December was quite an end to the year 2018. It was the weakest month for European equities since January 2016. The Fund slightly lagged the market this month, but was ahead of its benchmark for the year 2018.

Several reasons were mentioned for the sell-off this month, like the continuing trade war between the US and China, tightening monetary environment and worries about economies to show slower growth in 2019.

Also the oil price got another hit, despite the OPEC and Russia announcing oil production cuts. There is still fear about oil oversupply, while at the same time demand might level off due to lower economic growth. It resulted in our energy names detracting from the performance in December, with particularly John Wood Group and Equinor performing poorly. Also our selection in consumer discretionary was weak, as H&M - that reported better than expected fourth quarter sales figures, but analysts questioned how much the y had to cut prices - and Renault fell strongly. Selection within information technology and financials contributed to the performance. The Fund benefited from a positive sector allocation effect, particularly our overweighted defensive sector utilities did well.

We implemented the fourth quarterly rebalance this month. We sold three UK names, Britvic, Marston’s and Babcock International. Soft drinks company Britvic was not attractively valued anymore, while it is also strongly exposed to the uncertain British economy. The latter was also applicable to pub retailer Marston’s. Support services company Babcock International is encountering the risk of negative revisions of contracts with the UK government. We added four new names: BP, Valeo, Sydbank and easyJet. BP is an attractively valued major oil & gas company. Valeo is a supplier to the car industry and the share price had been extremely weak and offered an attractive entry point. Sybank is a Danish bank with an above average dividend yield while a lot of worries are priced in. easyJet is an internationally operating low-cost airliner, also here the share price weakness offered a good entry point.

The more volatile and negative financial markets in the last months, will give us the opportunity to add companies where valuations have become more attractive. Although the increased volatility helps our ability to pick stocks, we believe overall global stock market valuations are elevated. A firm may appear attractive based on its price to earnings ratio or other headline multiple, but if margins and/or revenues are high, this only gives you limited information about the future returns of an investment. In our investment process we spent a large portion of our time understanding where profitability should be on an over the cycle basis, as this is what determines the cash flows we will receive as a long term shareholder.

Our focus is on finding companies with sustainable dividends 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 analyse 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 Fund now has a forward yield of around 5.8%.