iva funds conf call transcript sept 10 2013 final

7/29/2019 IVA Funds Conf Call Transcript Sept 10 2013 FINAL

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International Value Advisers, LLC

IVA Funds Update CallSeptember 10, 2013

Important Disclosures:

Mutual fund investing involves risks including possible loss of principal. There are risks associatedwith investing in funds that invest in securities of foreign countries, such as erratic marketconditions, economic and political instability and fluctuations in currency exchange rates. Value-based investments are subject to the risk that the broad market may not recognize their intrinsicvalue. An investor should read and consider thefunds investment objectives, risks, charges

and expenses carefully before investing. This and other important information are detailed in

our prospectus and summary prospectus, which can be obtained by calling 1-866-941-4482 orvisiting www.ivafunds.com. The IVA Funds are offered by IVA Funds Distributors, LLC.

Total Returns as of 6/30/13 1 Year Since Inception Annualized (10/1/08)

IVA Worldwide Fund A (no load) 12.35% 11.11%

IVA Worldwide Fund A (with load) 6.72% 9.92%

IVA Worldwide Fund I 12.61% 11.36%

IVA International Fund A (no load) 13.86% 10.77%

IVA International Fund A (with load) 8.13% 9.58%

IVA International Fund I 14.11% 11.03%

Past performance does not guarantee future results. The performance data quoted representspast performance and current returns may be lower or higher. Returns are shown net of fees and

expenses and assume reinvestment of dividends and other income. The investment return and

principal value will fluctuate so that an investors shares, when redeemed may be worth more or

less than the original cost. To obtain performance information current to the most recent month-

end, please call 1-866-941-4482.

As of the most recent prospectus, the expense ratios for the funds are as follows: IVA WorldwideFund: 1.28% (A shares), 1.03% (I shares); IVA International Fund: 1.27% (A Shares), 1.02% (Ishares). Maximum sales charge for the A shares is 5.00%.

As of June 30, 2013, the IVA Worldwide Funds top 10 holdings were: SIGB (SingaporeGovernment) 2.25% 2013, 3.625% 2014 (5.2%); Wendel 4.375% 2017, 4.875% 2016, 6.75% 2018(4.0%); Gold bullion (4.0%); Berkshire Hathaway Inc. Cl A; Cl B (3.4%); Astellas Pharma Inc.(3.2%); Devon Energy Corp. (2.5%); Nestle SA (2.2%); Genting Malaysia Berhad (2.1%); OracleCorp. (2.0%); Expeditors International of Washington Inc. (1.9%).As of June 30, 2013, the IVAInternational Funds top 10 holdings were: SIGB (Singapore Government) 2.25% 2013, 3.625%2014 (6.8%); Gold bullion (3.9%); Astellas Pharma Inc. (3.5%); Wendel 4.375% 2017, 4.875%


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2016, 6.75% 2018 (3.5%); Genting Malaysia Berhad (3.0%); Nestle SA (2.9%); Total SA (ADR)

(1.6%); E-mart Co. Ltd. (1.6%); Orkla ASA (1.4%); GDF Suez SA (1.4%).

MSCI All Country World Index is an unmanaged index comprised of 45 country indicescomprising 24 developed and 21 emerging market country indices and is calculated with dividendsreinvested after deduction of withholding tax. The Index is a trademark of Morgan Stanley CapitalInternational and is not available for direct investment.

MSCI All Country World Index (ex U.S.)is an unmanaged index consisting of 44 country indicescomprising 23 developed and 21 emerging market country indices and is calculated with dividendsreinvested after deduction of withholding tax. The Index is a trademark of Morgan Stanley CapitalInternational and is not available for direct investment.

One basis point equals 0.01%.

The views expressed herein reflect those of the portfolio managers through September 10, 2013 anddo not necessarily represent the views of IVA or any other person in the IVA organization. Anysuch views are subject to change at any time based upon market or other conditions and IVAdisclaims any responsibility to update such views. These views may not be relied on as investmentadvice and, because investment decisions for an IVA fund are based on numerous factors, may notbe relied on as an indication of trading intent on behalf of any IVA fund. The securities mentionedare not necessarily holdings invested in by the portfolio manager(s) or IVA. References to specificcompany securities should not be construed as recommendations or investment advice.

The IVA Worldwide Fund and the IVA International Fund are closed to new investors.

Tara Hannigan: Good afternoon and welcome to the semi-annual IVA Funds update call. Wethank you for joining us. I am Tara Hannigan, director of mutual funddistribution. Our goals on this call are to update you on the Funds and shareour current investment thinking.

Our portfolio managers, Charles de Vaulx and Chuck de Lardemelle, willspend about 30 minutes giving an update and explaining what they are seeingaround the world today. And then we'll open up the call to questions.

To update you on IVA as a firm, as of August 31, 2013, we hadapproximately $17.9 billion in total assets under management with our twomutual funds comprising $12.0 billion of that total. Both Funds remainclosed to new investors.

A quick note on performance. As of June 30, 2013, the IVA WorldwideFund Class I returned 12.61% for the one year period while the MSCI AllCountry World Index returned 16.57% over the same period. Since the


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Funds October 1, 2008 inception, it returned 11.36% on an annualized basis

while the MSCI All Country World Index returned 6.42% over the sameperiod.

As of June 30, 2013 the IVA International Fund Class I returned 14.11% forthe one year period while the MSCI All Country World (ex-U.S.) Indexreturned 13.63% over the same period. Since the Funds October 1, 2008inception, it returned 11.03% on an annualized basis while the MSCI AllCountry World (ex-U.S.) Index returned 4.46% over the same period.

Year-to-date through Monday, September 9, 2013 the IVA Worldwide FundClass I returned 11.26% versus the MSCI All Country World Index return of12.29%. The IVA International Fund Class I returned 9.76% versus theMSCI All-Country World (ex-U.S.) Index return of 6.91%.

I will now hand the call over to Charles.

Charles de Vaulx: Thank you, Tara. Good afternoon.

The last time we had a conference call was mid-March. It seems that a lothas happened since then. Emerging markets have been hit hard: equities,currencies, and bonds. Bond markets, including US Treasuries, have alsocome down sharply. Many equity markets corrected quite a bit late May andinto June, including Japan, which then corrected some 20%. And today,there are now increasing geopolitical worries with Syria, in particular.

At the same time, there have been signs that the US economy is doingslightly better, that the Eurozone economies are stabilizing, and things arelooking up for Japan. Corporate profits remain at elevated levels worldwide.Stock buybacks are back in the US. And we have seen a few cash takeovers,the latest example being Molex -- the Molex acquisition announcedyesterday.

But for us at IVA, it feels today that we are back to where we were sixmonths ago, even though we tried to take advantage of the correction in lateMay and June when we became net buyers. We have since then become netsellers again. Not fun.

Chuck and I have argued for over a year now that equities were probablythe best house in a bad neighborhood. That is to say that equities, albeitnot cheap, still look good compared to cash or high-quality bonds that offervery low yields, and in fact, often have negative yields in real terms once oneadjusts for inflation.


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Yet, we have not been willing to walk the walk and be fully investedbecause we believe that buying new stocks that do not offer enough of amargin of safety or not selling existing positions once they reach ourintrinsic value targets, that indeed would violate the central tenents of valueinvesting. And that would compromise and endanger our attempt tominimize drawdowns and losses in the portfolios.

The good news is that this year our stock picking has been good enough tooffset, to a large extent, the fact that we have been less than 60% invested, onaverage, in equities year-to-date with, as Tara mentioned, the IVAWorldwide Fund Class A shares up 11.13% versus 12.29% for thebenchmark, the MSCI All Country World Index, while the IVA InternationalFund Class A shares are up 9.57% versus 6.91% for the MSCI All CountryWorld (ex-US) Index.

