Economic Activity in the First Quarter and the Results of the International Select Portfolio

With the first quarter of 2017 over, we are reviewing the progress of our International Select portfolio. Over the past ten years (ending 3/31/2017) North American markets have seen an average of over 7% a year, while the MSCI EAFE has averaged only 1.53% per annum. Furthermore, over the past year, also ending 3/31/2017, the North American markets have increased by 17.34% with MSCI EAFE only rising by a little over 12.25%. Despite these differences between North American and European, Australasian, and Far Eastern markets, we believe that non-US markets will become market leaders over the coming few years. The outlook for the global economy is affected by Trump’s presidency, and the effect of this on US GDP growth rate back up to 3% per year. If this level of growth can be met, it should ensure long-term, positive effects on a global scale.


In terms of the International Select portfolio, it has returned 9.75% pure gross, and 9.28% net while the MSCI EAFE Index has seen returns of 7.39%. Several factors have influenced the performance of this portfolio. Stock selection and country weightings in Switzerland, France, Belgium, the UK, and China have all proved beneficial, while the same processes in Canada, India, Norway, the Netherlands, and Panama have had hindering effects. Other factors that aided the portfolio’s return were positions in technology services, electronic technology, health technology, energy minerals, and retail trade. Hurting performance were positions in producer manufacturing, consumer non-durables, and transportation. However, portfolio activity was primarily in an upward direction, trailing one-year (ending 31/3/2017) and returning 19.21% pure gross, and 16.38% net versus the 12.25% result of the MSCI EAFE.

In terms of global growth, The US has been an influential presence and, on the political scene, populism has arrived in the UK, Italy, and various other nations. The hope is that the best characteristics of this doctrine will combine with proven economic activities, resulting in the resumption of global economic growth. This growth will hopefully occur in several sectors, including a period of rising GDP, corporate earnings growth, and a rising tide for economies in general. If this comes to fruition, it may open the door for non-US markets to come to the fore, where, up to the present, their currencies have underperformed the US dollar. In an environment of stronger non-US markets, the International Select portfolio, with a strategy of high-conviction, low-turnover which blends both quantitative and fundamental-based analysis, should thrive.


Insights into Emerging Markets

Interest Rate Hikes and Emerging Markets

  • As a result of next week’s virtually certain interest rate hike in the United States, emerging stocks and currencies had a second straight week loss on Friday (10th March). The move is expected to hit emerging equities and currencies. Weirdly, in this world of uncertainty, on Monday emerging markets stocks recovered by the strong showing of metals stocks, China’s economy showing new strength with Brazil and India rallying.
  • There are many reasons as to why the interest rate hike will affect emerging markets. One example is that higher interest rates could potentially decrease foreign investment


Super Rich and Ultra Rich of the Emerging Markets

Insights from The Knight Frank’s 2017 wealth report reveals that the Emerging markets are minting new millionaires.

  • Tanzania’s ‘super rich’ reached a total of 2,400 after creating 200 new dollar millionaires in 2016 which is an increase of 9% compared to its performance in the previous year.
  • Despite its impressive performance, Tanzania came second to Kenya in East Africa which created 900 new dollar millionaires.
  • Vietnam has 200 ‘ultra-high net worth individuals (people with investable assets of at least $30 million, excluding personal assets and property). The group is growing faster than any other economy in the world and on track to continue the growth into the next decade.
  • With a 12% increase, India ranked sixth in terms of ultra-high net worth individuals but is expected to reach third within the next decade. The country currently has around 2% of the world’s millionaires (13.6 million) and 5% of world’s billionaires (2,024).


Bitcoin – quick update on the previous blog

  • On 2nd March, Bitcoin’s worth was more than gold. It may seem as though much of it was fuelled by speculation that a bitcoin ETF could be approved by the Securities and Exchange Commission (SEC) as the currency’s value fell by 18% from nearly $1,300 to $1,060 after the proposal was declined by the SEC. However, the value of Bitcoin has since recovered to $1,233 as believers have taken the set back as just as another challenge.

From the Wall of Worry to Hard or Soft Brexit

The “Wall of Worry” has now shifted to “Hard or Soft Brexit”. French President François Hollande is calling on the EU to take a hard line in the negotiations with Great Britain to prevent more defections from the EU. This has had a chilling effect on the GBP and increases the likelihood of either very low growth or a recession in the UK during 2017. Either way, the GBP has depreciated against all major currencies since June 2016, and it appears that it will stay weak.


