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|
|% of Total||22.8|
|Attributes||Cambiar||MSCI World||MSCI ACWI|
|Market Cap Wtd Avg||83.1 B||124.5 B||120.4 B|
|Market Cap Median||46.3 B||12.7 B||10.7 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 (9.30.2017)
Global equities closed higher in the third quarter, fueled by encouraging economic growth data and solid corporate earnings reports. On a style basis, growth stocks continued to outpace their value counterparts (particularly in the U.S.), as low bond yields fell for much of the quarter.
International equities are poised to outperform the U.S. markets for the first calendar year since 2012, a trend that may have some legs to it. While valuations have broadly moved higher on a global basis, Cambiar believes that non-U.S. companies are poised to benefit from a combination of continued earnings recovery, multiple expansion and generally accommodative central bank monetary policy. On a regional basis, we believe Europe remains particularly attractive, as the EU shifts from survive to thrive mode (relatively speaking – Europe in general does not possess the same growth rates as the U.S.).
Energy Stocks - Poised for Improved Returns?
After meaningfully lagging the market for the first six months of 2017, energy stocks rebounded in the third quarter. Is the recent recovery the start of an improving performance trend within the sector, or a short-term bounce that is not likely to be sustained? After having maintained an underweight allocation to energy stocks in 2015, Cambiar has been slowly rotating capital back into the sector. At present, our view is that the energy sector offers an attractive risk/reward – based on our outlook for a stable-to-increasing price deck for oil over the next 12 months.
Why did energy stocks struggle in the first two quarters of the year? After posting a sharp rally in the fourth quarter of 2016 on OPEC’s announced production cuts, the energy sector reversed course in January. Climbing global oil inventories led to increased negative sentiment toward the sector – given the oversupplied market conditions. Despite rebounding in September, energy stocks remain in the red on a year-to-date basis. The decoupling in stock valuations relative to oil prices thus far in 2017 borders on capitulation by investors(see the below chart).
Source: Bloomberg. WTI (West Texas Intermediate)
Frustration with the pace of the recovery in the current oil market vs. past cycles is sure to be weighing on investor sentiment; that said, we believe the combination of attractive valuations (in what is increasingly becoming a fully/overvalued equity market) and improving fundamentals may result in brighter days ahead for energy stocks.
As with most assets, the oil price is primarily a function of supply and demand. Global oil demand has been strong this year, with industry publications continuing to revise their demand estimates higher. On the other hand, global oil supply growth has not kept pace with demand due to OPEC production cuts as well as underinvestment in many areas of the world outside of the United States.
While the current supply/demand picture is healthy, the spike in oil in storage during the 2014-2016 timeframe resulted in a glut of oil and oil products in storage. As the chart illustrates, U.S. oil inventories have begun to post consistent draws - which essentially means the global oil market is not just back in balance but is actually under-supplied. While there is some work to do in working down the supply bulge and reaching more normal storage levels in the U.S. (~700K barrels), the data is moving in the right direction.
A continued overhang in the bull case for energy stocks is the role of shale production in North America (N.A.); i.e., any uptick in oil prices will result in increased shale activity, thereby capping oil price gains. Yet can N.A. shale fill the potential gap that may occur from lack of new investment in conventional oilfields? Expenditures in new oil finds have been sharply curtailed since the collapse in oil prices three years ago. From our analysis, the big integrated and national oil companies are instead seeking to squeeze more out of their existing assets – which will succeed in providing barrels in the short-term, but at the expense of increasing decline rates. When comparing the barrels lost via a 5% decline rate vs. the incremental shale production estimates, one can create a scenario where shale is a necessary source of supply, vs. the burden tagline that it wears today.
Uncertainties regarding the pace of the recovery remain; however, Cambiar believes these concerns are reflected in the attractive valuations that exist within the sector. Cambiar’s holdings in the sector span the energy stack, including integrated oil companies, exploration and production companies and oil services companies. Many of these companies have undergone significant restructuring – such that improving top line results have the potential for a disproportionately positive impact on earnings.
The Cambiar Global Equity strategy posted a strong third quarter – on an absolute basis as well as relative to the benchmark. Although the Global strategy trails the benchmark on a year-to-date basis, we are encouraged by the positive turn we saw in the portfolio during 3Q. Trade activity during the quarter was modest, with five purchases and three sales. The Global portfolio ended the quarter with a 42% U.S./58% non-U.S. allocation. Europe represents the largest portion of the portfolio’s international exposure, followed by Emerging Markets and Japan.