Now I think it's important to highlight how, this year, we have achieved thisperformance.

First, it has been a combination of some good stock picking. Most of ourJapanese names have done exceedingly well, including domestic names,non-export oriented stocks, such as Temp Holdings or Yahoo! Japan. InEurope, many names, such as Teleperformance, UBS, Bollore, or even M6,the French TV company, or in the US, names such as Google, TheWashington Post, Berkshire Hathaway, or even Sealed Air, but also somenames that hurt us last year, such as Dell Computer or Hewlett-Packard.

Second, in terms of explaining our performance year-to-date, it is again thesimple power of avoiding the losers. And the result of some of the negativebets we have been making. In particular, avoiding emerging markets, to alarge extent, the BRICs (Brazil, Russia, India, China), in particular, whichAlbert Edwards, the bear from Societe Generale, has dubbed the BloodyRidiculous Investment Concept. Avoiding commodities and cyclical nameshas paid off as well this year along with avoiding long-duration bonds.

Finally, earlier this year, reducing our allocation to gold as well as avoidinggold mining stocks like the plague has also helped our performance.

Today, looking at the portfolios of both the Worldwide and InternationalFunds, you will see that we have never been as defensive as we are today asboth Funds have less than 55% in equities along with a very modestallocation to high-yield bonds. I find high-yield to be a misnomer as mosthigh-yield bonds today offer pretty low yields indeed.


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So why are we so defensive? It seems to us that many bonds and manystocks around the world are priced for perfection. In many ways, that wouldseem very rational and logical as stocks do not have to be cheap to competeagainst cash or bonds that offer such low yields. A combination of tepideconomic growth, record-high corporate profit margins, and ultra-lowinterest rates seem to be a wonderful recipe for what we have dubbedrational exuberance.

While there is no law of gravity that says that financial assets that are pricedfor perfection are bound to eventually go down in price, we would feel veryqueasy being fully invested today in such financial assets. While we loathethe idea of holding cash when it yields less than zero after inflation, we'drather own some than hold on to overpriced securities that indeed may godown in price. We also try to remember that cash that yields so little mayone day be the ammunition, the dry powder that hopefully will allow us topounce once genuine investment opportunities resurface as we believe theyare bound to at some point.

Some of you may think of Chuck and me as very cautious types. Restassured that at the right price, Chuck and I are willing to get exceedinglygreedy and we will be ready to pounce if those times ever happen.

One last point on cash. Many advisors have rediscovered in May and Junehow risky and unsafe bonds can be, including Treasury bonds, once theybecome overvalued. And many now recognize that cash may in fact be thesafest asset class. I like the way James Montier from GMO recently put it,"holding cash has the advantage that as it moves to fair value, it does notimpair your capital at all." Our latest newsletter at IVA was a piece on cashtitled "The Optionality of Cash," and I hope you and your clients read it tomake some sense as to why our Funds have such a pretty high allocation tocash today.

We understand that many financial advisors would rather not hold cashdirectly for their clients. So we are more than happy to hold that cash forthem right now! And hopefully, we will know when to redeploy that cashwhen truly attractive investment opportunities present themselves again.

A few words on the economic outlook. The world still seems to be in thethroes of a long deleveraging process, a process that started after thefinancial crisis of 2008. While some parts of the world may be at a moreadvanced stage of that process -- maybe the United States, in particular at theconsumer level, at the household level -- other countries just be joining in


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that process. There are various emerging countries right now that have

witnessed credit bubbles over the past few years and may need to slow thingsdown.

We reckon that the US economy is growing, is muddling through. But weare also mindful that the US economy may not be growing fast enough togenerate enough jobs. And we're also mindful that the US economy stillneeds the help of significant quantitative easing (QE) to keep muddlingthrough.

Europe remains a question mark for us. I think no later than last week,Mario Draghi, the head of the European Central Bank (ECB), was quoted inThe Financial Times saying that he was "very, very cautious about therecovery. I cannot share the enthusiasm. So again, he, too, worries aboutthe sustainability of the small recoveries seen in the Eurozone.

Japan, indeed, is doing better. But then again, Japan remains an export-oriented economy. It does today export more to China than it does to theUS. So should things slow down further in China, that would be anotherheadwind that Japan has to contend with.

China seems to have been the dominant theme impacting markets year-to-date. In May and June, markets were falling; commodities were falling --due to the fear that the Chinese would experience a hard landing.

Things have been looking up since then, but it still remains a big questionmark to us as to which way China will go. There has been a massive creditbubble there over the past seven years, not only with the banks but also theshadow banking system. And we worry about that.

Emerging markets: there is little doubt now that economic growth isdecelerating, will keep decelerating in many countries, such as Brazil, butalso South Africa, India, Indonesia, and Turkey.

Regarding valuation, I would like to make five comments.

First, with a backup in Treasury yields this year, along with the US equitymarket up again this year, the US equity market now offers a dividend yieldof only 1.9% compared to a 10-year Treasury yield of around 2.9%. That isquite a change from several months ago when Treasuries were yielding lessthan stocks.


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Regarding Western Europe, Western Europe as a whole offers a dividend

yield of 3.2%, which beats what German bunds or French treasuries have tooffer. But then again, as we've argued before and Chuck will discuss later,European equity markets, to us, represent a tale of two markets where if youlook at quality stocks, in particular, dividend yields are rather meager there.

Japan, despite the huge rally, remains cheap, trading at 1.2 times book value.To give you an idea, the US today trades at 2.6 times book value. And theJapanese market still offers a dividend yield of 1.9%, which may not lookcompetitive in the US, but definitely looks very competitive compared to 10-year Japanese government bonds that yield only 75 basis points.

Finally, even though many emerging markets are down a lot this year in USdollar terms, they are down a lot less than that in local currency terms, whichis another way of saying that many of these markets have not necessarilycome down enough in local currency terms to offer us genuine bargains.

My fifth comment has to do with emerging markets. We have beenextremely vocal, Chuck and I, over the past few years that one has to becautious with emerging markets. We have repeatedly stressed thatunfortunately, high economic growth does not always translate into goodstock market performance.

Conversely, apropos Japan, we have tried to argue that even in a country likeJapan, which may have muted economic prospects, not to mention somewhatbleak demographic prospects -- countries such as Japan may sometimes beable to offer a few individual stocks, which because of their absolutecheapness, may be able to deliver very strong stock returns indeed.

So this is the paradox of value investing. And it has been interesting for -- toChuck and me this year -- hopefully to our clients as well -- to see on onehand, a huge rally in Japan while at the same time, a pretty severe bearmarket in many emerging markets.

A quick word on gold. As you know, we view gold as a hedge against manythings, extreme outcomes, a hedge against inflation, against deflation. Andas a result of viewing gold as a hedge, earlier this year, we trimmed our goldexposure to around 5%, down from approximately 6% as both of our Fundswere getting more and more defensively positioned and less and lessinvested in equities.

After we did that, the price of gold proceeded to fall off quite sharply. Andas a result of this price movement, our allocation fell to 3.7%. As the price


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of gold bounced back, including very recently with the worries regarding

Syria, that allocation rose back to almost 4.2%. And last week, Chuck and Ireduced our gold allocation to 3.5%.

Relative to financial assets, including bonds, and as real interest rates may beturning either less negative or more positive in some currencies, gold seemsnot as attractive now to us as it was a year ago. We also note that whilephysical demand out of China is still very strong, including after the pullbackin the price of gold this spring, demand from India for gold may be moremuted going forward as the price of gold in rupee terms, in local currencyterms, is at a very high level today.

Allocation to gold remains strictly in the form of gold bullion as we find theproduction costs of most gold mining companies too high for comfort,making many gold mining stocks too speculative in our opinion.

