Black Creek Global Leaders Fund

Market Commentary Fourth Quarter 2014

The price of oil declined almost 50% during 2014. The price decline has been a gain for consumers around the world and also a transfer of wealth from oil-producing regions to oil-consuming regions. A possible explanation for the price decline could be that the period of higher prices led to higher production of oil at the margin and to lower demand at the margin. There are also a multitude of possible “political” explanations for the price decline: Saudi Arabia sending a message to other producers, a form of sanction on Russia for its aggressiveness, reduced funding for ISIS, etc. However, it is difficult to substantiate these factors. As for where the oil price is headed, we do not know. Cash costs for oil production in the Middle East are much lower than the current price of oil, but lower prices will severely hurt local economies. We believe that oil could settle in the $50-70 range per barrel.

The other significant factor of note for 2014 was the strength of the U.S. dollar. Relative to the U.S. dollar, the euro, sterling, yen, and Canadian dollar depreciated by 12%, 6%, 12%, and 8%, respectively. Some emerging market currencies collapsed against the dollar. The consensus view among investors seems to be “buy U.S. and buy safety.” While the U.S. dollar strengthened against most currencies, the U.S. stock market significantly outperformed most other markets, except for India and China. It is unusual, in our experience, to see strength in both the local currency and local stock market at the same time for any country.

We will definitely see the effect of the strong U.S. dollar on earnings for U.S. companies over the coming quarters. Combined with the fact that profit margins in the U.S. are already at or near historic highs, we believe earnings growth for U.S. companies will be difficult to achieve. In addition, valuations for U.S. equities are high relative to valuations that we are finding elsewhere. We wrote about this in our previous commentary and, over the past 12 to 18 months, we have reduced the U.S. holdings in our global portfolios in favour of new holdings outside of the U.S., even as the U.S. has outperformed.

The economic recovery continues in the U.S., and this region is being seen as an economic safe haven in the face of uncertainty in Europe, emerging markets, and China. The United Kingdom is also showing robust recovery, although there are only limited signs of recovery in Europe at this time. Growth in China is slowing, Japan remains the same, and most emerging markets are seeing either the effect of the slowdown in China or the effect of lower oil prices. We continue to suggest that global economic growth will remain subdued over the next few years, at about 2-3% real growth.

Another concern remains the effect of low interest rates. With capital costs (both debt and equity) so low, there is an incentive for companies to invest at what might turn out to be an insufficient level of returns. This in turn creates overcapacity and more competition for everyone, driving down margins and returns. It could also potentially reduce some companies’ period of competitive advantage. When these conditions of ample liquidity and low interest rates reverse, the impact on many companies may be severe, which in turn may create more investment opportunities.

Aside from these concerns, we continue to find businesses that are leaders in their field, gaining market share, and whose share prices offer us good returns given our expectations of long-term growth and profitability.

The decline in oil prices has had a specific effect on one holding in the portfolio, Galp Energia, and some indirect effects on a few other holdings. It has also given us an opportunity to buy a new holding. Galp Energia was one of the main detractors from performance in the fourth quarter, with the stock down 33% in euro terms. Galp’s major source of future value lies in its ownership of offshore oilfields in Brazil, which are currently being developed but will only add significant cash flows in 2018 and beyond. The estimated cash costs of producing this oil is only $15-20 per barrel, so, once developed, it will be a low-cost source of oil. The current stock price for Galp is approaching the value of its traditional refining, marketing, and gas distribution business together, with little value being ascribed to its oil and gas assets.

Macro investors have decided that lower oil prices are bad for Mexico, so our Mexican holdings (Santander Mexico, Grupo Televisa, and Arcos Dorados, in part) have been impacted by the lower oil price, even though these businesses are not oil producers. Finally, we have bought a new holding in Intertek Group, which provides quality and safety testing services to a broad array of customers and end markets, including oil and gas customers. Largely because of the oil price, we believe the stock has declined to a level where there is terrific value for a good business on a long-term basis.

In addition to Intertek, we added a small holding in Distribuidora International de Alimentacion, a leading retailer in the grocery and healthcare fields in Spain and Portugal. We sold our remaining holding in WuXi Pharmatech, which has been a terrific investment for us since we bought it in early 2012. We added to the holdings in Daikin Industries and ElringKlinger, both of which we began to buy in the third quarter, and we reduced the weightings in Grupo Televisa, Nabtesco, and Oracle. Cash at the end of the year was 4.3%, similar to the level at the end of the third quarter. We also received shares of Hermes International near the end of the quarter, which were distributed to shareholders of Christian Dior. These shares will be sold once the distribution is finalized.

Positive contributors to portfolio performance in the fourth quarter included Christian Dior, Carnival, Oracle, Dialog Semiconductor, and ElringKlinger. Negative contributors included Galp Energia, Arcos Dorados, Gerresheimer, Mindray, and Santander Mexico.

For the year as a whole, positive contributors to performance included Dialog Semiconductor, Nabtesco, Oracle, Biomerieux, and Carnival. Negative contributors for the year included Arcos Dorados, Galp Energia, II-VI Inc., and Mindray.

The strength of the U.S. dollar added positively to the portfolio in both periods. However, because we have generally been selling our U.S. holdings in order to buy companies outside of the U.S., the positive currency effect was dampened. As we indicated in our previous commentary, we have been selling U.S. holdings in favour of ideas that we are finding elsewhere, to the point where only eight of the portfolio holdings are U.S. businesses. This is probably the lowest representation of U.S.-based stocks in our portfolios in decades, and simply reflects the better valuations we are finding in other markets.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. This commentary is published by CI Investments Inc. It is provided as a general source of information and should not be considered personal investment advice or an offer or solicitation to buy or sell securities. ®CI Investments and the CI Investments design are registered trademarks of CI Investments Inc. Published January 2015