Litman Gregory Masters International Fund Fourth Quarter 2017 Attribution

During the fourth quarter of 2017, the Litman Gregory Masters International Fund gained 2.69% and the MSCI ACWI ex USA Index was up 5.00%. The MSCI EAFE Index returned 4.23% in the quarter and the Morningstar Foreign Large Blend Category gained 3.95%.1 For the year, the fund generated strong absolute returns, up 23.61%, but trailed the MSCI ACWI ex USA Index’s return of 27.19% and the MSCI EAFE Index’s return of 25.03%. Since its inception in December 1997, the fund has compounded returns at an annual rate of 7.63% after fees, while MSCI ACWI ex USA, MSCI EAFE, and its foreign large blend peers have gained 5.76%, 5.27%, and 4.71%, respectively.

Performance quoted represents 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. Current performance of the funds may be lower or higher than the performance quoted. To obtain standardized performance of the funds, and performance as of the most recently completed calendar month, please visit

Themes, Trends, and Observations from the Managers*

David Herro, Harris Associates
Global equity prices rose again last quarter on continued optimism around global growth. Though equity valuations continue to move higher, our fundamental outlook remains positive. Our confidence is based on the strength of our companies’ balance sheets, low interest rates, low inflationary pressures, still significant global monetary stimulation, and the potential for a more favorable business climate (lower taxes, less regulation) in the United States.  

Outside of the United States, we’ve been largely repositioning the portfolios across existing holdings in the financial and consumer discretionary sectors. Geographically, our portfolio exposure remains tilted toward developed markets; however, we are selectively exploring different opportunities across both developed and emerging markets. Despite higher equity prices, we continue to find attractive opportunities on a selective basis.

Vinson Walden, Thornburg
Equity markets delivered solid returns in the fourth quarter, driven by continued healthy global economic growth, a strong earnings season, and U.S. tax cuts. Over the calendar year 2017, we saw a synchronized global growth acceleration with Europe and Japan surprising to the upside. Emerging markets benefited from increased global demand and a stable recovery of commodity prices. Global real gross domestic product (GDP) growth returned to its long-term (50-year) average. 2017 saw geopolitical risks abate following Emmanuel Macron’s victory in the French presidential election and by his party, La République En Marche! (English translation: “The Republic Onwards!”), taking control of parliament. Political reform, such as U.S. tax cuts, French labor reform, and China’s supply-side capacity reduction coupled with robust earnings growth and international currency appreciation vis-à-vis the U.S. dollar drove strong returns for the year.

Howard Appleby, Jean-François Ducrest and Jim LaTorre, Northern Cross
In the fourth quarter of 2017, the team exited its remaining position in Lloyds Banking Group. Lloyds is a strong retail bank, but we are concerned that pricing competition is rising and delinquencies have the potential to increase, limiting the bank’s earnings power. We have added a position in Mexican real estate company Fibra Uno. Fibra Uno has a strong collection of industrial, retail, and commercial properties throughout Mexico. The company trades at an attractive 7% yield and has strong pricing power across its properties. We see Fibra Uno as a well-placed beneficiary of economic expansion in Mexico and do not expect Mexico’s close ties with the U.S. economy to be materially weakened.

Mark Little, Lazard Asset Management
International equities rose further in the fourth quarter of 2017. Growth indicators remained broadly positive, especially in Europe, and commodities, including oil, were on a firmer footing, while a material corporate tax reduction plan was finalized in the United States. Meanwhile, bond yields remain at historically low levels. This combination saw money continuing to flow into equities with a cyclical bias. Energy, materials, and industrial stocks were the best performers, while more defensive areas such as health care, telecoms, and utilities lagged.

On the macroeconomic side, the data is broadly encouraging with sentiment indicators at highs in the United States and Europe, buoyed by credit growth and the prospect of U.S. tax cuts and French reform. The more benign commodity environment and some increased confidence is feeding into strong industrial demand, and Chinese consumers are spending again, now driven by rising personal credit. However, we need only look at stalling U.S. car sales to see the impact slightly tighter monetary policy is having, reminding us of the overwhelming amount of debt that has continued to pile up on public and private sector balance sheets since the financial crisis.