A few words regarding our firm as a whole, International Value Advisers.Chuck and I were very pleased, over the past few months, to add two junioranalysts to our team. Gabriel Farajollah joined us late May. And then a fewdays ago, early September, HJ Lee (from South Korea) joined us as well.

Chuck and I are now helped by 10 analysts along with four traders. Andwe're happy to have beefed up the team.

In terms of assets under management for the firm, it's been very stable. Infact, our assets under management are up a little bit to $18.1 billion,reflecting NAV appreciation as inflows/outflows have been quite neutralover the past few months. In fact, we've been seeing very modest netinflows. And as you all know, we remain open only to existing investors.

In conclusion, we find the current investment landscape very difficult andtreacherous as it offers prospects of low returns, yet with some significantrisks. Risks of inflation down the road; risks of profit margins trendingdown in the future; risks of dislocation in China if a soft landing is notpossible.

The investment environment is particularly difficult if one's goal as aportfolio manager is to preserve wealth, that is to say in real terms, adjustedfor inflation, and to minimize drawdowns. But as we already said sixmonths ago, the even greater challenge today lies with financial advisors,fiduciaries and institutional clients out there that have the delicate task ofhaving to convey to their clients that financial assets will probably deliver


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very low returns for many years to come, and that volatility may also remain

here for a while, including with bonds.

This is not always an easy conversation, particularly when it means that anindividual client may have to change their lifestyle, consume less, save more,and maybe even work many more years before actually being able to affordretirement. In the case of an institutional client like an endowment or apension plan, it may mean the painful realization that some actuarialassumptions may realistically have to be modified in terms of the likelyreturns on those endowment or pension plan assets going forward.

Beyond the painful resetting of expectations, good advisors also need to helpclients grasp how asymmetrical things can be, especially when it comes toone's savings. Instead of emphasizing the need to take even higher risks topotentially achieve higher rewards - but also possibly ending up with steepimpairments of capital - in the low return world, advisors may also want toremind their clients of one of Warren Buffets quotes, "there is no need torisk what you have and need for something you do not need and do nothave."

I would like to end my formal part of the conference call by mentioning threebooks I've enjoyed reading recently. Books that I recommend highly, andnot only because I was mentioned and quoted in those three books!

The first two are very much investment related and more specifically dealwith value investing. The same Value that the "V" stands for in IVAFunds.

The first book is The Art of Value Investing, written by John Heins andWhitney Tilson. That book was actually featured in this week's Barronsmagazine where both writers showed a sample of quotes from some oftodays respected value investors. The second book is The Manual of Ideasby John Mihaljevic, who had kindly interviewed me a year ago in the fall of2012. By quoting most respected value investors of our generation, bothbooks do a good job at articulating many of the nuances of value investingand showcasing how Ben Graham's simple idea -- price, value, the need for amargin of safety -- has led, over time, to so many different brands and stylesof investing.

What I personally find so remarkable and encouraging is how valueinvesting has finally become global, global as in worldwide. Twenty-fiveyears ago, it used to be a very US-centric affair. Value investing waspracticed by US investors looking at analyzing US stocks only. Today, value


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investors try to find unvalued securities everywhere in the world, including

in emerging markets. And value investing today is practiced by valueinvestors from many parts of the world, be it in New Zealand by my friendChristopher Swasbrook or in Switzerland by my friend, Michelle Conus andby so many others, be they in Germany, South Korea, or even Japan andBrazil.

The third book is a book on the Bank for International Settlements, the BISthat we [at my previous firm] used to be shareholders of many years ago assome of you may remember, especially since we had to fight them in court successfully, I might add. The book is called The Tower of Basel: TheShadowy History of the Secret Bank That Runs the World. It is written byAdam LeBor. It is a very good account, in my opinion -- in fact, the onlyaccount I'm aware of, frankly, of a very powerful organization that isaccountable to no one. In particular, the book has many disturbing pages onthat bank and its managers' rather questionable activities during World WarII with Nazi Germany.

I will now let Chuck carry on with his formal part of the conference call.

Chuck de Lardemelle: Thank you, Charles. I will now describe briefly how our mutual funds arepositioned as of Friday, September 6, 2013, and make some brief remarks onthe investment landscape.

Currently, our overall equity exposure is roughly 52.5% in Worldwide and54% in International. Our corporate high-yield bond exposure is 7% inWorldwide and 6% in International. Our gold bullion exposure is 3.5% inboth Worldwide and International. Sovereign government bonds of shortmaturities (less than three years) account for 6% of Worldwide and 8% ofInternational. Our US dollar cash levels are 31% in Worldwide and 28.5%in International.

In terms of geographic exposure to equities, for the Worldwide Fundapproximately 24% of the Fund is invested in US equities and preferredshares, 12.5% in European equities -- and that includes 8% in the Eurozoneand 4.5% in other European countries, and 14.5% in Asian equities, withJapanese equities being 9% of the Fund. Roughly 1.5% is invested in SouthAfrica and Brazil.

As for the International Fund, approximately 29% of the Fund is invested inAsian equities with Japan being 17% of the Fund and South Korea 3.5%.And 22.5% is in European equities, 16% of that in the Eurozone. Roughly2.5% in equities is split between South Africa and South America.


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Finally, our Japanese yen exposure is roughly 50% hedged in Worldwide,60% in International, while our euro exposure is approximately 40% hedgedin Worldwide and 30% hedged in International. These hedges include orcorporate bond exposure.

In Japan, we took advantage of the substantial run to reduce some positions,especially less liquid or where capital allocation has been poor. Keep inmind that our Japanese portfolio is unusual, in that we own few exporters.Accordingly, we have a substantial portion of the yen exposure hedgedbecause a fall in the yen is not immediately reflected in higher share pricesfor local non-exporting companies.

In my opinion, the most important metric to watch short term may be wageinflation in Japan. Higher wages would be a sign that Prime Minister Abe iswinning his fight against deflation. There are encouraging signs, especiallyin Tokyo.

The path of success for Japan is narrow, with a huge amount of Japanesegovernment debt currently outstanding. And 95% owned by the Japanesethemselves, it is unclear if foreigners may be willing to fund that debt in thefuture.

Therefore, Abenomics may work as long as the current account balanceremains in surplus. Higher consumption yet higher overall savings couldperhaps be achieved with higher corporate profitability. In any case, we'rewatching the current account numbers carefully to understand when thegovernment debt situation may become precarious in Japan. While thecountry is currently in a trade deficit, a current account deficit may be anumber of years away. In the meantime, I'm enjoying the rally.

There are a number of excellent local companies still trading at reasonableprices in a depressed yet recovering economy. We're trying to stay focusedon higher quality business models. Daiichikosho, Miura, or Azbil are greatexamples of seemingly dull, boring industrial companies, yet possess veryattractive characteristics of high margin recurring income. In the case ofDaiichikosho, a manufacturer of commercial karaoke systems with highmarket share, profits are increasingly coming from recurring subscriptions tonew content. Miura, a manufacturer of industrial gas-fired boilers, with adominant market share and unique technology, generates almost all of itsprofits from a recurring stream of payments for long-term maintenancecontracts. Azbil, involved in high-rise building automation and commercial


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planet control systems, also derives a very large share of profits from

maintenance of existing systems.

All three companies are overcapitalized, some more than others. All threehave market capitalization in excess of $1 billion yet are barely covered bythe sell side. All three, in our opinion, currently sell at very reasonablemultiples of enterprise value to operating earnings. So while the Japanesemarket has gone up, valuations remain reasonable overall in our opinion, anddo not yet reflect intrinsic value, especially in the mid-cap, non-exportingsegment.

Europe remains difficult for us. Too much hangs in the balance of politicaldecisions. High-quality equities remain very expensive while telecom,banking and utilities are depressed, perhaps for good reason. In between, anumber of small industrial companies can offer decent opportunities. Mosthave gone up substantially though, and in some cases, including a few weown, we believe further appreciation may depend on an improving Europeaneconomy.

