International Equity Commentary | 4Q 2024

Author

John DeVita, CFA, CPA

Analyst & Portfolio Manager

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Author

John Hock, CFA

Founder & Chief Investment Officer

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Author

Rich McCormick, CFA

Analyst, Portfolio Manager, & Co-Chief Investment Officer

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01-28-2025

Dear Investor,

Divergence in the performance between AI-led US markets and the rest of the world accelerated in the fourth quarter, fueled by optimism after the Trump election victory and a strong US dollar. The MSCI EAFE index fell by 0.6% in local currencies and by 8.1% in US dollars. The Altrinsic International Equity portfolio declined by 7.3% gross of fees (-7.5% net), as measured in USD.ⁱ

Perspectives

“US exceptionalism” continues to be the mantra in markets, and this has certainly been reflected in equity market performance, elevated valuations of the ‘Magnificent 7’ stocks, and the premium afforded to most US companies relative to their international peers. Innovation and growth have only been outpaced by the enthusiasm surrounding these companies. The US dollar has also benefitted, gaining 7.6% against the DXY basket of foreign currencies, with the recent rise reflecting interest rate differentials, anticipation of tariffs, and the associated changing terms of trade. In the case of both stocks and currencies, valuations have evolved from a stage of fundamental support to one driven by narratives and momentum, presenting risks for subpar returns among popular and crowded segments of the global equity landscape.

The situation in international markets is quite different: less loved, less crowded, lower expectations, compelling valuations, and undervalued currencies. This combination results in more favorable long-term return prospects. Successful long-term investing ultimately stems from the right blend of valuation (price paid), earnings and free cash flow (FCF) growth, and the appropriate appraisal of risks surrounding the investment. Reevaluating these pillars gives us confidence that the outlook is particularly compelling in non-US markets.

1. Valuations
Valuation levels matter very little in the short term, but they matter overwhelmingly in the long term. Benjamin Graham famously said, “In the short run, the market is a voting machine, but in the long run it is a weighing machine.” Sentiment, momentum, emotion, and liquidity often prevail in the short term, with narratives surrounding stocks offering new and “transformative” ideas (AI, advanced robotics, GLP-1 drugs) contributing to lofty valuations. The proliferation of passive strategies and increased index concentration (Charts 1 & 2) have further exacerbated the procyclicality. But procyclicality works in both directions.
Over the long term, valuation has an outsized influence on returns. Charts 3 & 4 (S&P 500) and Charts 5 & 6 (MSCI EAFE Index) illustrate this relationship by looking back at the last 30+ years of data; the dots represent the level of annualized returns earned on the respective indices based on the price/earnings multiple paid at the time.

Valuation Has Had Little Predictive Power in the Short Term, Overwhelming in the Long Term Scatterplot of S&P 500 Forward P/E and subsequent returns

Scatterplot of S&P 500 Forward P/E and subsequent returns On a short-term basis, the correlation is very low, but over a 10-year period, it is over 85%. Based on this relationship, the 10-year forward annualized returns are much more favorable for the MSCI EAFE Index.

As we assess the narrow market leadership that is extended by most measures and by historical comparisons, we believe that, while possible, it is unlikely that many companies, particularly those in the US, can deliver on the long-term expectations embedded in their valuations. The likely best-case scenario is for them to tread water or experience a form of purgatory until fundamentals catch up with valuations. Chart 7 reflects the gap in valuations between the small sub-set of leading US tech stocks, the large-tech-dominated S&P 500 Index, and the broader equal-weighted S&P 500 Index. Chart 8 illustrates the growing spread between US and non-US markets. Looking beyond the small subset of market darlings, there is a lot of value in today’s markets, with the most compelling dislocations outside of the US.

2. Earnings and Free Cash Flow
Valuation is unequivocally important, but focusing on it without regard to quality is fraught with its own dangers, typically leading to lower quality, highly cyclical, and/or overleveraged companies. It is a common misperception that non-US companies are domiciled in countries that are ‘economic basket cases’ and therefore do not grow. However, investments are made in companies and not countries, so ultimately, underlying EPS (as opposed to GDP) is most reflective of the investment landscape.

