June 2014
Active, Value, and Absolute versus Indexing
IVA Worldwide Fund
Class
Ticker
CUSIP
A
C
I
IVWAX
IVWCX
IVWIX
45070A107
45070A503
45070A206
IVA International Fund
Class
Ticker
CUSIP
A
C
IVIOX
IVICX
45070A305
45070A602
I
IVIQX
45070A404
Warren Buffett surprised active managers, especially value investors, when he disclosed
a feature of his will in his 2013 shareholder letter: Buffett instructed the trustee for his
wife’s cash to put 10% of it in short-term government bonds and 90% in a very low-cost
S&P 500 Index Fund. He believes the trust’s long-term results from this policy will be
superior to those attained by most investors – pension funds, institutions, or individuals
– who employ high-fee managers. This is a very different recommendation from his
seminal Superinvestors of Graham-and-Doddsville speech in which he illustrated how
active, value managers can do far better than indexes over time.
In today’s era of “quantitative easing” – massive liquidity injections and a zero interest
rate policy, which had a strong positive effect on asset prices – we continue to see money
pouring into equity funds, especially index funds (usually a mutual fund or exchange
traded fund) as investors chase returns and can’t bear sitting on cash yielding zero and
losing purchasing power every day. Yet what will happen when the Federal Reserve
raises interest rates, corporate profit margins decline, or markets start exhibiting more
volatility? Is a fully invested index fund really the right place to be? At IVA, we believe
some active managers, especially some value investors, can still beat a benchmark over
the long-term, with the trick being: pick the right asset manager.
When investing in an index fund – timing matters. We believe that the ability to avoid
bubbles is key to long-term outperformance. As a passive investor, you cannot make the
decision to be less invested when markets appear to be overvalued or a bubble is brewing,
which could lead to significant losses. The following examples illustrate the importance of
timing when buying an index fund:
The infamous “dot-com” bubble roughly occurred from 1997 to 2000, peaking on
March 10, 2000. If one was able to invest in the S&P 500 Index at the peak through
March 31, 2014, one could have earned 4.0%, on an annualized basis, including
dividends. Yes, a positive return, however, when inflation is factored in (inflation was
2.3% annualized over that period) the return was only slightly positive in real terms,
before fees and taxes on dividends received.
Investment Risks
There are risks associated with
investing in funds that invest in
securities of foreign countries,
such as erratic market conditions,
economic and political instability
and fluctuations in currency
exchange rates. Value-based
investments are subject to the risk
that the broad market may not
recognize their intrinsic value.
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An even better example is the “Japanese bubble” which occurred from 1986 to 1991,
peaking on December 29, 1989. In Japanese yen, the Nikkei 225 Index fell -3.90%
annualized (yes, annualized, over a generation!) from its peak through March 31, 2014.
The Japanese market is still a long way away from the peak of ¥38,957; the Nikkei
Index closed at ¥14,827 on March 31, 2014.
If one had the flexibility to avoid these trouble spots and not be fully invested, the road
would have been less bumpy.
continued to next page
Performance Information
(as of June 30, 2016)
1 Year
5 Year*
Since
Inception
(10/1/08)*
IVA Worldwide Fund Class A (NAV)
-1.18%
3.63%
8.29%
IVA Worldwide Fund Class A (with 5% sales charge)
-6.10%
2.58%
7.58%
MSCI All Country World Index (Net)
-3.73%
5.38%
6.27%
IVA International Fund Class A (NAV)
-2.99%
3.98%
8.17%
IVA International Fund Class A (with 5% sales charge)
-7.84%
2.92%
7.45%
MSCI All Country World Index (Ex-US) (Net)
-10.24%
0.10%
3.17%
*Annualized
Past performance does not guarantee future results. The performance data quoted
represents past performance and current results may be lower or higher. Returns are
shown net of fees and expenses and assume reinvestment of dividends and other income.
The investment return and principal value will fluctuate so that an investor’s shares,
when redeemed may be worth more or less than the original cost. To obtain performance
information current to the most recent month-end please call 1-866-941-4482.
Maximum sales charge for the A shares is 5.00%. The expense ratios for the fund are as
follows: IVA Worldwide Fund 1.25% (Class A), IVA International Fund 1.25% (Class A).
The inception date of the fund is October 1, 2008.
Flaws in Indexing:
1.You always earn market returns – when you invest in an index fund, you are embracing
market risk in order to earn market returns all the time. Do you always want to earn
market returns? Many indexes delivered years of positive returns. Recent positive
years for the S&P 500 Index including dividends were: 32.39% in 2013, 16.00%
in 2012, and 2.11% in 2011. Conversely, they also delivered years of significant
negative returns. Recent negative years for the S&P 500 Index including dividends
were: -37.00% in 2008, -22.10% in 2002, and -11.89% in 2001. Since 1988, the
S&P 500 Index’s largest drawdown of -55.25% occurred from October 10, 2007 to
March 9, 2009. The Index would have to gain approximately 123.5% to get back to
where it was on October 10, 2007. We believe minimizing drawdowns is one of the
best ways to compound wealth.
