The Cambiar Global Equity strategy is structured as a ‘best ideas’ vehicle, whereby sourcing of new ideas will come from Cambiar’s existing domestic and international portfolios.
The strategy has the ability to seek investment opportunities from across the globe, making it Cambiar's most diversified product offering.
Ania A. Aldrich, CFA
Todd L. Edwards, PhD
|Top 10 Holdings||% Weight|
|Royal Dutch Shell||2.1|
|% of Total||22.1|
|Attributes||Cambiar||MSCI World||MSCI ACWI|
|Market Cap Wtd Avg||85.7 B||135.9 B||131.6 B|
|Market Cap Median||50.8 B||13.5 B||11.2 B|
|Sector Weights||Cambiar||MSCI World||MSCI ACWI|
|Top 5 Countries||Cambiar||MSCI World||MSCI ACWI|
|Risk Statistics*||Cambiar||MSCI World||MSCI ACWI|
Market Review (12.31.2017)
Global equities extended their year-long upward trajectory into the fourth quarter, closing out 2017 at or near their high water marks for the year. The positive sentiment towards stocks was primarily in response to an accelerating global economy, which bodes well for corporate profits. U.S. stocks received a boost from the U.S. tax reform bill, which should be an additional tailwind to earnings and provides corporates with more firepower that can be deployed via share buybacks, increased dividends or strategic merger/acquisition activity.
Posting a full-year return of 25%, the MSCI EAFE Index bested the S&P 500 Index return of 21.8% - marking the first year since 2012 where international developed stocks outpaced their U.S. counterparts. Emerging markets was the standout performer in 2017, with the MSCI Emerging Markets Index gaining 37%. While valuation levels have moved higher regardless of geography, international markets may continue to offer a more attractive risk/reward vs. U.S. stocks, based on one-year forward multiples:
|Market Index||One-Year Forward P/E|
|MSCI Emerging Markets||12.6x|
Given current valuation levels for U.S. stocks, further upside will primarily be a function of earnings growth, as multiple expansion beyond current levels will be difficult. In contrast, international markets offer the potential for multiple expansion as well as a continued recovery in earnings.
The Cambiar Global Equity strategy posted an in-line quarter relative to the strategy’s assigned benchmarks. While the objective is to outperform both of these indices on a rolling three-year basis, we view the MSCI World Index to be the appropriate performance bogey – given Cambiar’s developed market bias. The portfolio will selectively participate in emerging markets (EM - currently 6%), but has generally not approached the 12% allocation that EM comprises in the MSCI ACWI.
The Global portfolio generated a strong absolute return for 2017, but was unable to keep pace with the benchmark for the year. The relative underperformance was sustained in the first two quarters of the year – which was fairly narrow in scope, and exhibited a strong preference for growth over value. As the rally in equities broadened in the second half of the year, the Cambiar portfolio fared much better. Looking ahead to 2018, we believe the portfolio remains attractively valued and diversified at the country/region and sector levels.
The 4Q gain in global equities was broad-based on a sector level, with utilities as the one exception (posted a small loss for the quarter). The Global portfolio was paced by positive stock selection in the materials, telecom and industrials sectors. Energy was another bright spot for Cambiar; after a tough start to the year, energy stocks rebounded in the second half on stronger oil prices.
Representing approximately 20% of the Global portfolio, Financials remains the largest sector allocation. Although Cambiar’s holdings posted an in-line performance for the quarter, the sector was a strong contributor for the portfolio in 2017. Possessing what we feel to be strong capital positions, Cambiar’s bank, insurance and related financials holdings offer a combination of good earnings growth and high dividend yields. The potential for rising yields in 2018 will be an additional tailwind for many of the portfolio’s spread income businesses.
