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Monthly Update: International Fund October 2014

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International Fund October Monthly Report

During October, the Fund underperformed the MSCI ACW IMI (-2.9% vs 0.3%). Continuing a trend of recent months our three oil services stocks continued to cause pain, and numerous of our other large holdings were down a little. Partially offsetting was the significant appreciation in Madison Square Garden Company (see below) and two unnamed European small cap positions (one which will be unmasked at our upcoming Sydney seminar).

October was an eventful month for entertainment holding Madison Square Garden Company (NASDAQ:MSG). MSG announced that it would explore splitting itself into two separate, publicly-traded entities. One company would include the real estate portfolio and the MSG Entertainment business, focusing on event production. MSG has yet to determine whether the famous Madison Square Garden arena will end up in that entity, but our guess is that it will. The other company would be significantly larger, owning the sports franchises (Knicks, Rangers and more) and the valuable cable networks.

A separation would enable these rather distinct businesses to allocate capital more sensibly. The entertainment company should look to reinvest cash flow into growth opportunities. We expect the sports company will be more generous in returning cash to shareholders via dividends and buybacks. Splitting these businesses up will shine light on the various components and perhaps help remove the ‘conglomerate discount’ to the benefit of existing shareholders. It, and the appointment of some high-calibre independent directors to the board, might also be indicative of a more shareholderfriendly approach being taken by management. We welcome the development and look forward to seeing the company execute on this strategy. MSG’s share price rose 15% during October.

Google Inc. (NASDAQ:GOOGL) reported disappointing third quarter results. Revenue growth remained strong at 20%, but profit lagged. The company’s operating margin declined significantly from previous periods, dropping by over 4%. Mobile traffic continues to grow in importance and the cost-per-click data from the quarter provided further evidence that mobile advertising can be profitable. Whether it ultimately becomes as valuable as desktop search remains an important question mark. There were some results bright spots. The US search business saw accelerating growth and YouTube continued to steal advertising dollars away from the traditional TV market. The share price fell 3% during October.

American Express Company (NYSE:AXP) reported good third quarter results, including double-digit growth in card member spending. The US and Asia were particularly strong and corporate card activity showed a long-awaited resurgence. Unexpectedly, the company made a USD$700m gain from its ownership stake in Concur Technologies, which will be sold to SAP. The gain will likely be reinvested in marketing, allowing the company to pursue its growth objectives. Earnings per share (EPS) grew 12% and return on equity was an impressive 29%. The only negative was the chief financial officer’s announcement that the company will likely issue preferred equity, prompted by a US regulatory review that is encouraging all financial services firms to hold more capital. It is a shame that a company with as sturdy a capital cushion as American Express feels the need to issue more equity, but it doesn’t change the investment case. The share price rose 3% during the month.