On an attribution basis, the excess return (vs. the MSCI World) in the quarter was broad-based in nature, with the portfolio garnering positive effects via stock selection or over/underweight allocations in 9 of 11 sectors in which it was invested. The largest detractor in the quarter was a modest cash balance of ~5%, which was a 25 bps drag on return.
Cambiar’s consumer discretionary positions comprised the top contribution to performance in the quarter, led by Hugo Boss and Adient. The investment thesis for Hugo Boss was predicated on brand realignment and operational restructuring; while we remain constructive on the company’s prospects, the stock reached our price target and was subsequently liquidated in the quarter. Adient is a manufacturer of seats and related components for the auto industry and has a strong reputation (According to Adient, one in every three seats in the world is produced in their facilities). The stock moved higher in the quarter on disclosure of an activist investor taking a position in the company. While unsure what an activist has planned for a company that has been public for less than a year (Adient was formerly part of Johnson Controls), Cambiar still views Adient to represent an attractive risk/reward opportunity – the recent move notwithstanding.
The portfolio also benefitted from strong stock selection in financials; Cambiar’s bank and insurance positions have also outperformed the index on a year-to-date basis. The re-rating in financials has primarily been in response to better-than-expected profitability; although bond yields have remained flattish for most of 2017, financials have done a good job managing expenses and growing revenues via higher lending activity as well as non-credit segments of their business. With many of the portfolio’s holdings trading at reasonable price-to-book multiples and offering attractive capital returns via dividends and share buybacks, Cambiar remains constructive on our holdings in this sector.
Another bright spot for the portfolio during the quarter was consumer staples. Valued by investors for their perceived lower volatility profiles, steady dividends and consistent sales trends, the sector incurred a modest pullback during the third quarter. Some of the decline was due to a sell-off in tobacco stocks, which sold off on news of a possible proposal by the U.S. FDA to cut nicotine in cigarettes. Cambiar was able to counter weakness in the staples sector with positive returns from holdings such as Ambev and Tyson Foods.
Cambiar’s energy positions rebounded in tandem with oil prices moving higher during the quarter. Despite the 3Q lift, energy is the only blemish in what has been a broad-based rally in stocks this year. The stabilization in oil prices has primarily been a function of U.S. inventories beginning to see consistent drawdowns; should this trend continue, it could bode well for sentiment and price action within the sector. Energy represents approximately 9% of the Global portfolio as of quarter-end.
As mentioned, the Global strategy was negatively impacted by a cash position that was maintained throughout the quarter; additional detractors included Japanese real estate company Mitsubishi Estate and China Mobile in the telecom sector; resulting in both sectors lagging during the period.
Global equities have broadly rallied through the first nine months of 2017, with stock averages in the U.S., Japan, Europe and Emerging Markets all trading at 52-week highs. Given positive economic growth data, low volatility, strong corporate profits and lack of attractive investment alternatives, equities appear to be the best house on the block. Although Cambiar remains optimistic as it relates to our companies, we spend equal amounts of time thinking about what could impair the investment case. Complacency and investing are not a good mix.
As always, Cambiar continues to focus the core of our research on company-specific fundamentals. We will also include macro variables into our analysis, to the extent it is relevant to our bottom-up work. One segment of the market we are monitoring is central bank activity, in particular the U.S. Federal Reserve. The U.S. continues to slowly make progress on normalizing monetary policy; the key consideration is whether the markets will be able to digest higher rates, given the absence of inflation. The moves made by the U.S. Fed have a ripple effect on other markets – potentially jeopardizing what has been a synchronized global growth environment. We are also closely monitoring the energy markets, given the high correlations between oil prices and stock movements over the long-term within the sector.
Quarterly Top & Bottom Contributors
|Top Contributors||Avg. Weight||Contribution||Bottom Contributors||Avg. Weight||Contribution|
|Baidu||2.26||0.74||Actividades de Construccion||1.93||-0.07|
|Hugo Boss||0.81||0.43||Seven & I||1.16||-0.11|
|Ambev||2.17||0.43||Universal Health Services||2.01||-0.20|
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.