This does not mean that the FTSE 100 will be a bad investment as 70% of the earnings of the companies in the FTSE come from outside the United Kingdom. European corporate earnings growth should be positive in Q4, driven by an improvement in global growth, stable to positive commodity prices, and strong growth in East Asia at 5% in 2017. The Japanese yen appreciated against the dollar, euro, and GB and, while lowering expected GDP growth from earlier expectations, the Japanese economy is expected to remain in growth mode.

Latin America has been dragged down by Brazil over the past two years but they appear to have turned the corner and expect 1.6% GDP growth in 2017. With the help of good growth in emerging markets and stable commodity prices, we are expecting a continuation of the “Low and Slow Growth” as the global economy approaches a 2.4% rate.


For the third quarter of 2016, the International Equity Portfolio returned 6.22% (pure gross) and 6.21% (net) versus 6.50% for the MSCI-EAFE Index. The portfolio returned 8.33% (pure gross) and 7.06% (net) for one-year versus 7.06% for the benchmark. Stock selection and/or country weightings in Germany, Switzerland, Taiwan, South Africa, and Singapore aided the portfolio’s performance. However, stock selection and/or country weightings in Hong Kong, Brazil, Finland, Belgium, and Australia hindered performance. In relation to sectors, positions in electronic technology, producer manufacturing, consumer non-durables, consumer services, and transportation aided performance. Sector positions in technology services, health technology, communications, non-energy minerals, and finance hurt the portfolio’s return.


The International Select Portfolio returned 10.51% (pure gross) and 10.01 (net) versus -6.50% for the MSCI-EAFE Index. The portfolio returned 13.31% (pure gross) and 11.29% (net) for one-year versus 7.06% for the benchmark. Stock selection and/or country weightings in Switzerland, the United Kingdom, China, Japan, and France aided the portfolio’s performance. However, stock selection and/or country weightings in Hong Kong, New Zealand, Taiwan, and India hindered performance. In relation to sectors, positions in electronic technology, producer manufacturing, consumer non-durables, health technology, and energy minerals aided performance. Sector positions in industrial services, distribution services, consumer durables, non-energy minerals, and finance hurt the portfolio’s return.


The United States has much influence in the global growth of the world and we have seen populism arrive on the political scene in the United Kingdom, Italy, and other nations. In this Presidential election, both candidates have promoted protectionism which Moody’s Madhavi Bokil has called harmful for global growth. Hopefully, a congress that supports free trade will rule the day and the “Low and Slow Growth” economy will grow at a projected 1.5% in 2016 and 2% in 2017.


Both portfolios’ high conviction, lower turnover investment philosophy/strategy, which combines quantitative and fundamental based analysis, should prosper in this environment.

The International Select Portfolio

As another Olympic Games come to a conclusion, questions have begun to arise surrounding what the future holds for Brazil. With a high inflation rate and an economy expected to contract by around 3.8%, the country finds itself in the worst recession since the 1930s. Add to this an atmosphere of political unrest, with Brazil’s new interim president Michel Temer being booed at the Opening Ceremony, and it is understandable that many are contemplating Brazil’s next few years as bleak. But it is not all bad news. The Games went remarkably smoothly, and have reintroduced a sense of national pride which had recently been forgotten. Brazil remains Latin America’s biggest economy and planned projects by Shell, Santander, and Goldman Sachs to invest further in Brazil mean there are reasons to feel positive about the future.


In Hong Kong last week, a new mechanism was introduced to help mediate extreme volatility in the market. The new circuit breaker is there primarily to prevent huge swings and spikes in price arising from trading errors and the like. It restricts a stock from moving more than 10% per 5-minute period once a session. The introduction of this Volatility Control Mechanism brings Hong Kong’s stock market into line with its global peers.

Last quarter, our International Select Portfolio returned -0.58% (pure gross) and -1.04 (net) versus -1.19% for the benchmark. For three years the portfolio returned 9.47% (pure gross) and 7.49 (net) versus 2.52% for the MSCI-EAFE Index. Stock selection and country weightings in Hong Kong hindered portfolio performance, where country weighting in Brazil helped, though it remains to be seen whether this continues to be the case.


The Henry James International Select Portfolio, is a high conviction SMID Capitalization, at purchase, international core portfolio. The investment process is an objective, bottom-up, quantitative screening process designed to identify and select inefficiently priced international stocks, under $10 billion, with superior return versus risk characteristics. This is combined with quarterly, top-down risk mitigating country allocation system rebalancing, in which the management team over weights highly ranked countries and under weights lower ranked countries. Typically, the portfolio invests in 50 to 70 stocks that pass our disciplined fundamental and quantitative criteria and we let our winners run. The primary performance benchmark is the MSCI-EAFE.


To learn more about this, or any of our portfolios, please get in touch via email at, by telephone on 917-951-5170 or by heading to our website.