additional attractively positioned operations in the chemicals space.
  • High quality: The company has modern, low-cost assets and strong management aligned with investors.
  • Paths to success: The company is expected to see a cash flow inflection following an investment cycle that increased capacity and low-cost leadership, and an improving industry environment. Higher free cash flow will allow it to de-lever its balance sheet, pay dividends, and/or further consolidate the industry.
  • Valuation: The company trades at a discount to many of its peers and at an attractive valuation relative to its normalized cash earnings prospects several years forward.

Shares of OCI rallied during the period on strong first quarter results, with management reporting that all factories had contributed to recent performance. This fundamental progress highlights the company’s strengthening cash flow outlook and potential to pay down debt more quickly. Chinese fertilizer exports have continued to decline (because its domestic industry is not cost competitive with Western producers and China ended subsidies a couple of years ago), which has been positive for fertilizer supply/demand dynamics and pricing.


Top 10 Detractors as of the Quarter Ended June 30, 2018

Company Name

Fund Weight (%)

Benchmark Weight (%)

Three-month Return (%)

Contribution to Return (%)


Economic Sector

Daimler AG 1.66 0.31 -20.40 -0.39 Germany Consumer Discretionary
Telecom Italia SPA 1.44 0.05 -22.39 -0.35 Italy Telecommunications
Don Quijote Holdings Co. Ltd. 1.78 0.00 -16.55 -0.33 Japan Consumer Discretionary
CNH Industrial NV 1.32 0.07 -14.09 -0.25 Netherlands Industrials
CK Hutchison Holdings Ltd. 2.40 0.13 -9.68 -0.24 Hong Kong Industrials
Anheuser Busch Inbev 2.89 0.35 -7.71 -0.24 Belgium Consumer Staples
BNP Paribas 1.58 0.36 -12.94 -0.22 France Financials
Bollore 1.50 0.00 -13.22 -0.21 France Industrials
Aena SME 1.97 0.06 -9.65 -0.18 Spain Industrials
Lloyds Banking Group PLC 2.45 0.28 -6.91 -0.17 United Kingdom Financials

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

Daimler (David Herro, Harris Associates)

During the second quarter, Daimler issued a profit warning and expects this year’s group earnings to be slightly below 2017’s level. Daimler has faced some near-term challenges with higher raw material costs, adverse effects from currency movements, and minor difficulties with US suppliers. Management largely mitigated these issues through cost cutting. However, Daimler now faces a threat of a tariff on vehicles imported from Europe to the United States. The company also expects that reciprocal tariffs between the United States and China will impact its US-built SUVs intended for delivery to China. Management is evaluating methods to redirect auto shipments into China from other geographies as a possible work-around strategy to avoid tariffs. However, there is no certainty that tariffs will be imposed and the matter remains fluid. Emissions concerns have also put pressure on Daimler’s share price. To date, the company has recalled 750,000 vehicles to address emission issues but has paid no fines. Management remains adamant that their software issues are not related to emissions fraud. On a more positive front, Daimler held a capital markets day for the trucks division that highlighted the opportunity for margin expansion. The company continues to explore the potential for a separation of the trucking group via Project Future. Despite the current geopolitical noise, Daimler continues to meet our operational performance expectations and is trading at a significant discount to our estimate of intrinsic value.  

Mercedes-Benz is a premium asset for Daimler that is realizing renewed growth owing to an expanding market for high-end autos, as well as from a refreshed model cycle, greater product derivatives, increased modularization, and a restructured network in China. We believe that Mercedes-Benz’s accelerating growth, along with its ability to maintain what we see as solid margins and generate additional free cash flow, positions the brand well to close the gap against its peers BMW and Audi. Daimler is also the world’s largest truck producer, and its trucks possess strong market positions globally; we think the truck business should benefit from both cost efficiency and improving market conditions outside of the United States. We like that in recent years Daimler’s management team has aggressively addressed the company’s weaknesses and has shifted its focus away from top-line growth and “empire building” toward creating better profitability and shareholder returns.

Telecom Italia (David Marcus, Evermore Global Advisors)

Telecom Italia (TIM) is the domestic market leader in Italy for fixed line and mobile networks with a €13 billion market cap. TIM also owns a 67% stake in TIM Brasil, a €7 billion market cap telecom operator which provides mobile services, fiber optic data, and broadband services in Brazil. TIM has been undermanaged for quite some time over the last 15-plus years and in spite of that there remains substantial value. 

While the underlying domestic business has been steadily improving, shares of TIM underperformed during the second quarter. Elliott Management, an activist investor, amassed over an 8% stake and waged a proxy fight to replace TIM’s board. While we welcome new active shareholders that have intentions to improve corporate governance, we believe the possibility of a prolonged conflict and of losing the incumbent CEO proved to be disruptive to the positive trajectory. In the end, Elliott won the proxy fight with a tight 49.7% support for its slate, appointing 10 out of the 15 board members with Vivendi appointing the other 5 directors. The current CEO, Amos Genish, will continue to implement his previously announced 2018–2020 industrial plan, which is supported by Elliott. We hold Mr. Genish in high regard and we believe he has done a great job thus far despite his short time at the helm as CEO. We also believe TIM is still in the early innings, especially now with two activist shareholders (Vincent Bolloré and Elliott) with similar objectives of unlocking shareholder value. That said, we are closely monitoring how the new board of directors interacts with management and whether there will be any unwelcome changes to the company’s strategic direction. 

Don Quijote Holdings (Mark Little, Lazard Asset Management)

After a very strong run at the end of 2017, Japanese discount retailer Don Quijote has pulled back this year and in the second quarter. While top-line growth continues to be very strong, the cost of achieving this has been greater gross margin pressure than hoped, and this has limited operational gearing within the business. Meanwhile, the benefits of the Uny transaction are becoming better understood by investors, and the expected procurement savings may be used for further price investment rather than being allowed to flow through to the bottom line.