April was a positive month in absolute terms for the Fund. In addition, the relative performance versus our investment universe (Morningstar Developed Europe Dividend Yield > 2.5% Index) was positive as the benchmark was up only modestly in April. The Fund also outperformed the broader market index. The broader market index (MSCI Europe Index) was down, mostly driven by weak performance of the technology sector. The sector that contributed most to the absolute performance of the Fund was the consumer staples sector (Danone did well). From a relative perspective, the financials sector performed well. Especially banks like Svenska Handelsbanken and ABN AMRO were in favor. The sector that detracted most from the absolute and relative performance was the materials sector (Rio Tinto declined modestly).

One of the best contributors was Repsol (+20% in April). This integrated energy company reported strong first quarter results. Production is increasing and refining utilization rates are moving up. These developments lead to higher than expected free cash flows. The company positively surprised investors by announcing additional share buy backs. Consensus earnings estimates for 2022 and 2023 have been rising for several months now . Despite the 67% strong run-up of the shares since the summer of 2021, the shares still only trade at 6 times 2023 earnings.

One of the detractors from performance was Rio Tinto, declining 6%. Reported production numbers fell short of expectations. However, the company is still confident that it will meet the full year targets. Driven by a strong mining cycle, Rio Tinto is generating large sums of free cash flow, which are allocated wisely. The shares currently trade at a price/earnings ratio of 7 times 2023 consensus earnings. The dividend yield of around 13% is highly attractive. Given the strong earnings and free cash flows, we believe that the dividend will be sustained for longer. Despite the strong 20% return over the past months, the shares are therefore still undervalued.

We have added Telefonica to our portfolio. Telefonica is active in fixed and wireless telecommunication across Europe (Spain, Germany and UK) and Latin America. They currently are market leader in their home market Spain, which is also their largest market (~30% of revenue). The Spanish market is seeing consolidation in the market, which we believe this will lead to a more stable pricing environment. Brazil is also a consolidating market, which should eventually lead to improving profits. Telefonica has lowered its debt levels by selling infrastructure and non-core assets. These developments are not yet fully reflected in the share price. The current dividend yield of around 7% is attractive.

To finance our purchase of Telefonica, we have sold our shares in Telenor. The Norwegian telco has operations in the Nordics and in South East Asia (~40% of the company). In the Nordics, the company’s operating performance shows signs of weakness while the recovery of its Asian business is not as strong as expected.

We currently expect a dividend yield of around 5.2% for the Fund. This number is based on the consensus estimate of dividends paid out over the next 12 months. Based on those estimates the annual growth in dividends for the Fund will be 7%. The Fund still trades at a strong discount versus the market (the average valuation of all the holdings in the Fund versus the broader equity market). Historically, this has led to a strong relative performance in the medium term. Also, the absolute valuation of the strategy is compelling. We continue to focus on attractively valued companies, that have good capital discipline and generate positive cash flows through the cycle. In summary, the current environment offers the opportunity to buy a well-diversified portfolio with solid earnings power at an attractive valuation. In addition, ESG (Environmental, Social and Governance) is fully incorporated in our investment process.