May was a positive month for the Fund. In addition, the relative performance versus our investment universe ((Morningstar Developed Europe Dividend Yield > 2.5% Index) was slightly positive. The Fund substantially outperformed the broader market index.

Besides strong stock selection, the relative performance versus the broader market index was also driven by a positive allocation effect. We hold a relatively sizable position in energy, a sector that was up more than 10% in May. Energy markets continue to be tight, and it does not look like that this situation is going to change any time soon. It was therefore no surprise that the energy sector contributed most to the absolute performance of the Fund. For example, Shell and Equinor performed well. The healthcare sector detracted modestly from our absolute performance (Roche was down). The sector that added most to the relative performance was the consumer discretionary sector (Valeo and BMW performed well). The sector that detracted most from the relative performance was the communication services sector (WPP did poorly).

One of the best contributors was ING Group (+19% in May). ING reported better than expected earnings numbers. This was despite 800 million euro of Russia-related impairments. Investors were positively surprised by the announcement of nearly 900 million euro in dividends and nearly 400 million euro in share repurchases. These capital returns are approximately 3% on the current market capitalization. This shows that ING is in a strong financial position. Despite the run-up of the shares over the last couple of weeks, the shares still only trade at 8 times expected 2023 earnings.

One of the detractors from performance was WPP, declining 9%. WPP is one of the largest advertising agencies in the world. Investors are increasingly worried about a recession, which would hurt advertising spending. The results and comments by social media platform Snap Inc. (Snapchat) were much more negative than expected, and caused the shares to be down by more than 80% from their 52 week high. Also, new privacy measures by Apple make it harder for social media companies to use app-related data for targeted advertising. Many stocks of advertising-related companies came down in sympathy. However, we are optimistic about WPP’s future for two reasons. The first reason it that the company recently reported better than expected earnings and also raised its earnings guidance for the current year. The second reason is that WPP will be able to benefit from a more fragmented media landscape. I.e. if it becomes harder for companies to reach specific consumer groups, more help from advertising agencies is needed to reach the same consumers. The shares trade at only 9 times 2023 consensus earnings. The dividend yield of around 4% is also attractive.

In May we did not initiate any new positions. We also did not fully sell any positions.

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.