Dear Fellow Shareholders,
Below is our quarterly commentary for the fourth quarter of 2020. In this document, we seek to update you on the Fund’s performance, highlight some market developments during the period, discuss the key contributors to performance as well as any meaningful portfolio activity, and provide you with some perspective on the investment outlook as we see it at the time of the commentary.
In the fourth quarter of 2020, the Fund returned 13.79% (all figures in U.S. dollar currency, unless stated otherwise), net of fees and expenses. This compared to a 17.01% return over the same period for the MSCI All Country World ex-US Net TR Index (the “Index”). For the full year 2020, the Fund returned 19.64%, net of fees and expenses. This compared to 10.65% over the same period for the Index. Most importantly, since its inception on Dec. 1, 2011, the Fund has returned an average of 9.64% per year. This compares to an annualized return of 7.01% for the Index.
Cash and equivalent holdings stood at 16% at the end of the period. Equity holdings (excluding cash and cash equivalents) performed effectively in line with the Index in the quarter, with a positive return of 17%. Over the full year, they outperformed with a positive return of 12%. However, the contribution to the Fund’s performance from these equity investments was significantly higher, at 21%. This is because we were holding record levels of cash when the downturn started in the first quarter of the year and we deployed most of it in the short few weeks of subsequent market panic. Most importantly, since the inception of the Fund, the annualized return of the Fund’s equity holdings is about 15%.
As this tumultuous year reached a close, it was difficult to even remember how it started. In the first few weeks of 2020, a newly discovered virus quickly spread from China to the rest of the world, severely straining healthcare systems long taken for granted. They were unable to adapt to the new threat, leading to many deaths and a sense of panic that drove governments to resort to lockdowns as their only possible response. It was clear that such measures would have a dramatic impact on the economy. This prospect caused capital markets to fall sharply, with the Index dropping more than 30% from late January to the end of March.
As the pandemic and associated restrictions became a daily reality, recently established trends started to be magnified by the crisis. As we mentioned in our commentary on the pandemic in early 2020, the rise of everything digital as the fourth industrial revolution has been amplified, with many participating businesses benefiting materially from the new paradigm. Similarly, despite years of ultra-low rates and massive injections of “free cash” into the financial and economic systems, the so-called “government put” took on a whole new dimension with trillions of dollars and years of future income being handed over to market participants and individuals. Both phenomena acted as a morphine shot on capital markets with the Index up by roughly 40% through the second and third quarters.
Once the epicenter of the pandemic, China appeared to emerge relatively unscathed from the crisis. This was made possible in the short-term thanks in part to its totalitarian political system and its willingness to aggressively use fiscal policy on top of monetary expansion to artificially boost its economy. Its status as the world’s factory and its central role in global supply chains placed it in a natural position to benefit from the accelerated shift to e-commerce. Such economic resilience contributed to a broad price recovery across emerging markets.
In the meantime, innovative forces started to work toward a solution to better manage the virus. In a matter of months, another revolution came to light, this time in the fight against infectious diseases. Researchers brought to market a so-called mRNA vaccine that can teach cells how to make the protein that triggers an immune response and produces antibodies to avoid getting infected. Along with the use of more traditional immunologic solutions, several pharmaceutical firms proved capable of developing vaccines with levels of efficacy rarely seen before.
More positive developments also came unexpectedly from the political world on both sides of the Atlantic. In the UK, the recently elected conservative government finally accomplished a separation from the European Union, as mandated by an election four years ago, with an agreement that avoided a hard Brexit outcome. In the U.S., a highly dysfunctional presidential election cycle produced an outcome that many hope will allow for more serenity to prevail going forward. The removal of both uncertainty and risks of further disruptions provided for an overall sense of relief.
Equity markets around the world experienced another broad-based boom in November as the political conditions improved, pharmaceutical firms announced positive vaccine results, and hopes of a swift return to “normality” started to form. During the remainder of the year, the Index rose again by more than 20%, with the U.S. and many international markets reaching all-time records or multi-decade highs.
