For the quarter, the Fund’s Investor shares declined 0.67%, outperforming the MSCI EAFE Index net return of -1.53%†. Security selection was the largest driver of relative outperformance, with strong selection in the consumer staples, financials, and consumer discretionary sectors more than enough to offset weaker selection in telecommunication services, information technology, materials, and energy. Sector allocation had an overall positive impact on relative results.
Geographically, security selection was strongest in the developed Asia-Pacific region ex-Japan, particularly in Singapore. Selection was also strong in Europe, with better selection in the UK and Sweden offsetting weaker selection in Germany and Norway. The Fund’s non-benchmark emerging-market positions also contributed positively to relative results, particularly in South Africa.
The top individual contributor to relative performance this quarter was an overweight to French automotive manufacturing group Peugeot (PSA Groupe), which gained more than 18%. Peugeot reported solid fourth-quarter results, largely driven by better-than-expected volumes and a positive sales mix. The strong results were partially offset by uncertainty related to the Group’s recent acquisition of Opel Vauxhall. Excluding this new division, 2017 was a record year for Peugeot, highlighted by growth in sales, margins, and recurring operating income, as well as better-than-expected net cash flow. Guidance issued for 2018 was largely positive, with higher revenues expected from Russia, Latin America and China.
Singapore-based banking and financial services company DBS Group Holdings returned almost 13% for the quarter. The Group reported an impressive 33% year-over-year increase in net income for the fourth quarter, driven by interest income from its lending business and momentum in its wealth management business. After booking significant losses on allowances for non-performing loans in the previous quarter, DBS is more confident in its earnings outlook for 2018, and has signaled for higher dividends going forward.
Australian retail travel agency group Flight Centre was another top contributor, gaining more than 27% for the quarter. Flight Centre reported better-than-expected results for the first half its fiscal year, driven by strong growth in transaction volumes. The strong result led management to upgrade full-year guidance for the second time in six months.
Other top contributors for the quarter included Japan’s Nissan and KOSÉ, as the stronger yen helped to boost returns in US-dollar terms (the JPY/USD exchange rate increased by about 6% during the quarter). Automotive group Nissan, which was one of the Fund’s largest holdings as of March 31, returned just over 6% for the quarter, primarily attributable to currency effects. Cosmetics company KOSÉ, meanwhile, returned more than 34% for the quarter after reporting solid results for its fiscal third quarter, underscored by better-than-expected operating profit growth. Strong revenues and margins were driven by growth in sales of premium products.
Despite generally strong stock selection in the UK, the country did produce the two largest detractors from relative performance for the quarter. Telecommunications company Vodafone was the largest detractor, declining about 14.5%. The company’s third-quarter results were weaker, as intense competition in southern Europe forced it to turn to heavy discounts and promotions, and service revenue grew less than expected. Ensco, an offshore drilling services company, was the second largest detractor, declining almost 36%. Despite management’s optimism for an industry turnaround, it also cautioned investors on the pace of recovery, as excess rig supply remains a significant headwind.
Japan also produced some of the quarter’s largest detractors, including Mitsubishi Gas Chemical (MGC) and Nippon Electric Gas (NEG), which declined around 15.5% and 22%, respectively. NEG, which manufactures glass products for panel displays and other electronic products, reported weak fourth-quarter operating results, with margins dragged down by its newly acquired US fiberglass operations.
German airline Lufthansa was also among the most significant detractors, posting a 13.5% decline for the quarter. Despite delivering its best results in history for 2017, management issued a more cautious outlook for 2018, warning that earnings are likely to dip this year as higher fuel costs offset planned cost reductions.