In the US, valuations look full to us. We made Berkshire-Hathaway a largeposition when the discount to our sum of the parts was large and the stockwas priced like one of those passive holding companies one can sometimesfind in Europe. Yet today, that discount has narrowed very substantially andforced us to reduce the position.

In technology, you may notice Oracle showing up in the top 10 holdings inthe Worldwide Fund. We took advantage of the volatility in the name to addto the position on weakness. A very large portion of the value is embeddedin recurring payments for software maintenance, and capital allocation by thecompany has been smart, historically, a rarity in the tech sector in general.

We find no opportunities in high-yield whatsoever. Our allocation thereremains of short-duration and is the remnant of large investments in high-yield in 2009.

For the first time since the Great Recession, it seems that the next FederalReserve move will be to become slightly less accommodative. Thisannouncement triggered a violent reaction in the Treasury market, where a10-year yield has moved from roughly 1.65% in May to close to 3% today.Given inflation around 1.5% and low, yet positive real growth in the US, thisre-pricing of Treasuries seems appropriate for the US economy. And in factversus history and current inflation, these yields are still on the low side, butnot inappropriate anymore, we believe.


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While perhaps adequate for the US economy, these movements triggered aninteresting few weeks in markets, when all asset classes re-priced lower:developed equity markets, both corporate and sovereign bonds, commodities,gold, as well as emerging market equities and debt went down in unison.

Emerging markets, in particular, proved vulnerable to higher US long-termrates. We're finding more names to research in that space. In particular, ourexposure to Chinese equities, which have performed poorly since the end of2009 relative to other markets, is slowly rising from very low levels, throughHong Kong listed securities. Currently, direct exposure in China, in theWorldwide Fund, is 0.6%, through Hong Kong listed equities, while theInternational Fund direct exposure to China, through Hong Kong, is roughly2.5%. We continue to believe that the Chinese economy faces greatchallenges, in the form of overinvestment in property and infrastructure.This government mandated construction may eventually lead to a potentialbad debt crisis and the banking system being recapitalized by the Chinesetaxpayer. Yet, the country is self-financing as shown by its current accountsurplus. The situation looks comparable, to some extent, to Japan in the late'80s, not to the Asian tigers of 1998. A long and protracted malaise seemsmore likely to us than to a sudden catastrophic uncontrolled devaluation.

In addition, the companies we own in the portfolio are representative of theChinese economy of tomorrow: IT product distribution, shopping malls, foodand beverage, and advertising. None is government controlled. This recentshift in the portfolio has been very gradual, slow, and cautious. Goodbusinesses, managed for shareholders, are hard to find in China. We wouldneed much lower valuations and many more opportunities to be willing toincrease our exposure there substantially. To conclude, direct exposure toemerging markets remains low in both Funds for now.

Because of our strong bias towards preservation of capital, we would expectto outperform benchmarks in bear markets or difficult markets, andunderperform in stronger markets or towards the end of a long, old bullmarket. We do not pay attention to benchmark performance over a month, aquarter or over a year. Over the long term, however, we aim to deliverattractive absolute returns and hopefully, do as well or better than theseequity benchmarks.

All of us at IVA are extremely grateful for your continued and unwaveringsupport.


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This concludes my prepared remarks. I'd like to turn the call back to the

operator to open up for questions.

Question: Hi, thanks for staying disciplined and having the courage to hold some cash,which as you mentioned, gives you an option on all sorts of assets when theybecome cheap.

Two quick questions. One, much has been written in The Financial TimesandTheWall Street Journal recently about James Montier's regression to themean theory with the respect to profit margins and Professor Bob Shiller'sPE Ratio, which uses an average of 10 years of earnings. Do you believethese guidelines have merit and do you consider them in your stock analysis?

And the second question is, could you give us an update on GDF Suez andAstellas Pharma?

Charles de Vaulx: Okay. I'll try to answer the first question. I do not totally believe inreversion to the mean when it comes to corporate profit margins. I reallybelieve that starting in the mid-80s, many things changed, hopefully forever,that result in managers of companies paying a lot more attention than theyhad to before to shareholders, and making sure that profit margins are as highas possible while still delivering good products to their clients.

I also believe that there are more industries today than before that are lesscapital intensive. Think about Apple, Google, eBay. Business models thatare more global than ever before. Think about some of the consumerbranded goods manufacturers like Nestle, Diageo. So I think that many morebusinesses have the capability to offer much higher margins, much higherreturn on capital employed, maybe much stronger moats than ever before.

I also believe that antitrust authorities around the world, including Europewhere they tend to be tough, have been pretty lenient, allowing somesignificant consolidation in various industries. So I do believe that some ofthese secular changes will remain long lasting.

At the same time, I also believe that the tremendous decrease in interest ratesthat have taken place in many countries, including the US, since 1982 hashad a profound impact on profitability. Very low interest rates and variouscredit booms in many parts of the world has also allowed for consumption inmany parts of the world to be above trend.


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And that's where I think things will not be sustainable. I think that interest

rates are bound to get higher in the future. I also think that banks will be lesseager to lend than they have in the past.

So I think the best way to think about it is one company at a time. You haveto look at each individual company and assess how strong their moat istoday. There are some consumer products that are much more likely to facepressure from private labels than other products, for instance.

So that's my answer to that one. Chuck, if you have anything to add and thencomments on Astellas and GDF Suez?

Chuck de Lardemelle: Thank you, Charles.

And it's true also. as Charles mentioned, if you look back to say the '40s orthe '60s, a lot of the exports in the US were manufacturing companies or automanufacturers. Today, a lot of these companies are software companieswhere we believe that margins are likely to remain very high once you'veachieved critical mass.

So there are some skews in there that are not easy to untangle.

In terms of the Shiller PE Ratio, one thing I would like to point out is, let'stake an example. Lets say that Company A wants to buy Company B, andrecords $30 billion of goodwill when they make that acquisition. And then afew years later, that goodwill is written down in half. Well, in the Shiller PERatio, you're going to record a loss of $15 billion when the goodwill iswritten down. But you never record any of the earnings, the $30 billion ofgoodwill that would be recognized or the premium that was spent by theacquirer.

So the Shiller PE Ratio has been a bit distorted by a number of very largeacquisitions towards the late '90s, early 2000s in technology. And so that'swhy I like to use market capital to GDP, which I think takes that issue off thetable.

On that metric we are at elevated levels, I think its true of margins as well.Although we wouldn't expect necessarily margins to fall back to the long-term average.

So even though those ratios are not perfect and those metrics are not perfect,they point to some clues. And those clues tend to point today to a fairly highvaluation for the US market.


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As for Astellas and GDF Suez, let's start with Astellas. Astellas is apharmaceutical company in Japan. It's a very large company with tens ofbillions of market cap. There are a number of positive developments that ouranalyst, Thibaut Pizenberg, had recognized.

The first one is that the company does not screen well. If you look atrevenue growth, its revenues have been declining for a number of years andso have profits because you have two very large drugs going off patent that anumber of years ago were more than two thirds of profits, today they are lessthan a third.

And we are getting this inflection point, where the pipeline, which is verystrong, is starting to produce enough that earnings are growing again andrevenues are growing again. And the sell side is starting to recognize this.

Second, some of the earnings power of the company has been hidden by thefact that Astellas continues to depreciate goodwill, which is very unusual andreally only happens in Japan these days, and will switch to global accountingstandards shortly, within the next year or so. And so the true earnings powerof the company will show up.

As you know, it's been a large position for us because not only is it cheap, ithas some characteristics that are very unusual in Japan of very strong capitalallocation, returning a lot of cash to shareholders through dividends andbuybacks at reasonable prices, and an ability to walk away from acquisitionswhen they become too expensive. And that is quite unusual in Japan and hasallowed us to make Astellas Pharma a large position that continues to dowell for us.

