The trends we saw in 2019 and that were a headwind for the strategy, accelerated in January. Both in absolute and relative terms the Fund had a difficult start of the year. The valuation dispersion in the market increased even further as growth stocks continued to outperform value stocks. Investors continue to favor safety and earnings stability, irrespective of the price. They are finding this visibility in two groups of companies. First, in growth companies where investors are expecting continued growth, independent of economic developments. Second, in the ‘low vol’ stocks such as consumer staples, companies where the underlying business is less sensitive to the economic cycle. Cyclical companies on the other hand are eschewed. Many of these market favorites do not fit the profile of the Fund as they are outright expensive, making the current market environment challenging for the value strategy.

Strong performers this month were Wärtsilä, Enel and Engie. Finish capital goods company Wärtsilä was added in December to the portfolio and performed strongly this month. It benefited from a broker’s upgrade and it also reported in-line results. More importantly was the long-awaited stabilisation in orders that bodes well for the future. Enel and Engie were in favor as the utility sector is being regarded as a main beneficiary of some of the major ESG trends. Both companies are among the biggest renewables companies in the world.

Weaker performers in January were LyondellBasell, AIB Group and ArcelorMittal. US chemical company Lyondell fell without specific news, but prices of several commodity chemicals continued to be under pressure. Irish bank AIB fell without specific news as banks in general performed poorly during the month. Steel giant ArcelorMittal fell a cyclical and material companies were sold in January. Also here on no company specific news.

Our focus is on finding companies that can be bought at a discount to our estimate of intrinsic value. We base our estimate on the Earnings Power Value (EPV) framework of the Columbia Business School. EPV allows us to separate the three valuation components: asset value, earnings power and growth value. This framework improves our ability to analyze what we are paying for and gives insight into whether a stock is priced with a margin of safety. In addition, ESG (Environmental, Social and Governance) is fully incorporated in our investment process.

The Kempen Global Value strategy follows a disciplined valuation approach. We assess companies based on long term earnings power, and seek a margin of safety in the price we pay when we select our investments. In summary, the current environment offers the opportunity to buy a well-diversified portfolio with solid earnings power at an attractive valuation. Historically, value has outperformed growth over the long-term, but value has underperformed growth for an unprecedented period by now. As we believe in reversion to the mean, value investing could offer an attractive investment opportunity going forward. Like we wrote earlier, the current environment offers the opportunity to buy a well-diversified portfolio with solid earnings power at an attractive valuation.