QUARTERLY COMMENTARY | 31 December 2012 Mutual Global Discovery Fund
vestment Team KEY POINTS
• Post-election investor distress regarding the US “fiscal cliff” drove rapid
movements in global financial markets for part of the fourth quarter.
European equities benefited from an improved outlook, outperforming their
• Three of the fund’s largest contributors to absolute performance were UBS,
• In contrast, three of the fund’s main detractors from performance for the
Peter A. Langerman Philippe Brugere-Trelat
quarter were Vodafone Group, Exelon and Microsoft.
PORTFOLIO MANAGER INSIGHT Market Review
Post-election investor distress regarding the US “fiscal cliff” drove rapid movements
in global financial markets for part of the fourth quarter as negotiations continued
about how to postpone this set of imminent spending cuts and tax increases. In the
US, consumers spent more, partly due to stronger income and hiring as the
country’s real-estate recovery strengthened, but manufacturers teetered between
growth and contraction during the quarter.
The state of the global economy remained tenuous. While economies in China
and Brazil began to gradually improve, Japan and India were still on the
downslope. After China’s gross domestic product growth slowed to a three-year
low point last quarter, an acceleration in factory output for October and
subsequent expansion in industrial activity gave the country’s economic
turnaround more credence. Brazil’s interest-rate cuts and tax breaks helped its
economy to grow slightly in the third quarter after a prolonged stagnation, but
industrial output fell in November. Japan again expanded its asset purchase
program after a decisive general election victory for Shinzo Abe, making more
aggressive currency easing and economic support likely to come.
The eurozone remained in a deep economic downturn, but more cohesion in
Europe relieved part of the longstanding market tension from the region’s
sovereign debt crisis. Although many investors were disappointed by Spain’s
reservations about requesting a sovereign bailout and Greece’s larger-than-
anticipated financing gap, panic that had previously defined the crisis did not
surface during the quarter. European equities benefited from that improved
outlook, outperforming their US, Latin American and Asian peers for the quarter.
Although an accord on the US fiscal cliff was reached shortly after quarter-end,
weakness in US equities pressured developed-market equities to underperform
During the fourth quarter of 2012, three of the fund’s largest contributors to
absolute performance were UBS, Citigroup and General Motors. UBS is a global
financial services company with a leading wealth management franchise. The
market reacted favorably to the company's fixed income, currency and
commodities restructuring plan, which will lower earnings volatility, reduce costs
and improve the company's capital position. The LIBOR manipulation settlement
announced in December had little impact on the stock price. We believe the fine,
although large, will not have a material impact on the company’s performance
The globally diversified financial services holding company Citigroup announced solid fiscal third-quarter
results in October. In addition, Citigroup’s new CEO, Michael Corbat, announced a number of repositioning
actions aimed at reducing expenses. Cost reduction actions were expected but the announcement came
sooner and was broader than the market had anticipated, helping the stock to appreciate in December. In our
view, the company remains attractive as it maintains exposure to fast-growing international markets and
Shares of General Motors (GM) moved higher during the fourth quarter due to continued operational success,
as well as the announcement that the federal government would begin to exit its stake in the company. The
company’s third-quarter results exceeded consensus estimates as North American and International segments
performed particularly well. Toward the end of the year, GM also announced that it plans to repurchase 200
million shares of its stock for $5.5 billion from the US Treasury, which is seeking to exit its position in GM over
In contrast, three of the fund’s main detractors from performance for the quarter were Vodafone Group, Exelon
and Microsoft. Vodafone Group is a global mobile telecommunications company that provides a range of
services, including voice and data communications. The UK-based company struggled in the fourth quarter
due to a combination of steeper-than-expected deterioration in revenue trends, ongoing economic weakness
in Europe and the potential implications of a December Dutch spectrum auction. However, we believe there
are several possible catalysts to potentially drive the stock to our estimated intrinsic value, including improving
economic conditions in Europe, better revenue per customer as a critical mass of customers migrate to data-
oriented plans, and a larger 2013 dividend payment from its 45% stake in Verizon Wireless.
Exelon detracted from performance as management warned that it may cut the dividend if fundamentals do
not improve and the ratio of funds from operation to debt deteriorates. Despite the short-term challenges, we
see potential in Exelon due in part to its clean merchant power generation assets, and regulated entities in the
Midwest, eastern Pennsylvania and metro D.C. areas. At current valuations, Exelon presents an attractive
investment opportunity. The stock also provides the fund with solid dividend yield.
Microsoft detracted from performance this period after announcing quarterly revenues and earnings that
missed expectations. The softer-than-expected numbers were due largely to the sequential decline in
Windows sales ahead of the pending Windows 8 release. We are optimistic that the recent launches of
Windows 8 and the Surface tablet will be major drivers in improving operational performance during the next
Outlook & Strategy
In the fourth quarter, investors focused on headlines as the state of the global economy remained uncertain.
Europe’s sovereign debt crisis continued to steadily move in the right direction; China’s economy showed
signs of improvement, while nervousness regarding the US “fiscal cliff” returned after the presidential election.
We expect investors to remain somewhat cautious amid the uncertainty surrounding the strength of the global
Heading into 2013, we also expect further progress will be made toward the construction of a European
solution to the sovereign debt crisis but recognize that the process is complex and cumbersome and requires
market pressure to force progress. We cannot predict the timing and manner of a complete and final resolution
to the European debt crisis but believe more than ever that the euro will survive. From our perspective, the
situation remains politically—not financially—driven. Therefore, we believe opportunities exist in Europe for
patient and discerning investors. Indeed, it appears that investors are increasingly seeing Europe as we do
with the region’s stocks soundly outperforming the US over the second half of 2012.
In the US, we remain hopeful that politicians on both sides of the aisle can reach a constructive agreement to
address the issues surrounding the federal government’s fiscal imbalances. However, the process in
December was disappointing and significant policy differences between Republicans and Democrats remain.
A protracted political battle over raising the federal debt ceiling—officially reached at the end of 2012—and
spending reductions could continue to hinder a fragile US economic recovery.
We will also continue to watch China closely given the potential global ramifications of the country’s slower
economic growth and leadership transition. The extent and form of new stimulus adopted will be an important
short-term driver of the outlook but we are also interested in how China’s new leaders act on the need for
greater domestic consumption so that growth becomes more sustainable and less volatile.
While these headwinds will carry into 2013 to various degrees, we did find a new reason for increased
optimism as 2012 wound down. Fundamentals appeared to play a greater role in the price of some individual
stocks during the late stages of the year, and we believe this trend will intensify during the course of 2013.
Overall, we view undervalued securities with catalysts for value realization as an attractive opportunity for
Today’s investment environment may still be considered challenging, but we have been able to find what we
view as solidly undervalued companies with potential catalysts to unlock value in the future. We will continue
to look for quality companies that have been, in our opinion, unduly penalized by investors, while also
maintaining a clear focus on risk. After all, we recognize that even a deep-value, fundamental investing
philosophy cannot disregard today’s economic and political realities.
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