Global Equity Commentary | 4Q 2023

Author

John DeVita, CFA, CPA

Analyst & Portfolio Manager

Read Bio

Author

John Hock, CFA

Founder & Chief Investment Officer

Read Bio

Author

Rich McCormick, CFA

Analyst, Portfolio Manager, & Co-Chief Investment Officer

Read Bio

01-18-2024

Dear Investor,

Global Equity markets delivered strong gains in 2023, climbing 23.8% for the year and 11.4% in the fourth quarter, as measured in US dollars.¹ These gains marked a reversal of 2022’s dismal market performance (-18.1%), as animal spirits returned with vigor. 2023 concluded with the VIX near multi-decade lows, bitcoin up over 150%, global high-yield bond spreads near 15-year lows² , and equity investor bullishness near all-time highs.³

Many of the highly valued technology companies and cyclical stocks that were pummeled during 2022 led markets in 2023. Our underweight exposure to these areas – in some cases no exposure – was the primary source of our underperformance during 2023, as the Altrinsic Global Equity portfolio gained 12.8% for the full year and 8.4% in the fourth quarter gross of fees (11.9% and 8.1% net, respectively).ⁱ As shown in Chart 1, the outperformance delivered during the 2022 market decline was given back during the 2023 rally. We continue to see the greatest value and opportunity among less cyclical and more resilient businesses and among companies undertaking specific initiatives to unlock shareholder value that is not appreciated in the market. These investments provide scope for attractive returns and a margin of safety in an investment landscape that we consider dangerously complacent.

Performance Review

Equity markets experienced a robust recovery this year despite unsettling macro and geopolitical developments, including the most aggressive central bank interest rate increases since the 1980s, the third largest bank failure in US history, the collapse of the once-venerable Credit Suisse, a downgrade to the US credit rating, intensifying instability in the Middle East (amplified by the Israeli-Hamas war), and the ongoing Russia-Ukraine war. Massive fiscal spending, most meaningfully in the US, temporarily eased recessionary fears, while central bankers’ pivot to a more dovish interest rate outlook raised hopes for a potentially Goldilocks environment of a soft landing coupled with declining interest rates.

Leadership by the “Magnificent Seven” persisted during 2023. Median returns for the group exceeded 80%; the equal-weighted MSCI World and S&P 500 indices underperformed their market-weighted counterparts by the largest margin since the dot-com bubble. Unsurprisingly given this, growth stocks (MSCI ACWI Growth +33.2%) massively outperformed factor value (MSCI ACWI Value +11.8%) for the year.

Market broadening was primarily confined to cyclical stocks in Q4, as inflation and economic activity surprised positively. A policy pivot by US Fed Chair Jerome Powell in December seemingly gave an “all clear” signal to investors, providing a boost to long-duration growth stocks (technology +17.5%). Cyclicals (real estate +17.2%, industrials +13.8%) also delivered excellent returns, but defensive sectors (consumer staples +5.3%, health care +5.9%) and energy (-4.1%) lagged.⁴

Against this backdrop, the Altrinsic Global Equity portfolio underperformed largely due to below-market risk (current beta is 0.73) ⁵ , our “value” discipline in a market driven by “growth” stocks, and poor attribution by our exposures in the communication services, technology, health care, and financials industries.

Beta was the most powerful quantitative “factor” influencing market performance during 2023 and a source of headwinds for us. During the latter half of 2022, our value discipline led us to significantly increase our investments in cyclical businesses (and with it, our portfolio beta), as several stocks offered an attractive margin of safety. However, throughout 2023, many of our cyclical investments rallied sharply, leading us to sell them in favor of other opportunities

Our positioning versus benchmarks and most value peers is meaningfully different (Table 2). The portfolio is underweight the more leveraged and cyclical businesses that often dominate factor value indices. While these stocks may appear inexpensive at first glance, most are very expensive relative to their own history and are operating near peak profit margins, leaving investors exposed to a very poor asymmetry of returns if the market and/or economic environments worsen.