As was the case for much of 2017, tech stocks were the top gainers in the fourth quarter. The Global portfolio’s lower allocation to this top-performing sector (as well as modestly lower returns) was a detraction from performance – for 4Q as well as on a full year basis. Bright spots in the portfolio included HP Inc. (the printer segment of the former Hewlett Packard) and Baidu. One name that did not participate in the year was Qualcomm; the stock was down early in the year due to a royalty dispute with Apple before rallying in 4Q on news that Broadcom was interested in acquiring the company. Cambiar anticipates a stronger 2018 from Qualcomm; the company is laying the foundation for growth outside of smartphones, while the Broadcom offer helps put a floor under the stock.
Positive stock selection in basic materials and industrials was offset by below-benchmark returns in consumer discretionary and healthcare. This dynamic was true for the quarter as well as on a full year basis. Within discretionary, the traditional retail industry continues to face a challenging competitive environment from e-commerce. While valuations have compressed in the space, Cambiar continues to maintain a fairly cautious outlook. The portfolio does own a Japanese retailer that we believe has a defensible brand and market position. As it relates to healthcare, there were no outsized drawdowns from Cambiar’s holdings in the sector. Rather, the relative underperformance was simply a case of not keeping pace with the benchmark. We are optimistic that detractors such as Bristol-Myers and Medtronic can deliver improved results in 2018.
As mentioned, Cambiar’s energy positions were a positive contributor in the quarter, but represented a headwind for the portfolio on a full year basis. The Global portfolio was overweight energy throughout 2017 – not the correct call in hindsight. Despite the sector’s soft showing in 2017, Cambiar’s continued constructive view towards energy is a function of improving fundamentals in the industry. U.S. oil inventories continue to decline from their February peak, and OPEC extended their production limits – all of which is helping to bring greater equilibrium to the global oil markets. At the company level, managements reaffirm their focus on free cashflow and expense discipline. The result (hopefully) is greater earnings visibility vs. the rollercoaster ride of recent years.
The Global portfolio held an average cash position of ~4% over the course of the year, creating a drag on return given the strong move in stocks during 2017. While acknowledging that any cash balance is a negative contributor in a rising market, cash levels are a by-product of the buy/sell process. As would be expected, cash is a relative non-factor when evaluating performance over longer timeframes.
Global equities delivered a dream year for investors – strong returns with very low volatility. As we contemplate the outlook for equities in 2018, two key considerations are global growth and valuations. The acceleration in economic growth across most geographies is unlikely to sharply decelerate in 2018, providing a tailwind to corporate profits and stock prices. That said, it is improbable that 2018 will be without some degree of increased volatility along the way. Volatility is not necessarily a bad thing – the corresponding increase in dispersion across sectors is beneficial to active managers such as Cambiar.
Regarding valuation, it is hard to argue that equities in the aggregate are inexpensive. With that said, it is worth noting that the expansion in multiples has not been uniform – by geography nor by sector. For example, although U.S. stock averages are at all-time highs, market levels in Japan, the United Kingdom and Europe are still below their 2007 levels (in dollar terms). Such variances provide an additional opportunity for active managers to outperform.
What unforeseen shocks could derail the upward trajectory for equities? Geopolitical risk is always front of mind; changes in central bank monetary policy will be another variable worth watching. Although the three rate increases by the Federal Reserve did little to impede stocks from advancing in 2017, the ongoing normalization in policy will eventually be felt by market participants (particularly those with higher leverage ratios). And while generally accommodative monetary policy continues in Japan, the European Central Bank is likely to articulate their plan to end quantitative easing at some point in 2018. The mood at Cambiar is best described as constructive paranoia; while optimistic in the outlook for our companies, we spend equal time thinking about what could go wrong.
Quarterly Top & Bottom Contributors
|Top Contributors||Avg. Weight||Contribution||Bottom Contributors||Avg. Weight||Contribution|
|Royal DSM||2.22||0.36||BAE Systems||1.68||-0.15|
|Tyson Foods||2.01||0.30||CVS Health||0.21||-0.17|
A complete description of Cambiar's performance calculation methodology, including a complete list of each security that contributed to the performance of the Cambiar portfolios mentioned above are available upon request. Please contact Cambiar at 1.888.673.9950 for additional information. Past performance is no guarantee of future results.
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.