Download Commentary by Skylands Capital LLC, Sub-Investment

Perinvest Harbour US Equity – Q4 2014
PERINVEST HARBOUR US EQUITY
Q UARTERLY R EPORT Q4 2014
Perinvest Harbour US Equity is a Sub-Fund of Perinvest (Lux) SICAV, an open-ended investment company organized under the
laws of the Grand Duchy of Luxembourg as a "Société d'Investissement à Capital Variable". Perinvest Harbour US Equity aims to
maximize the return on investment over the medium to long term. Under normal conditions, the Sub-Fund mainly invests in
shares from companies in the US. The Sub-Fund may use derivatives to reduce its exposure to various investment risks (hedging),
for efficient portfolio management, but not to directly seek investment gains.
The investment manager uses economic data, onsite visits and management calls to determine the level of investment in
companies that appear to have the potential for growth.
The Sub-Fund is designed for investors who understand the fund’s risks and who have an investment horizon of 3 to 4 years
minimum.
Commentary by Skylands Capital LLC, Sub-Investment
Manager of Perinvest Harbour US Equity
Perinvest Harbour US Equity (Class A) gained 6.8%1 last quarter. The performance attribution during 2014
was unusually diverse, including strong gains, offset in part by declines in some small and mid-cap
investments.
The two railroad Union Pacific and Norfolk Southern delivered another strong year. However, the market’s
enthusiasm for the rails cooled in the fourth quarter following the collapse in oil prices. Union Pacific and
Norfolk Southern each derive about 5% of their business hauling oil, frac sand and piping materials. These
have been strong growth categories which are now at risk of shrinking. However, collectively they are still a
small portion of the railroads’ diverse traffic mix. Plus, Union Pacific Railroads is the world’s largest
consumer of diesel fuel. While most of the fuel savings accrued to their customers by formula, these fuel
surcharge reductions should make base rate price increases more palatable. The railroads are benefiting
from pricing power, market share gains from trucks, expanding profit margins, and growing free cash flow
which is being used for dividend increases and share repurchases. And these secular trends are intact.
General Motors (“GM”) was a negative performer in 2014, weighing on performance. GM had
disappointing year largely due to costs and bad publicity surrounding several large vehicle recalls.
However, the recall costs are modest relative to GM’s profitability. Further, GM’s stock market valuation is
very attractive following its 2009 restructuring. GM now has over $21 billion of cash (net of debt).
Following decades of market share losses and financial missteps, it will undoubtedly take time to
resuscitate GM’s image. However their product quality is competitive, their financial metrics are strong,
and GM has an enviable position in China, now the world’s largest car market. In 2014, over a third of all
GM vehicle sales were in China.
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Cumulative returns over 3 months. Other returns of the same share class are presented on page 4 of this report. Past
performance is no guarantee of future performance.
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Perinvest Harbour US Equity – Q4 2014
The most noteworthy addition to Perinvest Harbour US Equity was Lincoln Electric. Based in Cleveland,
Ohio, Lincoln is the global leader in welding equipment and consumables. Lincoln boasts industry leading
profit margins and return on capital measures. It is undeniably a good business. However, under prior
management, Lincoln was hoarding its impressive profitability in its cash accounts. With interest rates at
zero, this cash has been an unproductive asset for shareholders. Fortunately, new management is pursuing
a more efficient capital structure, including substantial dividend increases and share repurchases.
Outlook
The most important development in recent months is the precipitous decline in crude oil prices, already
down by half since last summer. Oil is an important commodity that touches nearly every person and
business on the planet. A price adjustment of this magnitude will create shock waves across the globe. The
United States consumes nearly 20 million barrels of oil per day, so $50 per barrel price reduction will save
U.S. consumers and businesses roughly $365 billion. However, our domestic energy industry and their
suppliers will be losers. Because the U.S. still imports 6.5 million barrels a day, a $50 price reduction should
represent a $120 billion net benefit to the U.S., assuming the propensity to spend money is equal between
the oil industry and U.S. consumers.
While abundant and inexpensive energy will have many visible beneficiaries, such as airlines, retailers and
restaurants, there is a less visible risk that could weigh on global stability and stock market valuations.
Specifically, some countries are dangerously dependent on oil to support their economies. The Russian
ruble has already lost nearly half of its value against the U.S. dollar over the past 6 months. Accordingly,
Russian companies with dollar or euro-denominated debt will have difficulty servicing their debt. This will
pressure financial institutions, like large European banks, that hold this debt. Because nobody knows the
degree of exposure, or exactly who has it, there will be ample reason for the markets to worry. Similarly,
less oil revenue in the Middle East will threaten what is already an unstable region.