At a more granular level, and through the lens of traditional attribution analysis, the greatest sources of negative attribution were holdings in communication services, technology, health care, and financials. Charter Communications and Comcast shares were pressured as subscriber growth disappointed. While not ideal, cash flow continues to improve, and competitive moats remain underappreciated. Similarly, Baidu was pulled down by macro weakness in China despite strong profit growth and compelling artificial intelligence initiatives. Not owning Microsoft, Nvidia, and Broadcom weighed on relative performance in the tech sector. In health care, poor performance by Sanofi, Bristol-Myers, and GSK was largely due to disappointing cost guidance (Sanofi, Bristol) and lower growth profiles than market leaders. Minimal exposure to high beta banks and more exposure to durable insurance companies weighed on overall financials performance. The greatest sources of positive attribution were in materials, energy, and industrials.

Investment Activity and Positioning

Investment activity during the quarter included 1) trimming cyclical investments on valuation grounds, 2) adding to quality compounding franchises, 3) selling four investments (GoDaddy, New Relic, Sekisui House, Tokio Marine) as share prices neared our intrinsic value assessments, and 4) establishing four new positions (CNA Financial, Healthpeak Properties, Kerry Group, Sandoz). The new management team at US insurer CNA has dramatically turned around its underwriting over the last several years, and the company should benefit from significant interest rate tailwinds in the years to come; current valuations give little credit for these opportunities. Healthpeak, a US medical office REIT, has shifted its business to more resilient areas of the medical food chain; near-term supply/demand dynamics present manageable risks, and long-term fundamentals are intact. Ireland-based Kerry Group, a leader in flavor and ingredients for the food and beverage industry, is managing its way through soft industry dynamics, but its discounted valuation gives little credit for sustainable profitability and long-term market share opportunities. Sandoz, a Swiss generic drug manufacturer recently spun out of Novartis, has opportunities to improve margins and growth as it grows its biosimilar portfolio and improves its cost focus as a stand-alone entity under new leadership.

Throughout the year, we increased our exposure to pharma and staples companies due to a valuation disconnect. Chart 2 illustrates the extent to which cyclical valuations are stretched versus more defensive stocks, while Chart 3 shows that cyclicals now trade near all-time highs on trailing earnings with peak margins, providing an unattractive margin of safety should the Goldilocks outcome not come to pass.

We recognize that staples companies are navigating through post-pandemic cost and price increases, leaving the near-term growth outlook uncertain. Anti-obesity drugs are further pressuring sentiment. Chart 4 highlights how valuations have collapsed. Low valuations and weak sentiment provide a favorable investment proposition for these durable franchises such as Nestlé, Heineken, and Danone.

Our investment approach typically leads us to opportunities outside of the mainstream, with positioning and risk exposures that are different from broad market indices. The greater the extremes in valuations and misperceptions involving risk, the more differentiated our investments, positioning, and risk exposures tend to be. As of the end of 2023, our portfolios are highly differentiated within all three categories.

Table 1A illustrates our largest investments and their representation in the MSCI World Index. Table 1B ranks the largest positions in the index and our exposure to each. There is very little overlap. We have no exposure to the ten largest index constituents. Our top ten positions make up almost 25% of the portfolio while representing just 1% of the MSCI World Index. This has been a challenging environment to be different, but such environments are often the most prudent times to stray from the crowd.

Table 2 illustrates our sectoral exposures, highlighting the greatest sources of differentiation.

Largest Overweight Sectors

Non-Bank Financials – Mostly insurance, which has a strong outlook for demand and competition, along with enhanced business mix and cost cutting opportunities
Food & Beverage Franchises – Strong category mix with premiumization, reopening, and cost cutting opportunities
Materials – Idiosyncratic investments in packaging, chemicals, gold, paints, and building materials
Health Care – Reduced patent cliff risk, investing heavily in innovative sciences, attractive valuations

Largest Underweight Sectors

Information Technology – Risks around end demand, competition, and regulation are not reflected in valuations
Consumer Discretionary – Many companies are expensive on normalized profitability with various disruption risks
Utilities – Valuations present unappealing risk/reward considering regulatory and growth outlook

Perspectives on Risk

The level of risk embedded in our portfolio is not a targeted or top-down decision, but rather a by-product of where we find undervalued companies with the most favorable asymmetric skew of possible outcomes. Given the risks and excesses present in today’s market, we are quite comfortable with the low beta embedded in the portfolio. However, this has been a relative performance headwind.

Many of the obvious risks are well-telegraphed and featured on the front pages, so they are less likely to be disruptive. Given the complacency in markets, we are particularly mindful of interest rates, corporate earnings, narrow technology leadership, and evolving market structure dynamics.