It is still selling at very reasonable multiples, especially if you were to findsimilar companies in Europe or the US with similar pipelines of similar size.Those companies are trading both in Europe and the US at much highermultiples in terms of enterprise value to operating earnings than AstellasPharma.

So we continue to enjoy owning Astellas Pharma and it continues to trade ata very reasonable discount even though that discount has narrowed.

GDF Suez is a bit more complex in the sense that it operates in a very matureindustry in Europe, but it has a number of attributes that we believe have notbeen recognized by Mr. Market.


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The first one is that we believe the dividend may be sustainable. Right now,

they are paying out more than 100% of profits. But they are buildingsubstantial capacity in emerging markets that is going to come online andshould be enough to make the dividends sustainable.

It is the least exposed large utility in Europe, the least exposed to Europeactually where power consumption is not growing. And oddly enough, whatwe found out is that coal prices in the US play a role in the stock price ofGDF Suez because of the shale gas revolution here in the US. Coal priceshave collapsed. That coal has been exported to Europe. It's being usedaggressively in Europe to produce electricity.

If coal prices eventually go back up, that would be bullish for gas-firedplants in Europe. And that would be bullish for GDF Suez.

But in the case of GDF Suez, it is less solid than Astellas Pharma in thesense that they are operating in industries that are not growing. It's quitecapital intensive.

Having said that, it has been well managed, historically, and continues to be.So we've not added to the position at all. We're very price conscious on thatsecurity, but the good news is that the dividend looks more and more like it'sgoing to be sustained.

Question: Thank you very much. I appreciate it.

Question: Great. Thank you. And thanks for the call today.

Two questions. First one, if we start to see some inflationary pressuresmaybe building next year, how would you expect gold to perform in thatenvironment? Obviously, typically, it's used to help combat inflation. Butmaybe it was just in the last 10 or 15 years in unique environments. So justcurious what your expectations would be if we start to see inflation nextyear?

And then secondly, it seems as if the Fund has done a good job of kind ofavoiding trouble, say, Europe in 2011, but hasn't been able to take advantageof when that trouble takes place. So I'm just wondering what has been kindof the -- is it just that the particular securities haven't fallen enough? I'm justa little bit concerned that the Fund isn't taking advantage of the opportunitiesthat it is given at certain times. Thank you.


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Charles de Vaulx: Thank you. Let me try to answer the first question. I think when I had some

comments on gold and I mentioned real interest rates, the idea that over thepast few months with yields back up, real interest rates either are turning lessnegative, or have turned positive, or have become even more positive.

So if inflationary pressures arise next year, it all depends on what happens tointerest rates. If yields go up even more than the inflation, then real interestrates, basically, would be rising and that could hurt gold.

Conversely, if inflationary pressures surface, yet if policy makers aresuccessful at maintaining yields at very low levels, that should spark anotherrun up in gold.

Chuck de Lardemelle: On the question of gold, gold to us is a currency. And so what would be themost bearish for gold would be a large discovery of gold that changes therelative amount of gold you have versus the relative amount of US dollarswe have in the world, which we absolutely do not anticipate.

Back in the days, you had bimetallism between silver and gold. And it wasvery hard to keep the ratios in line because at some times in history, youwere finding more silver than gold and vice versa.

Today, we also have to consider the price of that currency. And so a goodindicator might be how many ounces of gold you need today say to buy ahouse in the US, or how many hours of work you have to put up at theaverage income level to buy an ounce of gold. And on both these metrics,gold today is not yet cheap. It's still somewhat expensive. It was veryexpensive at $1800 and it's still somewhat expensive. So there is still apremium embedded in that currency, gold, for the risk of inflation andperhaps rightly so. Only history will tell.

So those are the two things I wanted to add on gold.

As for our lack of participation or increasing equity exposures when there areissues in the world, one thing that kept us, especially in Europe, from beingmore aggressive is the fear that the European backdrop is still quitedeflationary, which is very negative for equities.

And one of the difficulties, which I think makes this cycle, especially inEurope, different from others, one of the difficulties is that a lot has to dowith political decisions, how this union in Europe will mature, how they willsort out the issues of different fiscal policies in different countries. And that


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has made us, at least up to today, perhaps a bit too cautious on Europe. But

only history will tell.

I am quite happy that over the last year or so we've added four new analysts.They are going through a rigorous training program where Simon Fenwickand Thibaut Pizenberg, who are both partners at IVA, are helpingtremendously. And they will help us going forward looking at more namesand perhaps be a bit more nimble, being able to add more names at thebottom.

As you know, we construct the portfolio name by name. And so in order tobe fully invested, obviously, we need to have, perhaps a larger number ofnames in the portfolio, given how Charles and I like to size positions.

We never want to be in a position where we would be badly hurt by a singlename. And as a consequence, we pay attention to the size.

Liquidity sometimes is also an issue. And so finding the right people shouldhelp in that regard as well.

Charles de Vaulx: Great comments, Chuck.

If I may add one additional comment, which is that each time marketscorrected starting with the summer of 2011, and more recently in May andJune, it was striking to us how the stocks of high-quality companies fell somuch less than the stocks of companies with weaker businesses.

And we have an obvious bias towards quality businesses and we -- despitethose corrections, those quality businesses did not correct enough for us tobuy them. I hope that helps answer your question.

Question: Hi, Chuck. Hi, Charles.

I just want to -- you answered partially the question. But can you elaborate alittle more in Europe and as you alluded to adding a new analyst to help yousort of look for positions in Europe. Can you share with us a little bit ofwhat you are seeing ahead and how you think things will develop so you cancatch the opportunities in Europe?

Chuck de Lardemelle: We are not sure how things are going to develop. But I think it's fair to saythat on one side you have telecom companies, which have a lot of debt andwhere prices are going down, so you have a lot of debt in this deflationaryenvironment.


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You have utilities which have suffered substantially because the market haschanged completely. And all the gas-fired equipment that was put in placewith that is now not economical.

And you have banks. And for the banks, the difficulty there is whether ornot some inflation will come back or whether you're stuck in a deflationaryenvironment.

And unfortunately, it's almost impossible for us to answer that questionbecause a lot of that will depend on the European Central Bank -- andtherefore, on what the Germans allow the ECB to do or not do. And so thatturns us into political analysts. And we just can't do it because we're notpolitical analysts. We recognize this.

On the other side, you have high-quality companies like a L'Oreal, a Danone,a Bureau Veritas. And those pull very, very high multiples. In fact, highermultiples than similar quality companies in the US or in the rest of the world.

In between, you have a number of small and mid-caps. And we've done verywell with those. But whether it's a Bollore, Alten, Teleperformance. Theproblem that we face there is that usually the float is somewhat small, so ithas been difficult to or impossible to build them higher than the currentweights. We are not willing to become completely illiquid in these names.

In that regard, obviously having more help on the analyst side should helpus, finding more of these small and mid-cap opportunities, although I wouldsay today, those discounts have narrowed very substantially even with theones that we still own. You can only make a case that they are cheap if theEuropean economy comes back. It's possible that it does. It's been difficultin Europe for a long time now.

But we understand we're taking a risk with those small and mid-caps at theseprices. But both Charles and I are reluctant to position the portfolio intoeven more extreme positioning than it is today. So we're being very, verycautious today distributing some of our names, especially if they are wellmanaged and the capital allocation is proper.

As for how the economy does in Europe, we don't have a crystal ball. Wedon't know how it's going to do going forward.

Question: Hi, Charles and Chuck. Thank you for the call.


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Could you give us a few a few examples of some stocks that you've recently

exited? At what sort of multiples did you buy them? And what sort ofmultiples did you exit? Just to give us a flavor of how far the market hasrun?

Thank you.