The other major macro force that has taken root globally is aggressive central bank monetary policy. The
United States was early in adopting unconventional measures, such as a $3 trillion quantitative easing
program, to combat deflationary forces and compensate for mostly poor and ineffective fiscal policies,
such as tax increases and regulatory overreach. Japan embarked on a similar path a few years ago and has
depreciated their currency in an attempt to create a competitive advantage for their export economy.
More recently, the European Central Bank seems to be losing its pleas for member countries to adopt
structural reforms, principally reducing the role of government in their economies. Lacking smart fiscal
policy, the ECB feels compelled to pursue an aggressive monetary policy to stimulate growth and fend off
deflation. Unfortunately, unprecedented monetary stimulus, currency devaluation, and interest rates
hovering around zero have thus far failed to put the global economy on a solid footing. The U.S. economy
is doing the best, but their results are only mediocre. Global economies and markets are fragile, and it
appears further currency devaluation and monetary stimulus remains the preferred policy prescription.
This reality creates a conundrum for investors. Historically safer asset classes, such as cash and bonds, yield
virtually nothing and are exposed to fiat currency depreciation. Alternatively, investment options that
should offer good long-term protection against currency depreciation, such as common stocks, are
exposed to economic cycles and mood swings among investors as reflected in stock market valuations.
Considering relative valuations and government policy, common stock should be the preferred long-term
investment choice. However, investors will likely need a strong stomach for stock market volatility as
governments and central banks continue experimenting in an attempt to revive their economies.
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Perinvest Harbour US Equity – Q4 2014
NAV evolution of Perinvest Harbour US Equity A USD2
NAV EVOLUTION OF PERINVEST HARBOUR US EQUITY A
PERFORMANCE SUMMARY OF
PERINVEST HARBOUR US EQUITY
A AS OF 31/12/2014
CALENDAR YEAR PERFORMANCE OF PERINVEST HARBOUR US EQUITY
A SINCE 2011 (AS OF 31ST DECEMBER OF EACH YEAR)
Cumulated returns
December
YTD
1 year
0.2%
12.3%
12.3%
Annualized returns
3 years
Inception*
16.2%
11.0%
Returns are calculated in the reference currency (USD) and do not reflect any entry charges you might have to pay.
Past performance is no guarantee of future performance.
* The A share class has been launched on 8th December 2010.
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There are other share classes (B EUR and C GBP) and the relevant statistics are available on request and free of charge from
TreeTop Asset Management S.A. 12 rue Eugène Ruppert L-2453 Luxembourg and are also presented on our website
www.treetopam.com
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Perinvest Harbour US Equity – Q4 2014
WARNING
The present quarterly management report does not provide complete information about Perinvest
Harbour US Equity and should therefore be read before any investment together with the Key Investor
Information Document (KIID) available in French, Dutch and English, the prospectus of Perinvest (Lux)
SICAV (in English only), as well as the latest annual/semi-annual report of Perinvest (Lux) SICAV (in
English only). These documents are available on request and free of charge from TreeTop Asset
Management S.A. 12 rue Eugène Ruppert L-2453 Luxembourg, from the bank in charge of the fund
administration in Belgium: Banque Degroof NV/SA, rue de l'Industrie B-1040 Brussels or on
www.treetopam.com.
Regarding the Perinvest Harbour US Equity A USD share class (capitalisation): the Net Asset Value is
calculated on a daily basis and published in L’Echo, subscription fees are freely negotiable up to 5%, the
Stock Exchange Transaction Tax in case of redemption/sub-fund transfer is 1.32% (max €2,000) since 1st
January 2015, the minimum subscription amount is $5,000, and the Belgian withholding tax is currently not
applicable.
Although they are based on the best possible sources, the figures in this document have not been audited.
Furthermore, the present quarterly report contains opinions that should not be considered as investment
advice.
Distributor:
Investment Manager:
TreeTop Asset Management S.A.
Perinvest (UK) Limited
12 rue Eugène Ruppert
L-2453 Luxembourg
8 Waterloo Place
London SW1Y 4BE
Tel : +352 26 36 38 22
Fax: +352 26 18 75 97
Tel : +44 20 7451 1480
Fax: +44 20 7451 1489
www.treetopam.com
www.perinvest.com
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