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.

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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.

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The International Equity Portfolio

The big story in the news this week was the extraordinary loss reported by BHP Billiton. The Anglo-Australian mining giant recorded the worst loss in its history to the tune of around $6.4 billion annually. Along with an unavoidable dam collapse in Brazil, the company has suffered due to the continued slump in commodities prices.

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Also in the news, further stories keep trickling in detailing post-Brexit fall-out. Although the UK economy appears to be dealing with the situation far better than had been predicted by some, many sectors – such as IT, Finance, and Corporate Property – have been feeling the heat, with the pound still on shaky ground, international deals being pulled out of, and jobs being cut.

 

Last week, RBS announced that a large IT project originally due to be undertaken by Indian tech firm Infosys would no longer be going ahead triggering an “orderly ramp-down” of around 3000 employees. Banks and Finance firms are creating significantly fewer jobs too, moving roles to outside of the UK, according to recruiters Morgan McKinley.

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Despite this, our International Equity Portfolio performed reasonably well last quarter, returning 1.43% (pure gross) and 1.20% (net) versus 0.05% for the benchmark. For one year the portfolio returned -6.29% (pure gross) and -7.28 (net) versus -9.72% for the MSCI-EAFE Index. Although stock selection and country weightings in India and Australia hindered performance, weightings in Spain, Germany and Japan boosted it, as well as selections in the communications, health technology and consumer durables sectors.

 

The Henry James International Portfolio is a large capitalization international portfolio; it takes advantage of the international economy while seeking long-term capital appreciation. As with all our Emerging Markets Portfolio  The investment process is an objective, bottom-up, quantitative screening process designed to identify and select inefficiently-priced international stocks 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. The primary performance benchmark is the MSCI-EAFE.

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

 

(Please note: Henry James International does not currently holds a position in RBS.  Henry James International does currently own BHP and INFY for client portfolios).

Market Commentary – Quarter 2, 2016 – Part 1

This quarter, the global economy underwent a serious shake-up, with the UK’s EU referendum having initially severe ramifications for markets all across the world. In this week’s Market Commentary, we examine the financial situations of our portfolio countries now that the dust has settled.

Market Commentary

On Friday June 24, 2016 the “Wall of Worry” triumphed as British Voted to “Leave” the European Union. The VIX went up while the GBP and markets tumbled.  Then, as central banks do in a time of crisis, the market was flooded with liquidity.  After the markets stabilized, people began to look at the brighter side. As it stands, the United Kingdom is the fifth largest economy in Europe, and it does not appear that they are slipping into recession. They are headed for a little slow down, probably, recession – not likely.

Meanwhile, elsewhere in the world, Europe is experiencing stronger than expected GDP growth as it undergoes a cyclical recovery.  Emerging Market economies are back in growth mode, their currencies are recovering and GDP growth is accelerating. Things are looking up.

In the USA we expect GDP growth to continue on pace in 2016 with the two prior years’ growth rate of 2.4%.  This marks the first 10-year period that, for any single year, the USA GDP growth rate did not exceed 3%.  Globally, with the help of the emerging markets we are expecting, growth to approach 3.2% with a continuation of the Goldilocks economy we mentioned in last quarter’s Market Commentary.

In this, we predicted a close vote on the British exit, that no matter the outcome it would not really affect the markets in the long run, and that we had reached a market bottom earlier this year. Looking forward, the event will cause global volatility over the summer, and then over the next few years our estimate is that eventually both the United Kingdom and Europe will do what is best for their own long-term self-interests, which are generally tied to one’s own long-term economic interests.

In part two next week we will be discussing what this quarter meant for our Emerging Markets, International Select, and International Equity portfolios.