Interest rate risk – Markets and pundits have embraced the dovish outlook, confident that the inflationary pressures are behind us, the economic landing will be soft, and rates will normalize. Asset prices appear to be reflecting a dovish scenario too, but there are a range of other outcomes that could be disruptive. Sources of disruption include a deteriorating credit cycle, supply/demand imbalances in bond markets during a time of massive US treasury issuance, and quantitative tightening, to name a few. This is all taking place in a world of high fiscal deficits and debt in many of the world’s largest economies, presenting very real economic and market implications.

Corporate earnings risk – We have highlighted that cyclical companies are operating near peak profitability levels. Simultaneously, the conventional wisdom is that the “Magnificent Seven” can do no wrong. Importantly, surprises on either front are not expected by the consensus. More broadly, economies and earnings have been resilient in the face of massive monetary tightening. Monetary policy works with a lag, and we are just entering the window where the delayed effects should be felt, right at the same time that massive fiscal spending is subsiding. Profits have also been buoyed by strong pricing power and a pullforward in demand that has offset goods inflation; a potential shift in both dynamics remains underappreciated.

Technology leadership and market structure dynamics – History tells us that narrow equity market leadership is the exception, not the rule, and 2022 should serve as a reminder that the unwinding of excessive conventional thinking can be very painful. Technology and popular growth stocks have climbed to their greatest-ever representation in market indices, but many of these companies have gone from nimble upstarts with low product penetration to industry leaders with large profit pools to defend. With this scale often comes greater government regulation; many of the largest technology companies are likely to be targeted by anti-trust and other regulatory actions. Passive and other index-oriented flows have presented an enormous virtuous cycle that could turn vicious if it unwinds. We continue to believe that a broadening out in equity markets is a more likely scenario and that differentiation and risk management will be prized portfolio attributes in the years to come.

Connected to all these risks is the fact that 2024 is among the biggest election years in history. The US, EU Parliament, Taiwan, and South Africa are top of mind, but elections will occur in countries representing 73% of the global equity universe (MSCI ACWI Index weighting) and 54% of the emerging markets universe (MSCI EM Index weighting).⁶ The outcome of elections in Russia and Iran are foregone conclusions, but protests and disruptions (internal and external) are possible, if not likely. Among many, three global election issues could heavily impact markets: 1) politicians’ approaches to dealing with large deficits and debt that have supported the world for 15 years, 2) how a slowing of the global economy could impact voter behavior, and 3) whether politicians turn to populist or anti-business rhetoric to gain votes.

Summary

Most macro forecasters were wrong about 2023, and nobody knows how markets will play out considering the existing excesses. We do not have a crystal ball and, therefore, only consider the macro dynamics in the context of risk. A likely scenario is softness among last year’s leaders, as they will need time for earnings to grow into lofty valuations, while markets broaden and recognize opportunities elsewhere. Other more disruptive outcomes deserve greater consideration than what pundits are suggesting. We believe that the likelihood of continued exuberance is low and that our positioning is prudent, enabling us to deliver on our clients’ objectives.

Please contact us if you would like to discuss these or other matters in detail. Thank you for your interest in Altrinsic.

Sincerely,

John Hock

John DeVita

Rich McCormick

¹MSCI World Index, as of 12/31/23.
²Source: ICE Global High Yield Bond Index, as of 12/31/23.
³ Source: American Association of Individual Investors Bull/Bear Index, as of 12/31/23.
⁴ MSCI World Index, as of 12/31/23.
⁵ Source: FactSet, data shown is 3-year beta as of 12/31/23.
⁶ Source: CLSA Securities

ⁱ Performance is presented gross and net of management fees for the composite and includes the reinvestment of all income. Gross returns will be reduced by investment advisory fees and other expenses that may be incurred in the management of the account. Net of fee performance was calculated using the highest applicable annual management fee of 0.95% applied monthly. Policies for valuing investments, calculating performance, and preparing GIPS reports are available upon request. Past performance is not indicative of future results. The outlook and opportunities noted throughout this letter are the opinions of Altrinsic as of the date of this letter. There is no guarantee that we will be successful in implementing investment strategies that take advantage of such perceived opportunities or that any investment in the securities discussed will be profitable. Please see Important Considerations and Assumptions at the end of this letter for additional disclosures. Data sourced from FactSet, MSCI, Bloomberg, and Altrinsic research.