Given the continued broad recovery in market prices in the fourth quarter, many of our holdings made positive contributions to the Fund’s performance in the period. Among our disclosed holdings, only Alicorp, SAP and Unilever contributed negatively, and only to a small degree.
The largest disclosed detractor to performance this period was SAP. Based in Germany, the company is the world’s leading provider of enterprise resource management software. Companies use this software to manage their financial reporting, supply chains, logistics, procurement and other critical processes. We have actively followed SAP for the past 15 years, including several periods when it was a portfolio holding. Historically, concerns over SAP’s transition from selling on-premise licenses to offering cloud-based subscriptions have provided us with opportunities to invest in the company at attractive prices. While the transition does not change the critical nature of SAP’s solutions, it ultimately enhances the net present value of its users for the group. The company also generates a significant portion of its revenues from maintenance and other recurring services that have proven to be extremely sticky. We believe the mission-critical nature of SAP’s software, along with the cost and complexity of installation, create considerable switching costs for customers. Last, strong cash generation and moderate financial leverage provide the group with abundant financial strength. We believe the combination of these positive characteristics makes SAP a compelling investment, particularly at times of market distress.
Such an opportunity arose during the downturn triggered by the pandemic. While SAP’s stock initially bounced back along with the rest of the market in the second quarter of 2020, management’s decision to cut guidance due to the impact of government lockdowns disappointed investors and caused the price to fall back to its March levels. The company also reported that the ongoing multi-year transition of its customers to the cloud would limit short-term profit growth. Looking beyond the temporary effects, we continue to believe this continuous migration will ultimately boost SAP’s enterprise value. Longer-term, we believe the fundamentals of the business will remain strong, and that demand driven by working-from-home and the growth in e-commerce will continue to benefit the company.
The second-largest disclosed detractor to performance was Alicorp. Based in Peru, Alicorp is the country’s leading consumer goods company, with a portfolio that includes food, home and personal care products. Similar to SAP, Alicorp was a former holding of the Fund that we sold amid strong performance in the later part of 2018. Since then, the stock has experienced a decline of roughly 40%, primarily due to political instability in its home market. More fundamentally, we believe Alicorp continues to enjoy strong market positions across a broad portfolio of categories that benefit from good growth dynamics in countries that still offer significant room for development. Management execution also remains solid, not only on the operational side but also on the corporate development side.
The third-largest disclosed detractor to performance was Unilever. Based in the UK, Unilever is one of the world’s leading producers of fast-moving consumer goods. Like SAP and Alicorp, Unilever is a company we have actively followed for many years as part of our coverage list, including periods when it was a portfolio holding. It is also one of the many stocks we purchased in the middle of the COVID-19 crisis. While Unilever’s share price initially recovered by close to 40% from its March low, it has since experienced some relative weakness. This appears to have been driven by concerns over new waves of particularly deadly cases of virus infections in Europe and expectations of increased pressure from commodity prices.
The biggest disclosed contributor to performance this quarter was ISS. Based in Denmark, ISS is a leading global provider of outsourced services including cleaning, building maintenance, food catering, property security and other office functions. We talked about the business in more detail in our most recent commentary since the company was the Fund’s biggest detractor to performance in the third quarter. While ISS’ stock experienced a bounce back in recent weeks (along with the rest of the market and many of the names most impacted by the pandemic), it continues to trade at what we believe are discounted prices. The group is still grappling with COVID-19-related demand weakness and challenges with a few large integrated contracts. However, a new, well-regarded CEO joined from outside the company at the beginning of September. We believe the business retains many compelling characteristics for the long run, and that the plan being laid out by new management will help the group come out of the crisis stronger.
