August was a strong month for global equity markets as technology companies continued to rally. The returns in the technology sector drove performance in North America, with other regions lagging strongly. Fears about emerging markets, and its potential contagion, resulted in negative returns for European and Asian markets. In this market environment, the Fund continued to lag its benchmark, which is also the case on a year-to-date basis.

A period of underperformance is unfortunate but valuation spreads are nearing record levels. Although price to earnings multiples are a simplistic means of assessing future performance, on an aggregate level they are predictive of returns. Our portfolio currently trades at a 11.8x P/E based on historical profitability, which supports a dividend yield of 5.1% for the Fund as a whole. We believe this makes it an attractive absolute and relative investment going forward. The same cannot be said of the market as a whole. The MSCI World Index, which is our benchmark, trades a historical P/E of 18.5x and dividend yield of 2.6%. While the benchmark as whole may have slightly higher earnings growth, this cannot compensate for the large divergence in valuations. At a PE of 11.8x, investors in the Fund are getting a prospective earnings yield of 8.5% (vs the benchmark of 5.4%). The market is pricing in a high degree of disruption. We believe disruption is real, but that that pace at which it happens is lower than people expect. For more information on this topic please see our latest dividend letter. This can be found at https://www.kempen.com/en/news-and-knowledge/dividend-letter/dividend-letter-2018-july.

In a diversified portfolio of close to 100 companies, we are always going to have individual names that disappoint or surprise to the upside. We believe that a value process of bottom up stock picking will lead to more winners than losers, as our long term track record indicates. We continue to purchase our investments based on intrinsic value, while ensuring a margin of safety when we select our stocks.

Our performance for the month was driven by weak sector allocation and stock selection. Technology was the best performing sector for the month, which we are naturally underweight given the lack of dividends they pay out. Financials detracted as this sector performed poorly on fears of Turkish contagion.

Our stock selection was weak in August. Our top three bottom contributors for the month were MTN, H&M and L Brands. MTN group is an emerging market telecom provider. MTN was down significantly following news of Nigeria potentially levying fines. Nigeria is MTNs largest market. We do not believe the current demands have any merit, and that the demands are purely political. Long-term difficulties in repatriating capital could negatively affect cash flow. H&M, the Swedish retailer, performed poorly. There was no news for the month, but sentiment remains weak. L brands, a US retailer reported disappointing earnings. L brands has two large concepts, Victoria’s Secret and Bath and Body Works. Bath and Body works continues to grow but the market is worried about low sales growth at its fashion concept Victoria’s secret. The shares now trade at a very attractive multiple we believe the core retails concepts are sustainable. Our top contributors for month were Cisco Systems and John Wood Group which both reported better than expected results.