|Minimum Investment||$2,500||$5 million|
The Cambiar International Equity Fund is designed to identify compelling international investment opportunities that possess the desired combination of attractive valuations and potential for multiple expansion. The starting universe for the International Equity Fund includes any international company with a market cap above $5 billion.
Cambiar’s quality and value bias will result in portfolio overweight to developed markets, subsequent underweight in emerging markets.
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|
|Attributes||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.
International Equity Fund
The Cambiar International Equity Fund gained 7.25% 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. 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 (as measured by the MSCI Emerging Market Index).
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.
Within technology, the International Equity Fund 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 MSCI 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.
Mutual fund investing involves risk, including the possible loss of principal. In addition to the normal risks associated with investing, investments in international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involved heightened risks related to the same factors as well as increased volatility and lower trading volume. The Cambiar International Equity Fund may invest in derivatives, which are often more volatile than other investments and may magnify the Fund's gains or losses. There can be no assurance that the Fund will achieve its stated objectives.
To determine if a Fund is an appropriate investment for you, carefully consider the Fund’s investment objectives, risk factors and charges and expenses before investing. This and other information can be found in the Fund’s prospectus which can be obtained by clicking here or calling 1-866-777-8227. Please read it carefully before investing. There is no guarantee that the Funds will meet their stated objectives.
Performance data quotes are past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost and current performance may be lower or higher than the performance quoted. For performance data current to the most recent month-end, please call 1-866-777-8227.
The Morningstar RatingTM for funds, or "star rating", is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods. CAMIX was rated against 598 Foreign Large Blend funds over a three year period, 533 over a five year period and 344 over a ten year period. With respect to these Foreign Large Blend funds, CAMIX received a rating of 4 stars, 4 stars, and 4 stars respectively. Past performance is no guarantee of future results.
Price/Earnings F1Y is a calculation that divides the current share price by the estimates of earnings in the next four quarters. Debt/Equity - Long Term is a calculation that takes interest bearing, long-term debt divided by shareholder equity. EPS Growth - Long Term is a calculation that takes the company’s estimated profits for five years divided by the outstanding shares. Active share is a holdings-based measure of active management representing the percentage of securities in a portfolio that differ from those in the benchmark index. Alpha is a measure of risk-adjusted performance. Beta is a measure of risk in relation to the market or benchmark. The Sharpe Ratio is a direct measure of reward-to-risk and is calculated by subtracting the risk free rate from the rate of return for a portfolio and dividing the result by the standard deviation. Standard Deviation is a statistical measure of historical volatility; a measure of the extent to which numbers are spread around their average. R-Squared measures how closely a portfolio’s performance correlates with the performance of a benchmark index.These calculations are not a forecast of the Fund’s future performance.
The MSCI EAFE® Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the U.S. & Canada. The MSCI EAFE Small Cap index represents the 85th to 99th percentile of stocks found in the MSCI EAFE. The MSCI All-Country World and World Indices are unmanaged indices compiled by Morgan Stanley Capital International. The MSCI EAFE Value Index captures large and mid cap securities exhibiting overall value style characteristics across Developed Markets countries around the world, excluding the US and Canada. The MSCI EAFE Growth Index captures large and mid cap securities exhibiting overall growth style characteristics across Developed Markets countries around the world, excluding the US and Canada. The MSCI indices returns do not reflect any management fees, transaction costs or expenses. Individuals cannot invest directly in an index. The MSCI indices returns do not reflect any management fees, transaction costs or expenses. Individuals cannot invest directly in an Index. The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market-value weighted index, with each stock's weight in the Index proportionate to its market value. The S&P 500 returns do not reflect any management fees, transaction costs or expenses.
As of 9.30.17 the Cambiar International Equity Fund had a 0.0% weighting in Alibaba, Netflix, and Tencent. 2.0% in BAE, 3.6% in Baidu, 2.0% in British America Tobacco, 1.6% in Carrefour, 0.9% in Lloyds Banking Group, 1.5% in Mitsubishi Estate, and 2.8% in Sumitomo Mitsui.
This material represents the portfolio manager’s opinion and is an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice or a specific recommendation of securities.
Cambiar Funds are distributed by SEI Investments Distribution Co., 1 Freedom Valley Dr Oaks, PA 19456, which is not affiliated with the Advisor. Cambiar Funds are available to US investors only. Strategies included within the Institutional Investor offer are not mutual funds and are not affiliated with SEI Investments Distribution Co.