In light of the current and tragic events in Ukraine, and the negative impact those events have had on the performance of our international strategies, I am writing to address questions and concerns that have arisen and provide our views on why it is important to stay disciplined and focus on the long term.
Our international investment process has always focused on researching companies located in countries that have adequate legal protections for minority shareholders, where accounting is transparent and where there are no capital controls. Russia is a country that has failed this “screen.” As such, we have had no investment in Russian-listed companies. However, we do invest in a global marketplace and invest on behalf of our clients in multi-national companies that have global operations and revenues. As the Ukraine crisis continues, we will keep monitoring the companies in our portfolio that are impacted, including through secondary events.
To date, we believe the indirect exposure to these countries is minimal. Current holdings, including Allianz, Danone, Intesa San Paolo, Komatsu, Mercedes, Prosus and others, have operations in Russia, Ukraine or both. From the information we’ve gathered so far, we believe the overall revenue impact is small. Our other financial holdings, like BNP Paribas and Lloyds Banking Group, have little to no exposure from what we can see in their public disclosures. It should be noted, however, that these companies’ share prices have been severely impacted by the abrupt fall in interest rates that has arisen as investors flooded into the perceived safety of global bonds. Auto companies and suppliers, may also feel some impact on their supply chains, but we don’t think it will be material in the medium to long term. Where we can quantify the impact of these events on the value of our holdings, we will act accordingly and make adjustments where necessary.
Because of the uncertainty surrounding the crisis, as well as the impact on currencies and interest rates, our portfolios have experienced severe and adverse absolute and relative price performance. This is especially disappointing given the extremely strong start to 2022. While it is true there will be some effect on global economic growth, inflation and the supply chain, at some point, this crisis will be resolved. It is important to remember that our portfolio companies have strong balance sheets and diverse revenue streams, which should allow them to weather adverse economic conditions and be in a position to benefit when uncertainty clears. Recent economic data pointed to a robust post-pandemic global economy. Given the strength of the global consumer and high level of pent-up demand, we still believe that the ingredients for a strong rebound in global activity remain once the situation in Eastern Europe is resolved.
As we have mentioned in every previous crisis, such as Brexit and the global financial crisis, SHARE PRICE MOVEMENT POORLY REFLECTS THE LONG-TERM UNDERLYING VALUE AND QUALITY OF OUR INVESTED BUSINESSES. Our focus remains firmly on refining our value assessments as material fundamental information flows from our companies and NOT on short-term, sentiment-driven share price movements. Remember, volatility is not synonymous with risk. Rather, it is an asset that can be utilized to optimize portfolio positioning (i.e., to own more of a company as it gets cheaper and to own less of a company as price exceeds its value).
As in all past crises our international strategies have faced, it is very important to stay disciplined and patient to avoid the invariable “buy high, sell low” curse. Our investment discipline has rewarded our shareholders, and we feel this time is no different. Our international portfolios are attractively valued today, selling at around 50c/on the dollar as of this writing, which historically has been an extremely attractive entry price.
Thank you for your continued trust and patience,