2.Indexes cannot hold cash – you are always required to be fully invested. The ability
to hold cash may be paramount, especially in down markets, as it has the potential
to protect a portfolio on the downside and it can also act as the ammunition to buy
future bargains.
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3.You are forced to hold stocks you might not like – do you want to hold stocks that you
view as significantly overvalued or those with poor management and poor corporate
governance?
4.Index weights – because of how indexes are weighted, you are typically holding (in
the largest quantity) the glamour stocks that have risen the most in price and thus
have the potential to come down the most when markets correct. For example, the
top five components of the S&P 500 Index in 1999, at the height of the dot-com
bubble, were: Microsoft, General Electric, Cisco Systems, Wal-Mart Stores, and
Exxon Mobil. Below is a table of their share prices (rounded to the nearest dollar) at
the close of business on December 31, 1999 versus March 31, 2014:
Top 5 Components of the
S&P 500 Index
Share price on
December 31, 1999
Share price on
March 31, 2014
Microsoft*
$53
$41
General Electric*
$52
$26
Cisco Systems*
$54
$22
Wal-Mart Stores
$69
$76
Exxon Mobil*
$40
$98
Source: ETF Database and Bloomberg. Stock prices exclude dividends.
*Stock prices are adjusted to account for stock splits.
Today, some of these stocks are still trading below their share prices in 1999, while
some are trading above. It’s important to remember that stock markets have usually
gone down faster than they have gone up; corrections tend to be quite sharp. Most
people think they can get out fast, and first, but that usually is not the case.
If you don’t invest in an index fund, where should you put your money?
First and foremost, we think it’s important to find an active manager with a disciplined
investment strategy. Also critical is finding a manager with a proven track record,
reasonable fees, one who cares about fund size and recognizes capacity constraints,
someone who is an asset manager NOT an asset gatherer, one who “eats their own
cooking” i.e., is invested in the funds or products they manage, and one who is focused
on compounding returns while managing risks. Also important, is to make sure that
the decision makers, owners, and Board Members at the asset management company
will allow large deviations from any benchmark, will have the patience to see the results
come through, and that newspaper headlines will not trigger the buying or selling of
securities. Too many money managers face “career risk” by deviating from benchmarks;
too many institutions do not have the stamina or patience for contrarian allocations.
Most of these traits take discipline, a willingness to lose clients, a willingness to stand
outside the herd, and a willingness to close funds when they reach capacity. Few asset
management firms set up today are willing to lose assets in an effort to protect their
clients’ wealth.
continued to the next page
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Why the IVA Funds may be a good investment:
1.We try to minimize drawdowns. Over the short-term our attempt is to try to preserve
capital. We cater to people who not only are uncomfortable taking big risks and
waking up with a substantial drawdown, but also those who understand that
they may unexpectedly need the money today rather than 10 years from now. We
think that if we can succeed at minimizing losses, hopefully the gains will take
care of themselves. The tables below compare the three largest drawdown periods
of the MSCI All Country World Index, the Worldwide Fund’s benchmark, to the
performance of the IVA Worldwide Fund over those same periods, and the three
largest drawdown periods of the MSCI All Country World Index (ex-U.S), the
International Fund’s benchmark, to the performance of the IVA International Fund
over those same periods using daily returns from inception of the Funds on October
1, 2008 through March 31, 2014:
Time Period
MSCI All Country World Index
IVA Worldwide Fund Class A
10/2/08-3/9/09
-40.95%
-8.80%
5/3/11-10/4/11
-23.08%
-11.95%
4/16/10-7/5/10
-15.71%
-6.52%
MSCI All Country
World Index ex-U.S.
IVA International Fund Class A
10/2/08-3/9/09
-41.06%
-9.97%
5/3/11-10/4/11
-27.46%
-10.31%
4/16/10-5/25/10
-18.70%
-8.73%
Source: FactSet Research Systems
Time Period
Source: FactSet Research Systems
2.We try to minimize portfolio volatility, so timing doesn’t matter as much. Our flexible,
diversified approach helps to mitigate overall portfolio volatility. By having the ability
to invest in various asset classes (equity, fixed income, gold), all geographies, and across
the capitalization spectrum, we hope to withstand tough economic environments
better than most.
3.Over the long-term (5-10 years, a full economic cycle), we try to beat the benchmark
with less risk. Since inception on October 1, 2008 through March 31, 2014, the IVA
Worldwide Fund Class A (NAV) delivered a return of 11.85%, annualized, with a
standard deviation of 10.35%, annualized, versus the MSCI All Country World Index
return of 8.59%, annualized, with a standard deviation of 19.37%, annualized.
