Cambiar Investors | International Equity

Cambiar Investors LLC
2Q 2010 Market Commentary

The second quarter of 2010 unfolded in a stark contrast from the previous four quarters. The positive outlook and investor confidence in a global recovery were quickly replaced with growing fears about the European sovereign debt crisis and state of the Chinese economy. The shift from optimism to pessimism resulted in a sizable retracement in stock prices, sending indices around the world back to their lowest levels in months.

In Europe, the Icelandic volcano eruption that occurred in April might have foreshadowed the events to come for the region. The clouds of volcanic smoke paralleled the clouds of doubt hanging over the PIIGS nations (Portugal, Ireland, Italy, Greece, and Spain) and their ability to meet their debt obligations. Although a massive bailout package was successful in removing worst-case scenarios off the table, investor concerns remain elevated.

Across the globe, efforts by the Chinese central government to cool the property market and contain inflation left investors fearful that the economy would slow too much. The potential for a hard landing contributed to a broad selloff in China-related equities – in particular the commodity markets and companies that are particularly reliant on China as their primary export destination.

For the quarter, it was evident that investors were actively removing the ‘risk on’ trade, and crowding into safety haven assets such as U.S. treasuries, German Bunds, the Japanese Yen and gold. The divergent moves in stocks versus bonds has caused the equity risk premium (ERP) to rise from a seemingly normal level in the early spring to a level that is consistent with historically high risk aversion and market stress.

While it is impossible to exclude the macro from our investment thinking, the Cambiar investment team remains focused on closely watching our current holdings, while always seeking new opportunities. Given the recent sell-off, we are finding no shortage of attractive investment candidates.

International ADR

The Cambiar International ADR strategy returned -10.4% (-10.7% net) for the second quarter of 2010, vs. a return of -14.0% for the MSCI EAFE.

For the quarter, financials was the leading contributor to Cambiar’s performance relative to the EAFE. As many European banks were dragged down by the Eurozone sovereign default crisis, Cambiar’s low exposure here was a strong positive. The portfolio’s holdings within the sector (insurance companies, fee-based financial services positions, Asian banks) also held up better than the index.

The portfolio’s industrials allocation, which represents the largest sector weighting, was another positive contributor to performance in the quarter. Reflecting Cambiar’s bottom-up stock selection process in which portfolios are constructed on a stock by stock basis, the outperformance came from an array of businesses ranging from robotic automation to restroom fixtures.

Healthcare was the leading detractor for the quarter. The underperformance was primarily sustained by two positions – Teva Pharmaceutical and Lonza Group. Although disappointed by these companies’ performance in the short-term, we remain constructive on the earnings trajectory for these positions over the next 12-24 months.

At the country level, the U.K. was the largest contributor. Performance was not limited in scope, as the investment team was able to garner strong numbers from various industries ranging from media to electronic interdealer brokers. Japan continues to be the largest overweight as our diversified holdings continue to trade near historical lows and signs of domestic recovery remain strong.

Looking Ahead

The instability in Europe and slowing of momentum in Asia had many fearing a double-dip recession was right around the corner. Despite the uptick in macro consternations, attractive investment opportunities do exist…they just might be less obvious. For example, one fallout of the Eurozone sovereign debt issue was a weaker euro. From an investing vantage point, companies with Euro-expenses and non-Euro revenues should see an uptick in earnings. While company-specific fundamentals remain paramount in Cambiar’s buy/sell decision, the additional currency tailwind should bode well for holdings such as Adidas, Unilever and EADS.

Another silver lining that resulted from the recent sell-off is a broader reset of valuations; the recent pullback in stock prices has opened the doors for the Cambiar investment team to initiate positions in a number of durable franchises whose current prices we believe offer a compelling risk/reward profile.

While the immediate forecast for equities might not be appear to be terribly intriguing, at some point market consolidation phases conclude and further advances can occur - sometimes rather quickly. Just as the ultimate market low in 2009 was exceedingly difficult to forecast or to invest around, we would expect a similar market inflection to be difficult to pinpoint.

As always, we appreciate your continued confidence in Cambiar Investors.

The performance information depicted above represents Cambiar’s International Equity ADR Composite. Returns are net of transaction costs and include the reinvestment of all income. Gross returns do not reflect the deduction of management fees. Actual returns will be reduced by management fees. The client is referred to Cambiar’s Part II of Form ADV for a full disclosure of the fee schedule. As fees are deducted quarterly, compounding increases the impact of the fees by an amount directly related to the gross account performance. For example, an investment of $10,000 on 01/01/2009 would have grown to $13,855 on a gross-of-fees basis and $13,722 on a net-of-fees basis on 12/31/2009 based upon the actual returns earned in the composite. The performance of the MSCI EAFE benchmark includes the reinvestment of all income. 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. Cambiar’s past results do not necessarily indicate Cambiar’s future performance and, as is the case with all investment advisors who concentrate on equity investments, Cambiar’s future performance may result in a loss. 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 the Cambiar International Equity ADR Composite may differ materially from that reflected or contemplated in such forward-looking statements.