Chart 9 provides a broad perspective of economic and corporate earnings results over the last 10 years. US economic and earnings growth has outpaced most other nations, with productivity, a confident consumer, low interest rates, lower tax rates, buybacks, and massive fiscal stimulus playing supportive roles. Internationally, economic growth has been more muted, yet EPS growth has been solid and perhaps underappreciated. When also incorporating dividend yields, the value accrued to shareholders in the US versus outside the US has been comparable. Further, many of the best non-US companies have diversified their businesses with large and sometimes overwhelming amounts of revenue generated outside their home market. After a period of massive outperformance in the US, expectations for many US companies are elevated, particularly among the large market constituents. From a long-term investment perspective, we currently find the most compelling opportunities among companies with modest yet durable growth prospects, embracing change/AI/digitization to improve growth and profitability, and/or incorporating more productive capital allocation than markets are recognizing. These investments did well during the second half of the year (in local currency terms), but they have been unable to keep up with leading US growth stocks.

Chart of economic versus corporate earnings growth by country

From a regional perspective, companies in Europe, Japan, South Korea, and other emerging markets have expectations that are low and likely to be surpassed. Europe’s macro environment has been particularly weak, as politics, energy, Chinese demand, and uncertainly surrounding US trade policy have weighed on sentiment. However, financial conditions in Europe have been improving. Loan demand is finally turning positive (Chart 10), and European banks have stopped tightening lending standards for the first time in years. Just as important is the structure of debt in Europe. As highlighted in Chart 11, interest costs are a higher proportion of profits relative to the US, and variable rate debt is far more prevalent in Europe than in the US. Thus, while the US benefitted over the last few years from longer duration debt structures, Europe now stands to benefit in the current rate environment.
Line charts of European and US economic data

In Asia, earnings expectations are undemanding in Japan and South Korea. Shareholder-friendly reforms should boost earnings growth beyond levels that one might expect in otherwise mature economies. Historically, many Japanese and South Korean corporates have prioritized social initiatives and/or focused on top-line growth with little regard for financial productivity (i.e., ROE). Now, meaningful change is emerging, which is improving the investment opportunity set in both countries.

3. Risks
A multitude of interrelated risks span the world today, including geopolitical, policy-related, macroeconomic, credit, and excess leverage, to name a few. In theory, these considerations should be reflected in interest rates, risk premiums, and currency movements. At times, however, they can be overemphasized or underappreciated, presenting opportunities. Geopolitics took center stage in 2024, as more than 70 elections were held in countries representing more than half of the world’s population. While many were highly charged, we believe The Economist said it best, claiming 2024 “…affirmed the resilience of capitalist democracies, including America’s.”¹ We believe that US and Chinese policies relating to trade, security, and economic growth (particularly in China) will be the most consequential in the year(s) ahead. Currently, market consensus is overwhelmingly against China’s ability to endure a second Trump presidency and/or stimulate domestic consumption. An end to the prolonged war in Ukraine could be a major boost to the EU. President Trump’s policies, notably deregulation and tax cuts, have been greeted favorably by markets. Others, including deportation and tariffs, could stoke inflation and slow economic activity.

Deglobalization, necessary infrastructure spending, energy transition, aging labor forces, slowing immigration, excessive stimulus, high debt levels, and persistent fiscal deficits in major economies are supportive of sticky inflation and long-term interest rates remaining higher for longer despite slowing growth. In the US, for example, the ten-year Treasury bond yield ended last year nearly one percentage point higher than when the Federal Reserve began easing in September. Sovereign bond markets finally appear to be tuned in to the potential ramifications of excessive deficit spending and high government debt levels. Higher long-term rates and slowing economic activity are among the greatest risks in major economies, including the US. Corporate credit markets, however, do paint a more optimistic picture, with credit spreads declining to some of their lowest levels in decades (Charts 12 & 13).

Line charts of US and global credit spreads

Performance Review

The Altrinsic International Equity portfolio marginally outperformed the MSCI EAFE Index in the fourth quarter. Positive attribution was led by financials (Sompo, Willis Towers Watson, Axis Capital), materials (Agnico Eagle, CRH), and our underweight exposure to health care. Negative attribution was mainly driven by industrials (Deutsche Post, Kubota), consumer staples (Heineken, Pernod Ricard), and information technology (Samsung).