Chuck de Lardemelle: Well, we tend to exit around intrinsic value. And so in Japan, for instance,things have changed substantially. Discounts used to be at 40% plus. Theyhave narrowed to around 20%.

What we like about Japan is that those 20% discounts do not anticipate asuccess of Abenomics. And if that happens, it's possible all these discountsare wrong and they would be even larger.

It's also interesting to note that there has been a shift in Japan. And we hadtwo names recently where management either decided to issue equity or webelieve a large shareholder decided to sell. We also are seeing buyers bid forsome of our large positions in some less liquid companies at premiums. Sothere are signs that people are getting somewhat excited.

But basically, we like to enter positions in the high-quality businesses at 20%plus discounts. In the lower-quality businesses at 40% plus discounts. Andexit them, in the case of high-quality businesses, at intrinsic value or slightlyhigher.

In cases where you don't have the liquidity you would like or capitalallocation has not been great, we accept to get out a bit earlier. Basically,between the time we buy and the time we sell, some stocks have gone upanywhere between 30% and 50% over a two, three-year period. And if wehave held them for much longer because it took a lot longer for the market torecognize intrinsic value, if it's been a success, obviously, it's been going up,typically, more than 50%, which means for a regular company in Japan weare entering the name usually around 5 time EBIT, selling at 9, 10 times. Inthe US, it would be typically entering around 8, selling around 12 times forgood quality businesses. And the same in Europe. Typically enteringaround 8, selling around 12.

You can't generalize. There are businesses where we wouldnt enter above 5times and we usually would be out at 8 times.


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Question: Yes, I was wondering if you could give your philosophy a little bit on

energy? I noticed you had Devon and so if you could talk a little bit aboutwhat you think about natural gas, oil, and fracking.

And then my other two questions are one, just sort of a follow up on the goldstocks versus bullion. Some of them like Newmont seem like they're tradingas low as back in '94. So I was curious to see if you thought the stocks werecheaper than the price of gold.

And then, Expeditors, if you could just talk about that since it is in your topholdings and it is located in Seattle. So I'd like to know your rationale there.

Charles de Vaulx: Chuck, do you mind taking the first and third question? I'll tackle gold.

Chuck de Lardemelle: Okay. Yes, on Devon, natural gas and oil. Natural gas looks very depressedrelative to oil still. Obviously, there has been a revolution there. You haveto take that into account. So we're using very, very cautious assumptions inour long-term prices for natural gas. We're using 4.5/mmBtu because webelieve that anywhere above 4/mmBtu you have new supply coming up inthe US.

And that's going to be the case until hopefully LNG capacity is built and wecan export some natural gas. Some are talking about natural gas being usedfor trucks, which would help as well.

But I think you have to recognize that this relationship between oil andnatural gas is broken so we use very low natural gas prices vis--vis oil goingforward in our intrinsic values.

On oil, we are quite cautious. We use $85/barrel in the US as an equilibriumprice for oil. The fact that in the US we're finding a lot more oil is obviouslybearish worldwide. Global growth is not rapid enough that we would see theoil market being very tight for very long. And so we are quite cautious onoil as well.

Now why Devon? We don't have huge exposure to oil and gas. Devonstrikes us as a good balance between oil and gas. They have a lot of naturalgas liquids which trade at a premium to natural gas yet a large discount to theequilibrium oil.

But they also have Canadian oils and most importantly, for extractiveindustries like oil and gas, there have been very shrewd capital allocatorsover time. They are not promotional. They have a very conservative


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balance sheet so we can ride a depressed oil or gas price for a while without

being impaired by capital increases.

And so we continue to like Devon. And you can actually make a comparisonwith gold versus bullion in the sense that we believe that with Devon, we arebuying oil and gas at very substantial discounts to 4.50/mmBtu and $85.

While in gold stocks, it's not clear to us that you're buying bullion at adiscount. And at the end of the day, they are in very similar industries, justdifferent commodities.

On Expeditors, I think it's an interesting name for different reasons. Wellfirst, it's been extremely well managed for decades. And we were able toenter the name at reasonable valuations, 10, 11 times EBIT. So we werewilling to pay a slight premium to what we usually pay recognizing that thecompany's extremely well managed.

Now historically, you have had global trade basically two times GDP. Twotimes global GDP. And Expeditors taking share. I think it's interesting tonote that since the crisis, global trade has been very anemic. And bothExpeditors and Kuehne + Nagel, the equivalent in Europe, which is moreexposed to sea freight, have recorded -- even though they have taken share --or at least have not lost share -- they have recorded tepid top line growth.

And at the same time, what we've seen is the trade surplus of China hasshrunk very substantially. The trade surplus of Japan has turned into a tradedeficit. And so you see at the company level, what's happening at the globallevel, which is a rebalancing of trade, globally. So we've lost in the US ournumber 1 and 2 buyers of treasuries, which were China and Japan. It's beenreplaced by Bernanke.

Now, there is a price at which treasuries will find buyers. No question. Butit's interesting to note that this rebalancing is happening behind the scenesand has created issues for emerging markets, in the sense that these emergingmarkets used to have a large trade surplus. More and more foreign currencyreserves. And that has stopped as well.

And it reversed in some cases. And it has made emerging markets quitevulnerable to a shakeup and the trigger for the shakeup was interest ratesmoving up on the 10-year.

All this to say that Expeditors is probably in a less advantageous situationthan it was 10 years ago, in the sense that for some reason, global trade is not


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as buoyant as it once was. The multiples, at least on an enterprise value

(EV) basis are still reasonable, it's not a cheap stock on PE basis, its stocklooks expensive because they have a lot of cash.

And so we've been trimming the position as the stock went up. And withthat, I'm happy to let Charles take the question on gold and gold miningstocks.

Charles de Vaulx: Yes. For gold mining stocks, now, for Newmont Mining, I think -- did youmention 1994?

Question: I think I did just looking at the graph. But I was curious...

Charles de Vaulx: It's a great question. I think there are two major things that have changed,which renders the past, especially relative to valuation, totally irrelevant.The two changes are one, in '04, '05, '06, the advent of the gold ETF. Whenthe gold ETF was born, there was no longer a need, if one wanted exposureto gold, to pay this huge premium that people used to pay back in the early'90s when they were buying Newmont Mining, Franco Nevada, or BarrickGold.

And secondly, the big change is production costs. Back then, if my memoryserves me right, companies could -- like Newmont Mining -- have total costsincluding depreciation of around $250 to $300. Yet, the price of gold wasprobably around $400, $450. Today, the production costs have exploded sothat production costs today are oftentimes in excess of $1,000.

Instead of looking at depreciation, if you take into account replacementcosts, what it would take for a Newmont, for instance, to replace some of themines that will be exhausted over time, the total cash costs for them to stayin business and to maintain the same level of production, is oftentimes$1,200, $1,300. And with the price of gold being -- what was it today? --$1,365, in a way, in terms of margins, you have as little a cushion -- maybe apre-tax profit of $100, $150 or less than, you had back then.

So again, I think what took so many gold mining investors by surprise is theexplosion in gold production costs. And again, unless there's a technical,technological revolution which makes it easier to find and extract gold, Iwould not expect gold production costs to go down in any significant way.

So again with the price of gold so close to production costs, I believe thatgold mining stocks are way too levered, way too speculative. And that's whyour preference remains to hold physical gold.


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Question: Thanks again for your analysis and presentation.

Question: Yes, hi. Thank you very much.

I don't know whether your team has had a chance to look at preferred stocksbearing in mind how well banks are doing. Do you find this an attractivething? Or you just haven't had the bandwidth to look at this sector? Thankyou.

Chuck de Lardemelle: We are. We have been looking at preferred stocks. We've found there's avery small sub-segment of the preferred market that seems to be mispricingthe instruments, we believe. But we are not really at liberty to talk about itsince we're trying to build a position there. Suffice it to say that we're tryingto put 1 point to 1.5 points to work in those preferreds.