The second-biggest disclosed contributor to performance was Electrocomponents. Based in the UK, the company is a leading distributor of industrial and electronic products. Electrocomponents was one of the many companies we reported as a new purchase in our first quarter 2020 commentary. In addition to meeting all our selection criteria in terms of business quality, balance sheet strength, and superior management execution, the company conducts its business primarily online. This positioned Electrocomponents well to continue to take market share throughout the pandemic as restrictions have limited access to traditional forms of distribution.
The third-biggest disclosed contributor to performance was CARE Ratings. Based in India, the company is the country’s leading credit rating agency for mid- and large-sized debt issuers. Like ISS, CARE benefited from a recovery in highly discounted stocks that had not experienced a bounce earlier in the year along with the rest of the market. However, we believe the current share price remains discounted. The group recently underwent a change in leadership and still has to manage through a revamp of its internal practices following accusations of violating regulations while assigning ratings. CARE must also reckon with a developing triple crisis in India. In addition to being severely impacted by the pandemic, the country has been experiencing challenging economic and financial conditions, which have been further complicated by rising political tensions.
During the quarter, we initiated several new investments, including Clipper Logistics, Johnson Service and Shimano.Based in the UK, Clipper Logistics is a leading provider of logistics services to a broad range of customers across Europe. Johnson Service is also based in the UK. The company is a leading supplier of work wear and provides linen services for the hotel and food catering markets. Based in Japan, Shimano is the world’s leading manufacturer of bicycle components.
In the fourth quarter of 2020, we completed the sale of a large number of holdings (like we did in the third quarter). Many of these positions had been established in the uniquely compelling, broad-based buy-in opportunity triggered by the pandemic at the end of the first quarter and in the earlier part of the second quarter. Recent market conditions have been in sharp contrast, with continued strong performance across equity markets. As a result, we have continued to monetize investments in companies whose stock price reached their estimates of intrinsic value. Those included ALS (an Australia-based provider of geochemistry testing), Freightways (a New-Zealand-based provider of courier services), Henkel (a Germany-based personal care and home care company with an adhesive product business), Obic (a Japan-based provider of business software solutions), Pernod Ricard (a France-based world-leading branded spirits company) and Volution(a UK-based manufacturer of ventilation systems).
We were fortunate to be able to navigate these difficult, volatile markets successfully, both in terms of capital deployment and stock selection. Most importantly, we take pride in having stuck to our discipline through the crisis. Many investors often speak and write about waiting patiently to take advantage of short-term market dislocations to deploy capital and invest in companies whose stocks trade at a large discount to intrinsic value, but few managed to act accordingly when the opportunity arose. The strength of our philosophy, our process and, most importantly, our team allowed us to do just that. But we are not so arrogant as to believe that our performance in the past year, or even over the past decade suffices to prove anything. We remain careful not to become complacent and are already looking to the enormous challenges that lie ahead of us.
When all was said and done, the Index closed up by more than 10% for the full year. This was a most unlikely outcome since the year’s devastating circumstances came on the back of an already strong performance in 2019, when the Index increased by more than 20%. It is nothing short of extraordinary that most businesses are now trading at significantly higher valuations than before the virus, when economies around the world seemed to be on firm footings. One would be hard pressed to find evidence anywhere in today’s capital markets that many countries have just experienced their most severe economic downturn, seen sharp increases in unemployment levels and allowed sovereign debt to reach unsustainable levels. Similarly, most stock prices appear to write off entirely the significant costs of the pandemic, the long and uncertain path toward recovery and any structural changes that may ultimately result from this major shock.
Assuming swift and successful vaccination campaigns and no adverse developments of the virus itself, the vaccines should help restore some level of economic activity and improvements in company earnings. Yet market valuations are now running well ahead of future earnings growth even in such a favorable scenario. As we rush to price every seemingly ownable business, we are struck by the obviously unachievable assumptions of growth in free cashflow per share that are required in most cases to justify their current stock prices.