In financials, Sompo continues to improve its capital allocation by reducing cross-shareholdings, and the company is in a strong position to expand return on equity through better domestic underwriting practices. Willis Towers Watson’s efforts to revamp its personnel and utilize its global scale are bearing fruit through accelerating organic revenue growth and margin expansion. We see plenty of opportunities for further free cash flow improvement closer to peer levels as earnings quality continues to improve. Lastly, Axis Capital’s shift away from volatile reinsurance segments and toward its strong specialty insurance businesses is driving higher returns. We believe its CEO Vincent Tizzio’s strategy supports a more profitable, less risky business model that is still underappreciated by many.

In materials, Agnico Eagle and CRH provided strong operating results amidst robust gold prices and infrastructure demand, respectively. The outlook for CRH, in particular, remains very strong given its improving asset portfolio and legislated spending in the US.

The health care sector grappled with weak demand and pricing pressure in China, as well as volatility among highly valued pharmaceutical companies exposed to weight-loss drugs. Our investments are concentrated among companies prioritizing innovation and business improvements that are not well reflected in current valuations.

Performance was adversely affected by trade tariff concerns following the election of Donald Trump, and depressed consumer demand. In industrials, we believe the risk of tariffs overlooks DHL’s ability to help clients navigate even more complex global trade networks. Kubota’s cost-cutting measures and growing demand in Asia remain significant tailwinds for their bottom line. In consumer staples, we find compelling value in global businesses, including Pernod Ricard and Heineken, where there are doubts about a return to growth post COVID. In information technology, Samsung is actively addressing recent missteps in AI-focused products, which should reaccelerate sales growth and allow the company to resume its market-leading position within memory semiconductors.

Investment Activity

We initiated two positions (Koninklijke Philips, B3) and exited three positions (Seven & I Holdings, SAP, Eisai) during the quarter. We established a position in medical device maker Koninklijke Philips following recent lawsuit settlements that will allow the company to refocus on improving profitability closer to peer levels. Philips operates in growing, oligopolistic medical device markets with high barriers to entry and has a strong track record for improving operating leverage. We also initiated an investment in Brazil’s dominant exchange, B3, which offers a resilient business model with diversified avenues of growth across many asset classes.

We sold Seven & I as its valuation rose in anticipation of a takeover by either Alimentation Couche-Tard or the Ito family. We exited our position in SAP after it successfully navigated the shift to the cloud, which accelerated earnings growth toward our bull case scenario. We also exited Eisai, as we are increasingly concerned about the company’s complex rollout of its main Alzheimer’s drug, Leqembi.

Closing

Most objective measures (valuations, credit spreads, and bullish investor sentiment, among others) suggest a high degree of complacency in markets. A deeper look highlights how much of this complacency is concentrated in a small number of widely held stocks with exciting “stories” and valuation levels reflecting this enthusiasm. We see the best opportunities outside of the headlines and, most notably, in international markets. Our investments and overall positioning are quite different from popular indices, and we believe it has seldom been more important to be so.

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

Sincerely,

John Hock
John DeVita
Rich McCormick

ⁱPerformance 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 0.85% 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, and Altrinsic research.

GIPS Report – Altrinsic International Equity Composite

N.A. – Informatio n is not statistically meaningful due to an insufficient period of time.
N.A.1 – Informatio n 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 inceptio n date is 1 July 2000.

Altrinsic International Equity Composite is a diversified (60 – 100 holdings), bottom- up, fundamental, value oriented, Global- ex U.S., all cap portfolio, benchmarked to the MSCI EAFE (Net) Index. The MSCI EAFE is a free float- adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada. Portfolios in the composite may invest in countries that are not in the MSCI EAFE (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, 2023.

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 International Equity Composite has had a performance examination for the periods beginning December 8, 2000 through December 31, 2023. 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 undermanagement, 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 undermanagement 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 EAFE (Net) Index deducts withholding tax by applying the maximum rate of the company’s country of incorporation applicable to non- resident institutional investors. 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 International 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 and 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 and 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.

International Equity

Quarterly Letter

International Equity Commentary | 4Q 2024

John DeVita, CFA, CPA

John Hock, CFA

Rich McCormick, CFA

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