If you look into our filings, you will find that we own one that we've ownedfor a long time now, Bank of America preferred. That was our way toparticipate. We bought Bank of America preferred, I believe in the summerof 2011, just before Buffett made his investment himself in the preferred.That has worked extremely well for us. We sold more than a third of theposition a few months back when it was yielding something like 6%, 6.5%.

Preferred stocks in general, obviously, correlate to high-yield. We're notfinding anything in high yield. What I would say is this. For us to branchout in preferred stocks and high-yield we want to see at least 6%, 7% yield tomaturity with low credit risk. We're not finding that either in high-yield orpreferred stocks, not finding huge opportunities, nothing in high yield, and asI said earlier, we found a small pocket that we're trying to put some cash towork now.

Charles de Vaulx: And if I may add, Chuck, most preferred stocks are perpetual preferreds or ifnot, have an extremely long duration. So implicit in buying a preferred is theassumption of interest rate risk over the next 5 to 10 years, if not longer.

Question: Thank you. There's a fellow named Kyle Bass that runs Hayman CapitalFund, a hedge fund. And he's predicting that the Japanese bond market willblow up and I think Charles made a comment about it. He thinks it's goingto happen, I think in the next 18 months. And I think Charles implied that hethought a risk was there, but it might happen longer.

Could you please speak about that a little bit more?


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Charles de Vaulx: Yes, I'll start answering that question. Kyle Bass, it's been many, many years

now that Kyle Bass has talked about him worrying about Japan. I guess heshould have worried about Greece and Portugal instead.

I have a lot of respect for Kyle Bass but if I'm not mistaken, his bet onJapan is a tiny position for him. So I'm puzzled as to why he's so vocal abouta position that seemingly is so small for him.

But I'll let Chuck address the question?

Chuck de Lardemelle: We recognize the issue. Japan has a huge amount of debt and baddemographics. So far, they've been able to live with that situation becausethey had very high savings overall in the economy.

Now because of demographics, savings at the household level has dwindledto almost zero. It's basically that the retired people are dis-savers. They areusing their savings to live.

Households that are working, that are in the workforce, are still savingsubstantial amounts of money, about 15% of income.

What's interesting is that Abenomics wants to grow consumption so savingswould fall even more. And so what is interesting or a key to understand isthat savings minus investments equal basically your current account deficit.

So as savings are going to fall and investments are going to rise, then you'regoing to end up with a current account balance that gets worse over time.And when you get into a current account deficit, it means that you have toborrow from outside the country. And we believe that's where the line is,where the situation may become dicey.

Now, perhaps in a few years, Japan could show a current account deficit.They have a lot of assets on the other side. They own a lot of assets globally.And so they have a lot of assets they can sell to continue to finance theircurrent account deficit without having the yen completely collapsing or theirdebt in trouble.

But it is a very important metric to look at. And if it goes beyond 3% currentaccount deficit, then I think you have to become very, very cautious. Rightnow, Japan is still in current account surplus.

Second, and that's why the path to success in Japan is very narrow, there is apossibility that you goose up consumption, yet savings go up, and that is


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only if corporates are going to save even more than they did today, and for

corporates to be able to invest yet save even more than they do today. Theyneed to restructure, to goose up profitability. So the only way that Japan canget out of this 10 years down the road is if they allow mergers andacquisitions, they allow companies to enjoy higher margins. It's striking inJapan today that whether you look at cosmetics or pharmaceuticalcompanies, you have a very large number of competitors.

In other countries around the world, you would have had consolidation. Soyou look at a Kose, which we own, versus a Procter & Gamble or a L'Oreal,and you find the same gross profit margins of 75% in cosmetics. Yet at theEBIT level, at the operating earnings level, you see much lower profits inJapan. Why? Because there are so many new launches of new productsevery year, small market shares, a lot of competition. And it's the same forpharmaceutical companies.

And so we understand that the path is narrow. But it's not necessarily closed.And we also understand what we have to look for, what the red flag wouldbe. And to us, the red flag would be a current account deficit in Japan. Andwe're not there yet. But we keep an eye on this.

So I think we don't disagree necessarily with Kyle Bass. But we think thetiming may not be right.

Question: Thank you. I think using very, very high leverage on a very small 1% or1.5% of his portfolio. But he may be using futures contracts or somethinghe'd be leveraging himself 200 times on that small percentage.

Also I think it relates to having insurance companies, which have beenbuying government bonds stop doing so. That would change the dynamic.

Charles de Vaulx: No, you're right. But at the same time, look, Abenomics started lateNovember 2012. He talks about having an inflation of 2% a year, yet the 10-year Japanese government bonds are only yielding 75 basis points.

And yes, banks have been aggressively selling down their governmentbonds. Maybe the insurance companies, Im not sure. But on the otherhand, you've had the central bank precisely buying those very bonds with thehope of engineering some inflation.

But I think I share Chuck's analysis, which is, even though the trends arebleak in many respects in Japan, let's not forget that it's such a wealthycountry that they can afford to die very, very slowly over the next 20 or 30


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years if they decide to. And with so many of their government bonds held

from within and the ability to gradually sell out of the trillions of overseasassets they have, they can artificially, if you will, maintain very low Japanesegovernment bond (JGB) yields for a long time.

Chuck de Lardemelle: I think it's fair to say that if QE goes wrong, it's possible it goes wrong inJapan first. Because they are the ones printing the most aggressively, they --if you look at money in circulation versus GDP, that's where the ratio is thehighest, in Japan. So if velocity of money starts to pick up, you could have asurprise in terms of inflation.

If that were to happen first, you're going to have a huge rally on equities. Ifyou have inflation in Japan, you shift away from JGBs into equities.

The problem is how much will you be hedged on the yen? How much is thecost of that hedge going to move? And so in the case that QE goes wrong inJapan, in a sense, it's hugely bullish equities in yen terms. In dollar terms, itis another story.

But I think we have an eye on all of this. And we are very cognizant of thedangers lurking long term for Japan.

Question: Hi, guys. Thanks for doing the call.

I have two questions for you. One is, with Microsoft I noticed that you guysused to have a position or still have a position, but you reduced it.

And the second question, for Charles de Vaulx, I remember you once sayingthat you read the insider activity religiously. And Annaly Capital has hadsignificant insider buying and has a nice yield. And I just wondered whatyour thoughts were.

Charles de Vaulx: I will let Chuck answer both questions. Yes, I do care about insider buying.And insider selling, for that matter.

I did notice a few weeks ago that there was big insider buying at Annaly.But that's a company Chuck knows quite well, so I'd rather let him answerthat question.

Chuck de Lardemelle: On Microsoft, capital allocation, obviously, has been dreadful for years.They have a very strong franchise still with corporates. But in consumer, itis weak and getting weaker. And so we have to be very careful in terms ofthe multiples we're willing to use.


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In contrast, Oracle, which is getting a lot more mature as well, has donetremendous things in terms of capital allocation. Very shareholder friendly.And so we've taken advantage of the volatility in Oracle to add and thevolatility in Microsoft to reduce.

But we are still shareholders of Microsoft. It's too cheap for us to get out.And we believe that the franchise in corporate is quite strong and especiallyin server tools and SQL. That is one segment where they have done very,very well over the years.

As far as Annaly is concerned, yes, there has been some insider buying. Andthe stock has been hit hard. The issue is basically in owning Annaly, you'relong mortgage-backed securities. You're long treasuries plus the spread. Soyou have two questions, do you believe that treasuries at 3% are a good buy?And do believe that the spreads over treasuries for mortgage-backedsecurities are at adequate levels?

