The IVA International Fund (Trades, Portfolio) Class A (NAV) ("the Fund") ended the quarter on June 30, 2014 with a return of 2.50% compared to the MSCI All Country World Index (ex-U.S.) ("Index") return of 5.03%. This brings our year-to-date return to 4.46% versus the Index return of 5.56% for the same period.
Global equity markets continued to move higher this period with the S&P 500 Index reaching a record high close in mid-June despite a still murky economic picture. Towards the end of the quarter, it was announced that U.S. GDP growth fell -2.9% in the first quarter of 2014 and the Bank for International Settlements (BIS) warned in its annual report published in June that "buoyant financial markets are out of sync with the shaky global economic and geopolitical outlook."
Discovering new securities to buy remains difficult because we view equity markets as fully valued; however, we continue to search stock by stock. Over the quarter we found a few opportunities in equities, namely in South Korea, in consumer discretionary, and in technology, which brought our equity exposure up to 58.6% on June 30 from 54.4% on March 31. Since a few securities reached or are close to what we view as their intrinsic value, we trimmed or sold those, mostly in France. Our cash exposure totaled 26.2% at quarter-end, down from 29.3% last quarter. We remain comfortable with our cash position despite rising markets and we believe that to see the real return on our cash, one will have to see how we put it to work years from now. Only then can the true return on cash be fully understood and measured.
This quarter, our equities averaged a gain of 4.9% versus those in the Index gaining 5.0%1. Year-to- date our stocks have outperformed, up 9.1% versus the Index up 5.5%1. Stocks in Japan added the most to our return this quarter, 1.6%, by averaging a gain of 9.4% versus those in the Index up 6.7%. We benefited from good performance from a top 10 position as well as a few consumer discretionary stocks. In addition, our consumer discretionary stocks were the top performing sector this quarter and collectively contributed 0.8% to our return by averaging a gain of 5.0% versus those in the Index up 3.7%. The next top sector contributing to our return was health care, which averaged a gain of 9.6% and added 0.6% to our return, helped by solid performance from a Japanese stock. The Fund's holdings in Hong Kong also added about 0.3% to our return. A couple countries marginally detracted from our return this quarter. Together, Belgium, Finland, Germany, and Indonesia detracted almost -0.1% from our return. Also, our technology stocks underperformed those in the Index this period, averaging a return of -1.9% versus the Index up 5.9%, and detracted about -0.1% from our return. This was due in part to poor performance from a top 10 position. We took advantage of the stock price decline over the quarter and added to our position as we believe this is a quality service company with good management and excellent long term international growth opportunities that remains reasonably priced.
Over the quarter, especially in June, gold bullion performed well by averaging a return of 3.6% and adding 0.1% to our return. We remain comfortable with our gold allocation of 3.1% at quarter-end and believe it continues to serve as a good hedge against extreme outcomes (inflation or deflation).
We did not find any new opportunities in fixed income this period, therefore our corporate bond exposure totaled 6.1% and our sovereign bond exposure totaled 6.2% at period end. Collectively fixed income added 0.1% to our return this quarter.
Over the period our technology exposure rose to 7.7% from 5.8% on March 31. We added a new position in a technology company in South Korea (a top 10 position). We believe this company has a strong competitive position along with a low cost structure. Furthermore, the company has a substantial amount of cash and financial investments on the balance sheet, currently has a high return on equity, and trades at low multiples of our estimated normalized profits.
We increased our exposure to a few equities in India, China (through Hong Kong listed equities), and Hong Kong over the period that we believe are still trading at reasonable valuations. This brought our exposure to these three countries up to 7.2% at quarter-end from 5.8% on March 31. In Japan, equity markets are having a slower start to this year, following the Nikkei 225 Index rising over 50% (in Japanese yen) in 2013. We are pleased with our stock picking in Japan year-to-date as our stocks there averaged a gain of 12.2% versus those in the Index at 0.7%. We think this is mostly due to the types of companies we own; small and mid-cap, local companies that are undiscovered or misunderstood, and exposed primarily to the local economy, not exports. Despite the strong equity market performance last year, we still think some companies remain reasonably priced in Japan and over the quarter we added to a few existing positions that we think are still attractively valued, bringing our Japanese equity exposure up to 18.3% from 16.4% last quarter. As of June 30, 2014 our currency hedges were: 69.6% Japanese yen, 45.5% euro, 29.3% South Korean won, and 20.7% Australian dollar, and collectively they detracted about -0.2% from our return this quarter.
Even though this investment environment (low interest rates, high corporate profit margins) might tempt some portfolio managers to change their investment thinking, at IVA, we continue to stay true to our discipline. Our primary focus is to preserve capital and attempt to deliver a solid absolute return, in excess of nominal GDP growth, by only investing in securities that we believe offer a sufficient margin of safety. We believe too many imbalances still exist in the global economy and there is a reason why interest rates around the world are so low today.
1 The benchmark equity return excludes gold mining stocks.
Performance Information
(as of June 30, 2014)
| Average Annual Total Returns | ||||||
| Since Inception | ||||||
| Class | 3 Months | YTD | 1 Year | 3 Year | 5 Year | 10/1/08 |
| A (NAV) | 2.50% | 4.46% | 14.38% | 7.13% | 11.38% | 11.39% |
| A (w/ 5% sales charge) | -2.65% | -0.77% | 8.63% | 5.32% | 10.25% | 10.40% |
| C | 2.30% | 4.10% | 13.59% | 6.34% | 10.55% | 10.54% |
| I | 2.50% | 4.58% | 14.70% | 7.39% | 11.67% | 11.66% |
| MSCI All Country World Index (ex-U.S.) (Net) | 5.03% | 5.56% 
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