Thomas White International Fund
The Thomas White International Fund primarily invests in equity securities of companies located in the world’s developed countries outside of the U.S. There may also be a portion of the Fund’s assets invested in companies from emerging market countries.
Fund Manager Commentary
June 30, 2010
More than a year since the remarkably strong recovery started, international equity prices corrected during the second quarter of 2010. Weaker than expected economic data, persistent concerns over rising public debt in several countries, and unease over the proposed regulatory restrictions on key sectors, including banking, financial services, and energy, dampened market sentiment during the review period. The apparent lack of consensus among the leading economic powers about the preferred response to a slowdown added to the worries. However, the recovery in equity prices at the end of the second quarter suggests that most of these fears have now eased, while some of the concerns might have been unwarranted to begin with.
The Thomas White International Fund returned -12.05% for the quarter ending June 30, 2010, outperforming the benchmark MSCI All Country World ex US Index that returned -12.44%. For the trailing 1-year period, the Fund outperformed the benchmark by 259 basis points, posting a +13.02% return versus +10.43% for the benchmark. The Fund also continues to lead the benchmark in the long term, and has returned -10.54%, +5.43%, and +3.84% for the trailing three-, five-, and ten-year periods, respectively, as compared to -10.70%, +3.38%, and +1.86% for the benchmark during the same periods. Since inception, the Thomas White International Fund has returned +7.46% annualized versus +4.62% for the benchmark.
Though some global economic indicators have suggested a moderation in the pace of growth in recent months, economic conditions across the world are much improved even from a year ago. Historically, most recoveries after a deep recession have been uneven, especially in the early stages. In our opinion, after generally better than expected data for over a year, it is not unusual for some economic indicators to plateau for a while. Also, the moderation in demand growth in important sectors is mostly because the uplifting effect of stimulus measures has eased after their withdrawal. It is noteworthy that, despite the increased risks, the IMF has recently upgraded its global growth forecast for the current year.
Emerging market equities were relatively less affected by the correction during the quarter. Risks of a significant growth slowdown are far lower in the large emerging economies, when compared to some of the developed markets. Domestic consumption and investment growth in these emerging economies remain robust and some countries have hiked interest rates to contain inflationary pressures.
Portfolio Review
The Thomas White International Fund continues to lead the benchmark index in returns for the trailing 1-, 3-, 5- and 10-year periods. The broad diversification across sectors and geographies of the Fund’s portfolio is designed to provide better insulation from economic and other uncertainties, without sacrificing the potential for superior returns. The portfolio strategies for the Fund are designed to provide better protection in down markets, as seen in the performance relative to the benchmark for the second quarter. The Fund’s current positioning and characteristics reflect our investment philosophy, that emphasizes attractively valued firms with superior earnings potential. The trailing 5-year average earnings growth of all stocks in the Fund’s portfolio was 9.6% versus 4.6% for the benchmark at the end of the quarter, while the Fund’s trailing Price-Earnings Multiple of 12.3x was significantly lower than the benchmarks’ 14.2x.
During the review period, the Fund’s holdings in Asia as well as in emerging markets performed relatively better than other regions, while the European holdings underperformed. The Fund’s Indonesian holdings, including specialty tobacco manufacturer PT Gudang Garam Tbk (+38.6%) and cement producer PT Semen Gresik Tbk (+20.2%), posted exceptional returns, with Indonesia among the few markets that avoided a price correction during the quarter. Brazilian brewer Companhia de Bebidas das Americas, better known as AmBev (+8.8%), South African retailer Shoprite Holdings Limited (+8.2%), and South East Asian auto retailer Jardine Cycle & Carriage Limited (+2.1%) reflected the strong outlook for consumer spending in large emerging markets. Gold miner AngloGold Ashanti Limited (+13.3%) outperformed as gold prices rallied during the quarter, while drug maker AstraZeneca Plc. (+6.1%) was helped by a favorable patent ruling. Japanese furniture retailer Nitori Co., Ltd (+14.0%) and Indian technology services and outsourcing firm Infosys Technologies Limited (+1.9%) also added value during the review period.
The European banking and insurance holdings in the Fund’s portfolio lost value for the second consecutive quarter on concerns over the difficult business outlook and potential increase in credit losses following the sovereign debt crisis. They included Credit Agricole S.A. (-39.7%), Banco Comercial Portugues S.A. (-31.9%), and BNP Paribas S.A. (-28.7%), in addition to insurers AXA S.A. (-29.9%), CNP Assurances S.A. (-27.6%), and Munich Re A.G., (-22.3%). Global steel producer ArcelorMittal S.A. (-37.7%) corrected as product prices declined on subdued demand forecasts, while mining firms Rio Tinto Plc (-26.3%), Vale S.A. (-24.6%), and BHP Billiton Plc (-23.6%) underperformed as iron ore prices reacted to lower steel prices and concerns over increased taxation in their domiciles.
International Outlook
The high fiscal deficits in several European countries and the prospect of slower growth in China due to restrictive government policies and currency appreciation unnerved the markets during the second quarter. However, it should be noted that most of the troubled European countries have now announced austerity measures to cut their deficits while some have successfully issued new debt. Also, the results of the ongoing stress tests for European banks, if positive as expected, are likely to strengthen the confidence in the region’s financial system. In our view, it is unlikely that the Chinese policies will be harsh enough to cause a significant decline in economic activity. Though the Chinese government has announced more exchange rate flexibility, any currency appreciation is likely to be measured and spread over a longer period of time. Hence, in our opinion, fears that the Chinese economy will slow down appreciably from lower export growth due to a stronger currency are misplaced.
While there are regional disparities in growth rates, global economic activity remains stronger than expected for this stage of the recovery. Mirroring last year, the emerging economies in Asia and Latin America are likely to lead the revival as conditions for growth are more favorable in those markets. Though the unexpectedly high pace of growth and inflationary fears have forced governments and central banks in some developing countries to introduce measures to prevent overheating, we believe the effect on aggregate growth rates is likely to be limited. The outlook for the developed economies is more subdued, but the fears of a double-dip recession are overblown, in our opinion. That said, several developed countries do face significant policy challenges. In the short term, they are left with limited policy options to support growth while the long term challenge of restoring fiscal health may require more proactive efforts.
Thank you for the continued trust you have held in Thomas White International. We are confident that equities will deliver superior long term returns and we remain committed to helping you achieve your investment goals.
Thomas White Emerging Markets Fund (Ticker: TWEMX) Launched June 28, 2010: We at Thomas White are pleased to announce the addition of the Thomas White Emerging Markets Fund to the Thomas White Funds Family. The Emerging Markets Fund will invest primarily in securities of companies located in or whose businesses are closely associated with the world’s emerging markets countries. The new fund will offer investors an opportunity to gain increased exposure to equity assets in some of the fastest growing economies in the world. As global economic power shifts to the large emerging economies, we believe firms in these markets are likely to enjoy better growth opportunities in the future.
Archives