The portfolio team continues to identify a strong stream of interesting new investment ideas. However, many market valuation metrics look stretched leaving overall market direction dependent on a benign combination of reasonable economic growth without material upward pressure on interest rates or wages. Overall, the team remains confident that, by continuing to focus on stock selection and seeking to find stocks with sustainably high or improving returns trading at attractive valuations, the strong long-term track record of the strategy should continue.

Fabio Paolini and Benjamin Beneche, Pictet Asset Management
Despite the challenges presented by market conditions in 2017 (from a bottom-up perspective, attractively valued stocks have been getting harder to find), we remain enthusiastic about the companies we hold in the portfolio. More recently we have noticed a change, an increased level of volatility and a fall in the correlation between stocks in the market. For our investment approach based on a multi-year investment horizon, this type of environment, if sustained, is likely to start yielding more opportunities (both on the sell and buy side) and would be welcomed.

David Marcus, Evermore Global Advisors
I started investing in Europe about 25 years ago when I worked for renowned value investor Michael Price. Many parts of Europe, namely the Nordic region, endured panic and crisis during the 1990s, but it turned out to be an excellent time to invest in the region for the discerning investor. While Europe’s crisis may have passed a few years ago, I continue to see the same variety of opportunities in Europe today that I saw back then, as European-domiciled companies are transforming their businesses by engaging in an unprecedented level of operational and financial restructurings, including asset sales, spinoffs, and mergers. These are some of the catalysts we look for in our search for misunderstood, under-researched, and undervalued special situation investment opportunities. Throughout 2017, we had over 300 touches with corporate management teams of predominantly European companies; there is a level of confidence and excitement by corporate management teams that I have not seen in many years. We remain optimistic that this exuberance will translate into the creation of significant value for shareholders. While the majority of our investments over the past several years have been in European companies, we continue to find compelling special situation investments in Asia and believe that we will find even more opportunities in the region in the coming years as these same characteristics and valuations evolve there.

* The opinions herein are those of the sub-advisors at the time the comments are made and are subject to change.

Discussion of Performance Drivers

Both sector allocation and stock selection led to the fund’s underperformance in the fourth quarter. It is important to understand that the portfolio is built stock by stock so the sector and country weightings are a residual of the bottom-up, fundamental stock-picking process employed by each sub-advisor.

Litman Gregory Masters International Fund Sector Attribution

International Fund Sector Attribution

  • Within the benchmark, the energy sector was the highest-returning sector during the fourth quarter. The fund’s slight underweight and the relative underperformance of energy stocks owned by the sub-advisors detracted from returns.
  • The fund’s largest sector overweight continues to be the consumer discretionary sector. The sector performed slightly better than the broader index, which was a benefit from a sector allocation standpoint. However, consumer discretionary stocks held by the fund lagged those in the index, neutralizing any positive impact.
  • The worst-performing sector during the fourth quarter was utilities. The fund benefited from not having any direct exposure to utility stocks.
  • At the regional level, the fund remains heavily overweight to developed European stocks. The region lagged the returns of the broad benchmark. Fund holdings in Europe also underperformed and hurt relative returns in the fourth quarter.
  • Japan was a bright spot during the quarter, outperforming the broad international indexes. Despite an underweight to Japanese stocks, the fund overall benefited from strong Japanese stock selection. Three of the top 10 contributors were Japanese companies: Don Quijote, Universal Entertainment, and CyberAgent.


