August was a weak month for equities. Investors are more and more convinced that the global economy is in a recession or is heading towards one. In light of this slowdown, the general expectation was that central banks would reduce the speed at which interest rates are raised. Comments by central banks, most notably the Fed, clearly indicate that fighting inflation is on top of the priority list at the moment. Curbing inflation by increasing interest rates will further increase the possibility of a recession. Rising rates, lower growth, and still high inflation is a combination that makes investors more cautious on equities. Within this negative environment, the Fund modestly outperformed the broader market. The Fund underperformed the style index (Morningstar Developed Europe Dividend Yield > 2.5% Index).

The sector that contributed most to the absolute and relative performance of the Fund was the energy sector. Driven by higher energy prices, stocks like Repsol, BP, and Technip Energies performed well. The consumer discretionary sector detracted most from the absolute performance of the Fund. The downturn in the more cyclical consumer stocks was driven by recession fears, rising energy prices, and inflationary pressures. The worst performing sector from a relatively perspective was the communication services sector (WPP did poorly).

One of the largest contributors was Technip Energies (+8% in August). Technip is an EPC (Engineering, Procurement, Construction) contractor in the energy industry: they build LNG terminals, refineries or other industrial plants for their customers. Recent results indicate that revenues and profitability are stronger than previously anticipated. Technip is benefiting from higher energy prices. Longer term, Technip Energies is well placed to benefit in many key areas of the energy transition, e.g. green hydrogen, biofuels, green chemistry and plastic recycling. With a price/earnings ratio of 10 and a dividend yield of around 3.5% the share do not reflect these long term positive developments.

One of the detractors from the Fund’s performance was Taylor Wimpey, declining 17%. Taylor Wimpey is one of the largest housebuilders in the UK by volume. There are three negatives that are driving the disappointing share price performance, which are inflation, rising interest rates, and deteriorating consumer confidence. The housebuilders have successfully battled with inflation for a couple of months now as building materials like cement, bricks, and wood have become more expensive. So far, most of the cost inflation could be passed on to the home buyers. However, investors are increasingly worried that consumers will see their budgets squeezed by higher cost of living (e.g. food and energy) and higher interest rates. We believe that the demand/supply balance in the UK housing market remains healthy, which creates a strong pricing tailwind for UK homebuilders. Recent company results were reassuring, and Taylor Wimpey’s 2022 profit guidance was raised. Both price/earnings ratio (6 times expected 2023 earnings) and dividend yield (~10%) indicate that the shares are offering good value at current levels.

Portfolio activity over August was limited.

We currently expect a dividend yield of around 6.0% for the Fund. This number is based on the consensus estimate of dividends paid out over the next 12 months. 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.