The Cambiar International Equity 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 portfolio is constructed by Cambiar’s eight-person international investment team.
Jennifer M. Dunne, CFA
|Top 10 Holdings||% Weight|
|Royal Dutch Shell||2.8|
|Sumitomo Mitsui Financial||2.8|
|% of Total||28.3|
|Holdings Subject to Change|
|Sector Weights||Cambiar||MSCI EAFE||MSCI ACWI ex U.S.|
|Market Cap Wtd Avg||59.5 B||62.7 B||67.8 B|
|Market Cap Median||33.3 B||11.1 B||8.6 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 (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 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 International Equity strategy gained approximately 7.6% (gross of fees) in the third quarter – besting both of the strategy’s assigned benchmarks. Outperformance in the quarter was primarily a function of positive stock selection in the portfolio’s more cyclically-geared allocations, including financials, technology and materials. Value stocks were able to narrow the gap vs. their growth counterparts in the quarter, providing an additional tailwind to the portfolio.
Trade activity was modest in the quarter, resulting in only subtle changes at a sector level. Financials remains the largest individual sector allocation, representing approximately 22% of the portfolio at quarter-end (vs. 21% for the MSCI EAFE). In aggregate, the portfolio continues to maintain a prudent balance of ‘offense’ (cyclicals) and ‘defense’ (healthcare, telecom, utilities), with an emphasis on quality via balance sheet strength and free cashflow attributes within our companies.
On a country/regional basis, Europe continues to represent the largest exposure of the portfolio, followed by Japan. Cambiar’s allocation to the United Kingdom was increased by ~600 bps via purchases of British American Tobacco, BAE Systems and Lloyds Banking Group. Each of these new purchases were based on company-specific fundamentals; i.e., the fact that each are domiciled in the UK is coincidental, vs. intentional. The portfolio also has an approximate 10% allocation to Emerging Markets (EM); EM continues to be one of the top-performing regions – up ~28% in 2017.
Energy and basic materials were the strongest sectors in the third quarter; Cambiar benefitted from a combination of strong stock selection in materials and an overweight allocation in energy. The rebound in energy was particularly encouraging, given the sector’s decline in the first two quarters. As discussed above, Cambiar remains constructive on the opportunity within energy – particularly in light of what we view to be an improving industry backdrop. The portfolio’s positions do not require heroic assumptions in the oil price to do well, and each holding has a shareholder return policy in the form of dividends that can providing a degree of downside protection.
Within technology, the International portfolio benefitted from a strong return from Baidu, which was the top individual contributor to performance for the quarter. Baidu is a Chinese internet search company – essentially the Google of China. The stock gained on a combination of strong earnings, as well as above consensus forward guidance. Despite the recent gains, Baidu trades at a relative discount vs. its two closest peers, Alibaba and Tencent. Given the momentum in their core search business, in tandem with related initiatives (e.g., their own version of Netflix), Baidu remains a high-conviction holding within the portfolio.
Cambiar’s holdings within financials have been additive to performance for much of 2017, including the third quarter. Solid economic growth data, increasing consumer confidence in Europe, and a more constructive monetary policy stance have been supportive for equities in general, in financials in particular. Cambiar’s bank positions are generally posting asset growth, stable-to-improving margins, and low credit costs – clearly all positives for the bottom line. With reasonable valuations, strong capital levels (with excess capital that can be deployed in the form of increasing dividends and/or share buybacks) and high rate sensitivity, Cambiar believes the risk/reward remains attractive in this sector.
One portfolio position that did not participate to the upside in the quarter was Carrefour – a French food retailer. The stock declined in response to an increasingly competitive environment that has pressured margins and profits across the industry. Despite the disappointing reset, Cambiar’s analysis led to the conclusion that capitulation was not the proper course of action. We are confident that new CEO Alexandre Bompard can deliver improved operating performance via store rationalization, improved product mix, and higher inventory turns. Mr. Bompard has a successful track record in French e-commerce and omnichannel innovation, including a turnaround at his last company (former CEO of electronics retailer FNAC).
Additional laggards in the quarter included two Japanese financials – Sumitomo Mitsui and Mitsubishi Estate. In both cases, the loss in the quarter was modest – so more of a relative detraction in light of the broader positive return for equities. Although positive on a year-to-date basis, Japan continues to lag Europe/UK and EM in 2017. Japan tends to be more of a ‘value’ market; thus some of the underperformance is understandable in light of investor preference for growth. A weaker U.S. dollar (and thus stronger Yen) has been another headwind, although this trend has reversed more recently. Cambiar’s allocation to Japan is approximately 19% (vs. ~23% for the EAFE).
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|
|ZTE||1.60||0.52||Seven & I||1.46||-0.09|
|BHP Billiton||2.65||0.46||Otsuka Holdings||1.77||-0.11|
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.