Top 10 Contributors as of the Quarter Ended December 31, 2017

Company Name

Fund Weight (%)

Benchmark Weight (%)

Three-month Return (%)

Contribution to Return (%)


Economic Sector

Don Quijote Holdings Co. Ltd. 2.17 0.00 37.21 0.71 Japan Consumer Discretionary
Hyundai Mobis Co. Ltd. 1.62 0.07 19.41 0.30 Korea Consumer Discretionary
Aena SME SA 2.12 0.06 11.81 0.27 Spain Industrials
Israel Discount Bank Ltd. 1.61 0.00 15.44 0.24 Israel Financials
Universal Entertainment Corp. 0.97 0.00 27.68 0.23 Japan Consumer Discretionary
OPAP SA 0.97 0.00 25.07 0.23 Greece Consumer Discretionary
MGM China Holdings Ltd. 1.11 0.00 20.48 0.22 Macau Consumer Discretionary
Teekay Lng Partners LP 2.20 0.00 9.52 0.22 Bermuda Energy
Cyberagent Inc. 0.72 0.00 32.55 0.21 Japan Consumer Discretionary
Las Vegas Sands Corp. 2.47 0.00 8.33 0.21 United States Consumer Discretionary

Portfolio contribution for a holding represents the product of the average portfolio weight and the total return earned by the holding during the period. Past performance is no guarantee of future results. Fund holdings and/or sector allocations are subject to change at any time and are not recommendations to buy or sell any security.

Edited Commentary from the Respective Managers on Contributors

Don Quijote (Mark Little, Lazard Asset Management)

Don Quijote, the discount Japanese retailer, rose strongly in the quarter, mainly as investors started to appreciate the potential from its tie up with Uny/FamilyMart. This significant development offers potential upside both from an operating improvement at the Uny stores as Don Quijote takes management control and from procurement savings across the whole footprint as purchasing is combined. Meanwhile, trading has continued to be strong.

Hyundai Mobis (Fabio Paolini and Benjamin Beneche, Pictet Asset Management)

Hyundai Mobis performed strongly over the quarter after seesaw price action since the business was first added to the portfolio in the second quarter of 2017. Within the auto parts industry, Mobis is unique in its reliance on high margin (20%-plus) after-market parts, which today make up around 70% of profit and around 50% in our normalized scenario. This core business continues to perform well but weakness in the original equipment and module businesses, specifically in China, led to share price weakness throughout much of the past year. With Chinese auto penetration at fractions of the level of developed countries and our expectation for political concerns to subside over the longer term, we remain optimistic that both volumes and margins for this business will return to more normal levels. This, in fact, is what we began to see last quarter with a significant sequential improvement from 40% year-over-year sales declines to 23% year-over-year declines. We remain positive on Hyundai Mobis and continue to expect reform in corporate governance to unlock significant shareholder value in time.

Israel Discount Bank (Mark Little, Lazard Asset Management)

Israel Discount Bank rose as investors applauded its combination of strong loan growth and cost control. The bank continues to trade at a significant discount to book value despite improving returns and is a beneficiary both of the strong Israeli economy and an eventual likely rise in interest rates from very low levels.

Universal Entertainment (David Marcus, Evermore Global Advisors)

Universal Entertainment is a leading developer and manufacturer of pachinko and pachislot gaming machines in Japan and is the owner of one of the largest new casinos in the Philippines. Shares of Universal were up over 25% in the fourth quarter as the core businesses in pachinko and pachislot machines continue to generate strong cash flows and the Philippines casino has been on track with its ramp-up and should start contributing to cash flows meaningfully in the coming quarters. A notable development during the second quarter was the ouster of the founder, Kazuo Okada, from his chairman role by his own family members. Universal is controlled by Okada Holdings (68%), which in turn is 45% owned by Kazuo Okada and 55% held by his children (one son and one daughter, both in their 40s). We believe this internal rift could ultimately lead to better transparency and corporate governance for the company. 

Also, during the fourth quarter, a judge rejected Steve Wynn’s motion to dismiss Universal’s lawsuit and the case is now scheduled to go to trial in April 2018. Universal took legal action in 2012 after Wynn Resorts forcibly redeemed Universal’s 19.7% stake in Wynn Resorts at an implied 31% discount to the stake’s market value at the time. We remain cautiously optimistic that the company will win its pending case against Steve Wynn, which could potentially amount to more than today’s market capitalization. The value of the Philippines casino and the former stake in Wynn Resorts continue to represent compelling value, which the market is just beginning to appropriately value.