Candidly, we struggle to think of a time of similar excesses, either in our experience as investors in the past 20 years or in our readings of capital market conditions before our times. Signs of rampant speculation and inflation can be seen everywhere, from the incredible rise of Tesla’s share price, to that of bitcoins and other cryptocurrencies, to global IPO activity reaching its highest level in a decade including a record number of unprofitable businesses and special purpose acquisition companies, to a boom in retail trading promoted by social media-like platforms such as El-Toro or Robinhood. Excesses are particularly notable in companies focused on social good initiatives, technology or arguably healthcare, but exuberance seems to permeate all segments of the economy at this point. All of it stems from the disease of monetary policies that effectively replace the production of goods and services with government money printing.
It would be absurd and unconscionable to trust that such monetary policies will not ultimately produce catastrophic consequences, or that the pandemic and its devastating economic effects are now firmly behind us. As investors’ enthusiasm persists, we expect it will be difficult to continue holding most of the investments we made in the aftermath of the market’s COVID-19 panic and to find more new investment ideas. We still believe it might take many more months before we can return to more normal conditions or fully understand the long-term impact of the pandemic. We expect difficult times ahead for the world’s economy and for capital markets. While we are concerned and saddened by the possibility of further deaths, and the likelihood of more job losses and wealth destruction, from an investment standpoint, it could provide us with compelling value opportunities and we are energized and hopeful about that.
As always, we stand ready to take advantage of any price dislocation in the markets to help us seek to compound wealth for our fellow shareholders. To achieve these goals, we will stay focused on investing only in high-quality companies with strong, sustainable fundamentals that command pricing power, compelling prospects to build shareholder value in the long run, and balance sheets that can withstand short-term disruption. They must also have management teams capable of steering the business through both good and bad times, and of deploying capital in a way that creates value over time. Last, we will only put capital at risk when we think we can buy those stocks at significant discounts to our estimates of their intrinsic values.
We thank you, as always, for your confidence, and we look forward to continuing to serve your interests as shareholders of the Phaeacian Accent International Value Fund.
Pierre O. Py
 Based on the annualized rate of the Fund from Dec. 1, 2011 to Dec. 31, 2020 in U.S. currency.
 The Index’s annualized return of 7.01% is for the period from Nov. 30, 2011 to Dec. 31, 2020 in U.S. currency. From Dec. 1, 2011 to Dec. 31, 2020, the Index has produced an annualized return of 6.91% vs 9.64% for the Fund.
 The performance of the equity portfolio holdings segment of the Fund is presented gross of investment management fees, transactions costs, and Fund operating expenses, which if included, would reduce the returns presented. Performance of the equity portfolio holdings excludes the impact of cash and cash equivalents and investments in government debt. An investor in the Fund cannot achieve these returns and can only purchase and redeem shares at net asset value. The long equity performance information shown is for illustrative purposes only and may not reflect the impact of material economic or market factors. No representation is being made that any account, product or strategy will, or is likely to achieve profits, losses, or results similar to those shown.
Periods over one year are annualized. The fund performance data quoted here represents past performance, which is not indicative of future results. Current performance may be lower or higher than the performance data quoted above. Investment return and principal value will fluctuate, so that shares, when redeemed, may be worth more of less than their original cost. The total operating expense ratio (including indirect expenses such as the costs of investing in underlying funds), as stated in the fee table in the Fund’s prospectus dated October 13, 2020, is 1.31% (1.29% net of expense limitation agreement, contractually in effect through October 31, 2023). Phaeacian Accent International Value Fund commenced operations on 19 October, 2020, following the receipt of the assets and liabilities of the FPA International Value Fund (“the Predecessor Fund”) through a reorganization into the Phaeacian Accent International Value Fund (the “Fund”). FPA was the investment adviser from inception through October 16, 2020, and reflects fees, charges and expenses of that vehicle for the time periods shown. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown. This data represents past performance and investors should understand that investment returns and principal values fluctuate, so that when you redeem your investment it may be worth more or less than its original cost. Current month-end performance data may be obtained by calling toll-free, (800) 258-9668.