Since inception on October 1, 2008 through March 31, 2014, the IVA International
Fund Class A (NAV) delivered a return of 11.43%, annualized, with a standard
deviation of 10.31%, annualized, versus the MSCI All Country World Index (exU.S.) return of 6.67%, annualized, with a standard deviation of 21.62%, annualized.
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4.We are focused on delivering an absolute return – our focus is not on relative returns. We
believe investors should be less concerned about daily, monthly or even yearly price
changes and more concerned about permanent impairment of capital. If the Index
is down 20% and the IVA Funds are down 15%, yes, the Funds outperformed on a
relative basis, and many asset managers would be happy with that, but to us, we still
lost our clients, shareholders, and ourselves 15% of their/our capital. Absolute returns
can be spent, relative returns cannot.
5.We are willing to have no exposure or little exposure to what has become big in the
benchmark. Also, a significant portion of the stocks we own are not in our benchmarks.
In the Worldwide Fund, as of March 31, 2014, only 45 of the Fund’s 98 stocks were
included in the MSCI All Country World Index and they comprised 34% of the
Fund. In the International Fund, only 27 of the Fund’s 93 stocks were included in the
MSCI All Country World Index (ex-U.S.) and they comprised 25% of the Fund.
6.We have a disciplined investment approach. We are focused on buying what we
consider quality businesses trading below what we think their intrinsic value (what
a knowledgeable buyer would pay in cash for the entire business) is and selling those
businesses when we believe they reached their intrinsic value. We are willing to hold
cash and let it build up when we cannot find enough good investment opportunities
with a sufficient margin of safety – the discount between the current stock price and
intrinsic value. It takes years of investment experience to know when to hold cash, to
not follow the herd, and remain patient.
7.We view cash as a valid asset class. Cash has a few powerful advantages: it helps to
mitigate portfolio volatility, it helps to protect the portfolio on the downside, and cash
also provides the dry powder necessary to take advantage of genuine bargains that may
appear in the future. Only then will the true return on cash be fully understood and
measured.
8.We believe managing our asset size is in the best interest of our clients as we want to
maintain the flexibility to go wherever we want, whenever we find value. We often have
a bias towards small and mid-cap companies as well as those with significant insider
ownership where the float can be substantially less than the total market capitalization.
We also, at times, dabble in high-yield bonds which may not be as liquid, when these
instruments provide equity-like returns. Becoming too big could hinder our ability to
invest in these types of securities.
Stock picking remains critical.
We believe we are going to witness a low return environment over the next several years,
making stock picking and active management even more important. To us, evaluating
the qualitative aspects of a company (such as, is their profit margin sustainable, and why
does the business have some inflation protection or the ability to raise prices) is going to
be just as important as the quantitative metrics. Additionally, we can use volatility to our
advantage and deploy cash when individual stocks correct. The tables below compare the
weighted average return of the equities in both Funds versus the return of each Fund’s
respective benchmark each full calendar year since inception on October 1, 2008:
continued to the next page
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Year
Equity weighted average
return in the IVA
Worldwide Fund
Return of the
MSCI All Country
World Index
2009
30.26%
34.63%
2010
22.75%
12.67%
2011
-1.26%
-7.35%
2012
9.54%
16.13%
2013
35.49%
22.80%
Compounded from 2009-2013 (Annualized)
18.58%
14.92%
Compounded from 2009-2013 (Cumulative)
134.44%
100.42%
Past performance does not guarantee future results. Equity average returns are calculated by FactSet, using market
values and are gross of fees and expenses.
Year
Equity weighted average
return in the IVA
International Fund
Return of the MSCI
All Country World
(ex-U.S.) Index
2009
29.29%
41.45%
2010
25.95%
11.15%
2011
-1.33%
-13.71%
2012
15.31%
16.83%
2013
31.80%
15.29%
Compounded from 2009-2013 (Annualized)
19.57%
12.82%
Compounded from 2009-2013 (Cumulative)
144.38%
82.74%
Past performance does not guarantee future results. Equity average returns are calculated by FactSet, using market
values and are gross of fees and expenses.
In today’s economic environment, we do not believe in being fully invested, which most
index funds are.
We understand that artificially low interest rates create an incentive to chase higher
returns in risky assets. The temptation (for some) to pay up becomes irresistible when
cash or Treasury bills lose purchasing power every day while companies are improving
their balance sheets, paying larger dividends, and profit margins are rising. We believe
this low interest rate environment is likely pushing investors (or are they speculators?)
into risk assets at the wrong time – it may be the exact wrong time to jump into an
index fund as valuations appear rich and corrections and market dislocations happen
quickly. There is, in our opinion, significant risk with how distorted asset prices are
due to central bankers’ actions, and today one is likely not paid enough for the risk of
investing in a basket of securities that is fully valued.