GIPS Report – Altrinsic Global Equity Composite

^{N.A. – Information is not statistically meaningful due to an insufficient period of time.

N.A.1 – Information is not statistically meaningful due to an insufficient number of portfolios in the composite for the entire year.

*Results shown for the year 2000 represent partial period performance from July 1, 2000 through December 31, 2000. The composite inception date is 1 July 2000.}

^{Altrinsic Global Equity Composite is a diversified (60 – 100 holdings), bottom- up, fundamental, value oriented, Global, all cap portfolio, benchmarked to the MSCI World (Net) Index (accounts have the ability to invest in 144A stocks). The MSCI World Index is a free float- adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. Portfolios in the composite may invest in countries that are not in the MSCI World (Net) Index. Additional information is available upon request. The minimum account size for this composite is $5 million. Prior to January 1, 2004, the minimum account size for this composite was $10 million. Returns include the effect of foreign currency exchange rates. Prior to April 1, 2006 the exchange rate source of the composite was Bloomberg 4pm New York close and the exchange rate source of the benchmark was WM Reuters 4pm London close.}

^{Altrinsic Global Advisors, LLC claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS Standards. Altrinsic Global Advisors, LLC has been independently verified for the periods from December 8, 2000 through December 31, 2022.}

^{A firm that claims compliance with the GIPS standards must establish policies and procedures for complying with all the applicable requirements of the GIPS standards. Verification provides assurance on whether the firm’s policies and procedures related to composite and pooled fund maintenance, as well as the calculation, presentation, and distribution of performance, have been designed in compliance with the GIPS standards and have been implemented on a firm- wide basis. The Altrinsic Global Equity Composite has had a performance examination for the periods beginning December 8 , 2000 through December 31, 2022. The verification and performance examination reports are available upon request.}

^{Altrinsic Global Advisors, LLC is a registered investment adviser. A list of all composite and pooled fund investment strategies offered by the firm, with a description of each strategy, is available upon request. The type of portfolios in which each strategy is available (segregated account, limited distribution pooled fund, or broad distribution pooled fund) is indicated in the description of each strategy.}

^{Results are based on fully discretionary accounts under management, including those accounts no longer with the firm. Beginning July 1, 2005, composite policy requires the temporary removal of any portfolio incurring a client initiated significant cash inflow or outflow of at least 40% of portfolio assets. The temporary removal of such an account occurs at the beginning of the month in which the significant cash flow occurs and the account re-enters the composite after the first full month under management if fully invested. Additional information regarding the treatment of significant cash flows is available upon request. Composite performance is presented net of foreign withholding taxes on dividends, interest income, and capital gains. Withholding taxes may vary according to the investor’s domicile. The MSCI World (Net) Index deducts withholding tax by applying the maximum rate of the company’s country of incorporation applicable to non- resident institutional investors. The normal characteristics of the transactions in the Altrinsic Global Equity Composite include the purchase and sale of forward currency contracts using a foreign exchange credit line(s) secured by the underlying assets. Past performance is not indicative of future results.}

^{The US dollar is the currency used to express performance. Returns are presented gross and net of management fees and include the reinvestment of all income. Gross returns will be reduced by investment advisory fees and other expenses that may be incurred in the management of the account. Net of fee performance was calculated using the highest applicable annual management fee of 0.85% applied monthly. Prior to January 1, 2005 the highest management fee applied was 0.75%. The annual composite dispersion is an asset-weighted standard deviation calculated for the accounts in the composite the entire year. Policies for valuing investments, calculating performance, and preparing GIPS Reports are available upon request.}

^{The investment management fee schedule is 0.85% on the first $25 million, 0.60% on the next $50 million, and 0.50% on the remainder. Some accounts may pay incentive fees. Actual investment advisory fees incurred by clients may vary. The Altrinsic Global Equity Composite was created January 1, 2004. Performance presented prior to December 8, 2000 occurred while the Portfolio Manager was affiliated with a prior firm and the Portfolio Manager was the only individual responsible for selecting the securities to buy and sell.}

^{GIPS® is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein.}

^{Important Considerations & Assumptions}

^{This presentation has been prepared solely for informational purposes and nothing in this material may be relied on in any manner as investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you.}