Now, a lot of the move in the treasuries is being hedged by Annaly throughswaps. And you have what's called basis risk, which is the meaning of, hey,if your swap rate moved differently from mortgage-backed securities thenyou're not fully hedged. And that's been happening recently. So you've hada lot of basis risk.

We have a price at which we're interested. Obviously, we own the stock fora very small allocation, about 30 basis points. We're not adding. We're notselling.

And also, if you take a 10-year view on those companies, one of the issues is,we don't know how the mortgage-backed securities market is going toevolve. For instance, there are propositions in Congress where thegovernment would only guarantee about 90% of your principal. And 10% ofthe principal would be at risk, basically. It would be underwritten by privatecapital.

That changes your spread or the volatility of your spread of mortgage-backedsecurities versus treasuries. So you have a lot more basis risk in such anevolution.

So there are so many questions around the future of the business that we tendto be a little bit cautious. We err on the side of caution on those.


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And we are not seeing mortgage-backed securities spreads that are high

enough that we believe that the mortgage-backed securities market isdistressed yet. Obviously, it's been heavily, heavily manipulated for years bythe government, by Bernanke.

And all these mortgage rates have benefited Annaly with the mortgage-backed securities spread versus treasuries narrowing for years. And now thatQE is being tapered down, you've seen some volatility. Whether or not that'san opportunity to buy heavily into mortgages, we'll hold judgment.

Charles de Vaulx: Another question mark, correct me if I'm wrong, Chuck, is that if interestrates -- if the yield curve were to flatten out or even worse, be inverted, I'mnot sure what happens to that industry.

Chuck de Lardemelle: Correct. You're absolutely right, Charles. They've been able to service suchhigh dividends because of a very, very steep yield curve, much steeper thanaverage. And so that has allowed them to reduce leverage considerably yetstill be able to service very large dividends. But the steepness of the curve isreally unusual in terms of how steep it is. And so that's not going to lastforever.

So you know that going forward, either they move up leverage, but withmortgage-backed securities that's maybe more volatile than in the pastbecause they're not 100% backed by the government. That's a dangerousproposition. Or they don't increase leverage and your dividends are going tofall substantially over time.

So the dividend yield today, we believe that over time is absolutely notsustainable.

Charles de Vaulx: And who knows. Maybe that whole industry will cease to exist 10 or 15years from now.

Question: Okay. When you talk about Microsoft capital allocation, are you talkingabout these bad purchases they make? Or are you talking about the fact thatthey don't repurchase shares. Because their dividend is very good.

Chuck de Lardemelle: Yes, it's more about the purchases they make and their inability, afterbillions of dollars, to break into the consumer market. And consumers areobviously moving away from PCs. And worse, they are starting, what'scalled in the industry as, bring your own device, where they show up atwork with their phone, their tablets. It creates all kinds of issues in somecompanies. Yet it's a trend that may last. And so who knows how strong the


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corporate franchise of Microsoft is. But we have no faith in their ability to

succeed in the consumer market.

Having said that, we are not paying anything for it. So we're still happy withabout a 1.1% position in Microsoft. It's cheap enough that we're willing tohold it -- holding our nose.

Question: Okay. Thank you very much.

Question: Yes. Charles and Chuck, how are you doing? Thank you very much forbeing a great steward of the clients' money. And I just had a quest ion someof my customers have been asking.

With the state of the stock and bond markets as they are, what are yourthoughts on using alternative assets in the portfolio, because there is a widevariety available?

Charles de Vaulx: Well, I'm not sure alternative assets have done that well either in the currentenvironment. We certainly would not want to use assets that are levered.

Question: For instance, things like covered calls or covered call writing in addition toowning stocks, or even using some of the floating rate strategies for moniesthat are sitting in the cash position.

Charles de Vaulx: I don't believe there is ever a free lunch. A covered call strategy is verytempting, as to increase yield. But the risk is, as you know, that you forfeitthe possibility that the stock -- you may not be able to enjoy the benefit ofthe stock maybe rising much above your strike price.

I don't know if Chuck has been looking at calls recently and impliedvolatility. But my sense is that there isn't much value there.

Chuck, do you have any thoughts?

Chuck de Lardemelle: No, I have not looked at implied volatility recently. And a problem withcovered calls is it really skews your risk, because you keep all the downsideand you capped the upside. So we have not used those, although we have theability to do so.

As far as floating rate notes, we haven't found some where the pickup issubstantial -- we do have one in Stolt-nielsen, Norwegian krona, where wethink the asset values are substantial vis--vis the credit.


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We would be interested if we could find some, but we usually find them in

financial paper, paper of banks. And so we haven't found too manyopportunities in floating rate notes.

Question: Hi. I see that in the portfolio you have more than 80 positions that are lessthan 1%, given the amount of hard work you do and the scarcity of verygood ideas that are shaped and perhaps selling lower than your estimate ofintrinsic value. I feel like, perhaps the position sizes could be larger, likemaybe around 1%. I'm not saying that you do what I say, but I just feel likeyou're putting so much work in, then why not, perhaps increase the positionsizes?

Charles de Vaulx: I'll start with two answers. I think Chuck alluded to one of the problemsearlier, which is that, some of the smaller companies we sometimes getinvolved in, be it in Asia or Europe, some of the small and mid-cap stockswe talked about, and especially since so many of them have significantinsider ownership, many of these companies are family controlled. And as aresult, the float is smaller.

And basically, we just, oftentimes, are logistically incapable of having two,three, four times more than we actually have. Or if we did, as Chuckindicated, our position would become totally illiquid and we would never beable to sell out of.

The other point I want to make is, I think we have been reminded over thepast few years, especially in emerging markets, of the fact that corporategovernance outside the United States remains far weaker than it is here.There are many companies out there, around the world, that sometimescannot resist the temptation to fleece their minority shareholders. And oneway to protect yourself against that is by making sure that the position size isnot too large, even if there's no bad intent on the part of the company interms of fraud. You always run the risk, say with a Japanese or a SouthKorean cash rich company, you always run the risk that the company maydecide to splurge and make an overly expensive acquisition.

So I think to control risk, our preference has always been, at IVA, but alsobefore that in our days at First Eagle and SoGen Funds, our preference hasalways been to have diversified portfolios. What we are willing to do -- andI alluded to that earlier -- is that we are willing to make big negative bets.We are willing to own say no financials when financials become a big part ofthe index. We're willing to own virtually no emerging market stocks whenemerging market stocks are popular and so forth.


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But it's not our style to -- it's never been our style to run a highly

concentrated portfolio. Again, keep in mind that our strategy is not to try tobe up 15% or 20% a year. Our overall strategy is wealth preservation.

And our philosophy is, if we succeed at minimizing losses, gains will takecare of themselves. And that's the best way, long term, in our opinion, tocompound wealth.

Question: Well I just had one follow-up question. Can you talk about the mutual fundsand their year end? And can you do anything to tell us if there are capitalgains coming. It's been a better year. What do things look like in the mutualfund industry or for your Fund?

Charles de Vaulx: Well, in our case, sometime in October, we'll give an indication to themarketplace as to what our distribution will look like, distribution which willtake place mid-December.

And all I can tell you is that there will be a distribution in our case. We havetaken gains here and there. We have trimmed some positions. We havegotten out of a few names.

But that distribution will be quite modest compared to the performance ofour Funds year-to-date. And again, I cannot speak of other fund complexesout there. I know that we tend to have a lower turnover ratio than most ofour competitors. And since many markets have been up, at least maturemarkets, including the US, I would not be surprised to see many of ourcompetitors have distributions that account for a larger percentage of theiryear-to-date performance than will be the case for us.

Charles de Vaulx: Okay, well, thank you so much for listening to the conference call. I believethat over the next few weeks an audio version of this conference call will beavailable on our website. And within a week or so, we will also put atranscript on the website. Thank you again.

iva funds conf call transcript sept 10 2013 final

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