Teekay LNG Partners (Vinson Walden, Thornburg Investment Management)

Teekay is an international provider of marine transportation services for liquefied natural gas (LNG), liquefied petroleum gas (LPG), and crude oil. Teekay LNG Partners operates through two segments: its liquefied gas segment and its conventional tanker segment. The liquefied gas segment consists of LNG and LPG or multigas carriers, which generally operate under long-term, fixed-rate charters to international energy companies and Teekay Corporation. The conventional tanker segment consists of Suezmax-class crude oil tankers and one Handymax product tanker. The company's fleet, excluding newbuilds, consists of around 29 LNG carriers.

Teekay has an industry-leading, young, and technologically advanced fleet of specially designed LNG and LPG carriers and has secured long-term charters for its active LNG fleet with an attractive set of global oil/gas customers, most of which are Blue Chip counterparts. This should insulate the company from what could be a difficult spot market over the coming years and should make for more predictable EBITDA/earnings in what is still an oversupplied LNG shipping market.

We bought the stock after the company cut their distribution in late 2015, after analyzing the actions they’d likely have to take to get through a liquidity crunch to fund their growth and upcoming debt expirations. Our expectation was they’d be able to significantly raise their distribution once new construction capital expenditures decline and the balance sheet is clearly stable, and with a far higher dividend the shares would appreciate to drive a more “normal” yield on the higher payout.

Management’s actions to date have largely shored up the liquidity needs and we’re starting to see the light at the end of the tunnel, so to speak, around their ability to get through their remaining cash needs and raise the distribution. Although somewhat volatile during 2017, the share price appreciation during the fourth quarter reflects the market’s growing confidence in the outlook for LNG markets and Teekay’s ability to refinance debt maturities and fund its remaining capital expenditures. We remain constructive on the stock and our overall thesis is unchanged.


Top 10 Detractors as of the Quarter Ended December 31, 2017

Company Name

Fund Weight (%)

Benchmark Weight (%)

Three-month Return (%)

Contribution to Return (%)


Economic Sector

Altice NV A 1.58 0.02 -52.99 -1.29 Netherlands Consumer Discretionary
Frontline Ltd. 1.00 0.00 -26.61 -0.30 Bermuda Energy
Grupo Televisa SAB ADR 0.94 0.00 -24.16 -0.24 Mexico Consumer Discretionary
Inmarsat PLC 1.27 0.01 -15.90 -0.22 United Kingdom Telecommunications
IWG PLC 1.76 0.00 -17.93 -0.21 Switzerland Industrials
Anheuser Busch Inbev SA/NV 3.36 0.42 -5.32 -0.19 Belgium Consumer Staples
Bayer AG 1.56 0.51 -9.11 -0.15 Germany Health Care
GlaxoSmithKline PLC 1.28 0.42 -10.12 -0.14 United Kingdom Health Care
Telecom Italia SPA 1.30 0.05 -8.67 -0.12 Italy Telecommunications
Codere SA 0.67 0.00 -7.88 -0.11 Spain Consumer Discretionary

Portfolio contribution for a holding represents the product of the average portfolio weight and the total return earned by the holding during the period. Past performance is no guarantee of future results. Fund holdings and/or sector allocations are subject to change at any time and are not recommendations to buy or sell any security.

Edited Commentary from the Respective Managers on Detractors

Grupo Televisa (David Herro, Harris Associates)

  • We believe the continued penetration of pay television and broadband in Mexico will drive Televisa’s growth and boost earnings figures in the coming year.
  • We find Televisa’s target audience in Mexico and the United States to be attractive, as the population is young and growing with increasing wealth at a healthy rate.
  • We like that Televisa’s ownership of its distribution helps to both better protect content and save on distribution costs.