^{All information is to be treated as confidential and may not be reproduced or redistributed in whole or in part in any manner without the prior written consent of Altrinsic Global Advisors, LLC (“Altrinsic”). The information contained herein shall not be relied upon as a primary basis for any investment decision, including, without limitation, the purchase of any Altrinsic products or engagement of Altrinsic investment management services; there is no and will be no agreement, arrangement, or understanding to the contrary.}

^{This material has been prepared by Altrinsic on the basis of publicly available information, internally developed data and other third party sources believed to be reliable. However, no assurances or representations are provided regarding the reliability, accuracy or completeness of such information and Altrinsic has not sought to independently verify information taken from public and third party sources. Altrinsic does not accept liability for any loss arising from the use hereof. Any projections, market outlooks or estimates in this document are forward-looking statements and are based upon certain assumptions. Due to various risks and uncertainties, actual events or results, or the actual performance of any investment or strategy may differ materially from those reflected or contemplated in such forward-looking statements. Except where otherwise indicated, the information provided, including any investment views and market opinions/analyses expressed, constitute judgments as of the date of this document and not as of any future date. This information will not be updated or otherwise revised to reflect information that subsequently becomes available, or changes in circumstances or events occurring after the date hereof.}

^{The data and information presented is based on representative accounts and is for informational and illustrative purposes only. Individual client data and information may vary based on different objectives for different clients. This material does not constitute investment advice and should not be viewed as current or past recommendations or a solicitation of an offer to buy or sell any securities or to adopt any investment strategy. Any documents describing Altrinsic’s products or services shall not constitute an offer to sell or a solicitation to buy the securities from any person in any jurisdiction where it is unlawful to do so. Any specific investments referenced may or may not be held by accounts managed by Altrinsic and do not represent all of the investments purchased, sold or recommended for client accounts. Readers should not assume that any investments in securities described were or will be profitable. There are no guarantees that investment objectives will be met. Investing entails risks, including possible loss of principal. Altrinsic may modify its investment approach and portfolio parameters, in the future, in a manner which it believes is consistent with its overall investment objective of long-term capital appreciation and reduced risk.}

^{Past performance is not a guide to or otherwise indicative of future results. No representation is being made that any account will or is likely to achieve future profits or losses similar to those shown. Any investment results and portfolio compositions are provided for illustrative purposes only and may not be indicative of the future investment results or portfolio composition of any account, investment or strategy managed by Altrinsic.}

^{Disclosure of Risk Factors: An investment in any account, investment or strategy is speculative and involves a significant degree of risk, which each prospective investor must carefully consider. Returns generated from an investment in any account, investment or strategy may not adequately compensate investors for the business and financial risks assumed. An investor in any account, investment or strategy could lose all or a substantial amount of his or her investment. Before making an investment, prospective investors are advised to thoroughly and carefully review any disclosure documents with their financial, legal and tax advisors to determine whether an investment is suitable for them.}

^{Additional Performance Disclosure – Use of Benchmarks: Benchmarks are provided for illustrative purposes only. Comparisons to benchmarks have limitations because benchmarks have volatility and other material characteristics that may differ from the accounts, investments or strategies managed by Altrinsic. Because of these differences, benchmarks should not be relied upon as an accurate measure of comparison.}

^{Important Disclosures with Respect to Australia: These materials are not, and under no circumstances are to be construed as, a prospectus, an offering memorandum, an advertisement or a public offering of any securities described herein in Australia or any province or territory thereof. Under no circumstances are these materials to be construed as an offer to sell securities or as a solicitation of an offer to buy securities in any jurisdiction of Australia. Altrinsic Global Advisors, LLC is regulated by the US Securities and Exchange Commission (SEC) under US laws which differ from Australian laws, however, Altrinsic Global Advisors, LLC is exempt from the requirement to hold an Australian Financial Services License (AFSL) under the Corporations Act in respect of financial services it provides to wholesale clients only in Australia.}

^{The MSCI information may only be used for your internal use, may not be reproduced or re disseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages.

(www.msci.com)}

^{This document is not intended for public use or distribution.}

Global Equity

Quarterly Letter

Global Equity Commentary | 4Q 2023

John DeVita, CFA, CPA

John Hock, CFA

Rich McCormick, CFA

Receive our Perspectives

Terms