October was a strong month for equities. Investor sentiment was driven by the hope that central banks would start slowing down the pace of interest rate increases. This hope was based on encouraging inflation data in the United States. Commodity prices had come off over the last few months. In the second half of October, earnings reporting season started. In this period, companies publish their financial statements, and management teams give an outlook on what their expectations are in the upcoming months. So far, earnings have not disappointed investors and the business outlook was frequently somewhat better than expected. In this bullish environment, KEDHF outperformed the broader market. The performance was also better than the performance of the style index (Morningstar Developed Europe Dividend Yield > 2.5% Index).

The sector that contributed most to the absolute performance of the Fund was the financial services sector. Driven by higher interest rates and strong financial markets, the shares of banks (e.g. ING) and insurers (e.g. Allianz) were up substantially. No sectors detracted from the absolute performance of the Fund. The best performing sector from a relative perspective was the consumer discretionary sector. This was the result of strong stock selection (e.g. Autoliv and Taylor Wimpey). From a relative perspective, the materials sector was the worst performing sector (Rio Tinto was down modestly).

One of the best contributors was Autoliv (+19% in October). Autoliv is the world market leader in passive automotive safety products like airbags and seatbelts. Their latest reported numbers show that the company is benefiting from a strong recovery in the automobile market. Automobile makers had not been able to keep up with demand, because of covid-related supply chain issues. It now looks like these issues are resolving. A strong uplift for automobiles is driving a strong uplift in demand for Autoliv’s safety products. By raising prices and controlling costs, Autoliv has been able to show a strong recovery in profitability. At the current price, the shares trade at a 3.2% dividend yield. If the earnings of Autoliv continue to grow as expected, we believe that the shares remain substantially undervalued.

One of the detractors from performance was Rio Tinto (declining 5%). Commodity prices have corrected over the past months from very high levels earlier this year. Iron ore is Rio Tinto’s most important commodity and has also come down. Despite the correction, commodity prices are still at elevated levels, allowing Rio Tinto to make substantial profits. Most of these earnings are paid out to shareholders through ordinary and special dividends. Based on consensus estimates, the shares will provide a dividend of around 12% over the next year.

Portfolio activity over October was limited. We did not initiate new positions, nor fully exited existing positions.

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.