In our assessment, Grupo Televisa’s third quarter results were weak. We were disappointed by poor performance in the content segment, which management attributed to the disadvantageous industry practice of using prior-year ratings to structure current TV advertisement pricing. Televisa is now moving to a Gross Rating Point (GRP) system that is based on current ratings. This pricing process, which aligns with how television advertising is sold in most developed markets, is the favored method of large multinational corporations and Televisa’s implementation allows consistency for these advertisers across regions. We expect that this approach, coupled with the strengthening ratings trend of late, will lead to better growth for Televisa. In addition, the company recently appointed Bernardo Gomez and Alfonso de Angoitia as co-CEOs. In November, we met de Angoitia who believes Televisa is better positioned to move forward now that the prior CEO’s legacy relationships are no longer a factor in transforming the company. He and Gomez are reviewing the company’s overall strategy and are considering all options to improve its competitive position moving forward. Considering its cache of advantages, we believe the company’s shares are tremendously undervalued compared to its total underlying worth, and our investment thesis for Televisa remains intact.

IWG (David Herro, Harris Associates)

  • We like that IWG is the leader in the flexible office space industry and is subsequently best positioned to capitalize on the structural shift that is resulting from the secular growth of the flexible workspace business.
  • We believe IWG is building up a highly scalable operating structure and economic moat that smaller players will find extremely difficult (if not impossible) to emulate.
  • In our view, IWG runs a capital-light business model, which lends itself to attractive returns on capital and free cash flow generation.

IWG was negatively impacted in October by an article that outlined the struggles of competitor WeWork, as well as by IWG’s own profit warning for the full fiscal year. On the latter, the company announced an approximately $50 million reduction in earnings guidance driven by weaker mature center revenue growth and increased overhead. Investors were also displeased with management’s unwillingness to discuss fiscal year 2018. We spoke with CFO Dominik de Daniel following the announcement, who explained IWG wants to continue to aggressively invest in building out the network given the strong returns. While we appreciate the efforts to create a strong business overall, we recognize that it will result in significant earnings and share price volatility. Additionally, we like that CEO Mark Dixon’s ownership of the company exceeds 25% and aligns him with shareholders. Furthermore, IWG recovered some of its losses toward the end of the reporting period as it received a takeover offer from Brookfield Asset Management and Onex. We continue to find IWG to be an attractive investment that is undervalued relative to its normalized earnings power.

GlaxoSmithKline (Fabio Paolini and Benjamin Beneche, Pictet Asset Management)

The investment thesis on Glaxo rests on buying a franchise that, having suffered some severe headwinds (patent cliffs), offers visible and profitable growth in the coming years at an attractive valuation.

The company in the past announced several transformational deals with Novartis that not only gives better focus to its portfolio of businesses, but also improves the visibility of future returns and creates significant cost savings potential. Glaxo sold its oncology business (which accounted for 40% of the unproductive research and development spend) to Novartis and bought Novartis’s vaccine operations. It has also merged Novartis’s and its own consumer divisions into a joint venture (in which Glaxo will retain the larger share). After these transactions, Glaxo has the global #1 position in Consumer, #1 position in Vaccines, #1 position in Respiratory, and #2 position in HIV. A combination of the synergies from the pooling of these businesses, the fall-off in research and development costs (post the oncology sale, and as several expensive respiratory trials conclude), and the additional structural savings, all point to a rebasing of Glaxo’s fortunes, resulting in better cash generating potential than investors are currently assuming.

Over the course of 2017, several headwinds appeared that although important haven’t changed our underlying investment thesis. A combination of the launch of a generic version of Glaxo’s respiratory blockbuster, Advair, in the United States and the competitive threat that upcoming data on a rival HIV treatment from Gilead Sciences could have on the growth of Glaxo’s important ViiV franchise all impacted the sentiment around the stock. The negative news flow was further compounded by the latest set of results, where the company failed to commit to paying an 80 pence dividend beyond 2018, an indication that research and development investment would remain at high levels. Whilst none of these developments is a positive, we don’t believe that any of the above affects the longer-term outlook for the business. The respiratory franchise will remain resilient thanks to the launch of substitute products, the HIV franchise is likely to maintain its lead, and with time the dividend coverage will increase. Failure to monetize or reduce the research and development budget is worth monitoring but also note that we give little or no optionality to Glaxo’s pipeline.