The International Equity ADR portfolio is designed to identify compelling investment opportunities that possess the desired combination of attractive valuations and potential for multiple expansion. Cambiar’s quality and value bias will result in portfolio overweight to developed markets, subsequent underweight in emerging markets.
The strategy is constructed by Cambiar’s eight-person international investment team.
Jennifer M. Dunne, CFA
|Top 10 Holdings||% Weight|
|British American Tobacco||3.1|
|Sumitomo Mitsui Financial||3.1|
|% of Total||28.1|
|Sector Weights||Cambiar||MSCI EAFE||MSCI ACWI ex U.S.|
|Market Cap Wtd Avg||61.6 B||64.1 B||71.5 B|
|Market Cap Median||40.7 B||11.7 B||9.3 B|
|Sector Weights||Cambiar||MSCI EAFE||MSCI ACWI ex U.S.|
|Top 5 Countries||Cambiar||MSCI EAFE||MSCI ACWI ex U.S.|
|Risk Statistics*||Cambiar||MSCI EAFE||MSCI ACWI ex U.S.|
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.
International Equity ADR
The Cambiar International Equity ADR strategy posted a 4.2% return, gross of fees, for the fourth quarter of 2017, matching the return for the MSCI EAFE Index. The strategy was unable to keep pace with the index on a full-year basis, primarily a function of the portfolio’s first quarter performance deficit. Cambiar’s value bias was an additional headwind during the year, as growth stocks outpaced their value counterparts by a margin of almost 700 bps during the year.
This is not to suggest that we could not have had better execution in a few areas of the portfolio; stock selection in healthcare and technology were below expectations in 2017. That said, attunements made in the portfolio have translated into improved second-half performance that we believe can continue in 2018. While always looking ahead in our pursuit of exceeding client expectations, it is worth noting the strategy’s strong longer-term record.
Portfolio buy/sell activity was slightly elevated in the quarter, with five liquidations and four new purchases. One effect of the quarter’s trade activity was a modest uptick in the portfolio’s allocation to Japan, which comprised approximately 20% of the Cambiar portfolio as of quarter-end. Cambiar’s constructive outlook for Japan is no longer the non-consensus view that it was a few years ago, yet a combination of attractive fundamentals, reasonable valuations and improving macro data results in a favorable investment backdrop within the country.
Bright spots in the quarter (as well as on a full-year basis) included positive stock selection within the basic materials and financial sectors. Royal DSM was a standout performer in 2017, as the company re-rated on its continuing transition from a chemicals producer to a higher-margin nutrition company. Other outperformers within basic materials were BHP Billiton and Arcelor Mittal – both of whom are benefiting from a combination of strengthening commodity prices and productivity gains via cost controls and improved volume production.
Financials represented a source of positive stock selection for the portfolio in 2017, as Cambiar attained strong contributions from a number of the portfolio’s traditional bank holdings as well as private banking and insurance positions. All banks are not created equal, and Cambiar’s focus has been on high quality operators that have a history of consistent profitability (as measured by return on equity) and possess excess capital that can be returned to shareholders. We have trimmed positions where prudent, but believe the sector continues to offer an attractive risk/reward in the portfolio.
Cambiar received positive contributions from holdings in the consumer staples and healthcare sectors in the quarter, offsetting underperformance sustained in industrials and consumer discretionary. Cambiar is hopeful that the improved 4Q performance in healthcare is a precursor of things to come in 2018 – after a relatively challenging 2017. The sector’s defensive attributes hampered upside given more of a risk-on rally in 2017; nonetheless, there were gains to be had and Cambiar’s stock selection fell short of the mark. On an individual stock basis, Astellas and Otsuka were individual detractors for the year. Astellas was sold earlier this year as part of a portfolio review, while we continue to hold Otsuka. Otsuka is a show-me story, as the company needs to demonstrate that they can move beyond their key drug (Abilify), which went off patent in June 2016. The company trades at a discount to peers, yet we believe is poised to deliver above-peer profit growth in 2018. If they can execute, the stock should re-rate accordingly.
Energy stocks led the market in the fourth quarter, as the continued recovery in oil prices was a positive catalyst for gains in the sector. Energy was truly a tale of two halves in 2017 – significantly lagging the market in the first half of the year before outperforming in the third and fourth quarters. Despite positive returns in the aggregate, Cambiar’s energy positions were unable to keep pace with the index – in the quarter as well as on a full year basis. Although the portfolio benefited from its ownership of Royal Dutch Shell, Schlumberger was an outlier to the downside, as the stock was impacted by the slower-than-expected recovery in drilling/well activity outside the U.S. Increased cost discipline within the sector is a positive (and supportive for oil prices); however, the reduced activity has been a near-term headwind for Schlumberger. With that said, we do not believe that now is the time to part ways with this high quality market leader. All indications point to a robust pipeline of new business in 2018, which should translate into a strong earnings recovery in the coming years. Schlumberger, we feel, has also done an excellent job of restructuring their business during the industry downturn - which should add significant operating leverage as revenues improve.
The technology sector took a respite in the fourth quarter, after a torrid 2017. With the sale of Murata Manufacturing in the quarter, the Cambiar portfolio has only one tech position at present (Baidu). With many tech companies trading near the upper end of their long-term valuations, we are exercising patience in waiting for more attractive attachment points.
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|
|Sumitomo Mitsui Financial||2.93||0.41||Bayer||1.66||-0.18|
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.
DOL Disclaimer: These materials are intended for use by sophisticated parties as described in Section (c)(1) of the Department of Labor’s Fiduciary Rule, 81 Fed. Reg. 68, at 20999 (April 8, 2016). In connection with the sale of our products and services, we are not undertaking to provide impartial investment advice or to give advice in a fiduciary capacity for purposes of the Employee Retirement Income Security Act of 1974, as amended or section 4975 of the Internal Revenue Code of 1986, as amended. While we have a financial interest in the sale of our products and services because we earn revenue once we are hired, we do not receive a commission, fee or other compensation directly for the provision of investment advice (as opposed to other services) in connection with any such sale.