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Mr. Buffett answered the question posed at the beginning of this newsletter at his
annual shareholder meeting, saying that the amount of money he will leave behind
is already pretty enormous. The point is not to accumulate even more wealth. Mr.
Buffett has a far different objective than most people; his fortune is able to withstand
the ups and downs that come with market volatility: he can live off the dividends and
does not need to access the capital. As Charles de Vaulx likes to say, “Life’s bills do not
always come at market tops.”
At IVA, we strive to invest in a way where our clients do not have to worry about timing
their entry into or exit from our Funds. While we may not beat the index each calendar
year, if we can minimize drawdowns, compounding becomes a wonderful force and
the timing issue fades away. We remain focused on delivering absolute returns over
the long-term, preserving purchasing power, staying disciplined with our investment
strategy, and always focusing on buying businesses whose stock offers a meaningful
margin of safety.
Let’s not forget that good track records are built in challenging market conditions!
continued to the next page
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As of June 30, 2016, the IVA Worldwide Fund’s top 10 holdings were: Gold Bullion
(6.3%); Astellas Pharma, Inc. (4.5%); Berkshire Hathaway, Inc. Class A, Class B (4.2%);
Samsung Electronics Co., Ltd. (3.7%); Nestle SA (2.5%); News Corporation Class A, Class
B (2.1%); Oracle Corporation (2.0%); DeVry Education Group, Inc. (1.6%); MasterCard
Incorporated Class A (1.2%); Intelsat SA 5.5% ’23; 6.625% ’22; 7.5% ‘21 (1.2%).
As of June 30, 2016, the IVA International Fund’s top 10 holdings were: Gold Bullion
(7.1%); Astellas Pharma, Inc. (4.6%); Samsung Electronics Co., Ltd. (4.2%); Nestle SA
(2.7%); News Corporation Class A; Class B (2.5%); Alten SA (1.9%); Genting Malaysia
Berhad (1.9%); HSBC Holdings PLC (1.5%); Hongkong & Shanghai Hotels Ltd. (1.3%);
Haw Par Corporation Limited (1.2%).
MSCI All Country World Index (Net) is an unmanaged index consisting of 46 country
indices comprised of 23 developed and 23 emerging market country indices and is calculated with
dividends reinvested after deduction of withholding tax. The Index is a trademark of MSCI, Inc.
and is not available for direct investment.
MSCI All Country World Index (ex-U.S.) (Net) is an unmanaged index consisting of 45
country indices comprised of 22 developed and 23 emerging market country indices and is
calculated with dividends reinvested after deduction of withholding tax. The Index is a trademark
of MSCI, Inc. and is not available for direct investment.
The S&P 500 Index is a diverse index that includes 500 American companies that represent
over 70% of the total market capitalization of the U.S. stock market. The Index is not available
for direct investment.
Nikkei 225 Index is a price-weighted Index comprised of Japan’s top 225 blue-chip companies on
the Tokyo Stock Exchange. The Index is not available for direct investment.
Drawdown is the peak-to-trough decline during a specific record period of a fund. A
drawdown is usually quoted as the percentage between the peak and the trough.
Standard deviation is a risk measure that shows how widely an individual data point varies
from that of the average. A low standard deviation indicates that the data points tend to be
closer to the average whereas a high standard deviation indicates the data points have greater
variation from the average.
Equity weighted average return is calculated by using individual equity returns weighted as a
percentage of the equity portion of the portfolio.
The views expressed in this document reflect those of the portfolio manager(s) only through the
end of the period as stated on the cover and do not necessarily represent the views of IVA or any
other person in the IVA organization. Any such views are subject to change at any time based
upon market or other conditions and IVA disclaims any responsibility to update such views. These
views may not be relied on as investment advice and, because investment decisions for an IVA
fund are based on numerous factors, may not be relied on as an indication of trading intent on
behalf of any IVA fund. The securities mentioned are not necessarily holdings invested in by the
portfolio manager(s) or IVA. References to specific company securities should not be construed as
recommendations or investment advice.
International Value Advisers, LLC
717 Fifth Avenue, 10th Floor
New York, NY 10022
877.874.2999
www.ivafunds.com
An investor should read and consider the funds’ investment objectives, risks, charges and
expenses carefully before investing. This and other important information are detailed in
our prospectus and summary prospectus, which can be obtained by calling 1-866-9414482 or visiting www.ivafunds.com. Please read the prospectus and summary prospectus
carefully before you invest. The IVA Funds are offered by IVA Funds Distributors, LLC.
The IVA Funds are closed to new investors.