May was a positive month for the Fund in an absolute sense. The performance slightly lagged the performance of our investment universe (defined as Morningstar Developed Markets DY > 3%). However, the Fund was substantially ahead of the MSCI World 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 Chesapeake performed well. The consumer staples sector detracted modestly from our absolute performance (PepsiCo. was down). The sector that added most to the relative performance was the consumer discretionary sector (BMW performed well). All sectors attributed positively to the overall performance of the Fund.

One of the 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 AvalonBay Communities, declining 10%. AvalonBay Communities is an apartment REIT based in the US. The company has a portfolio of around 87,000 apartment units. With rising interest rates, investors worry about a potential downturn in the US housing market. However, we are less worried about these developments. Recent data shows that wages are going up and that rents are up strongly as well. AvalonBay has a dividend yield of approximately 3.2%. We believe that this yield is well-protected by AvalonBay’s ability to adjust rents to inflationary developments. We also think the company’s development pipeline will add value thanks to relatively high rental yields on newly developed apartments.

In May we completed our purchase of Western Forest Products. Western Forest Products is an integrated forest products company and a coastal woodland operator located in British Columbia, Canada. The Company's activities include timber harvesting, reforestation, sawmilling logs into lumber and wood chips, value-added remanufacturing, and producing pulp. The company’s free cash flows have been increasing sharply as a result of rapidly rising prices for their products (e.g. lumber). Part of this free cash flow is used to pay for a 25% dividend increase. As a result, the shares now have a dividend yield that is significantly above our 2% dividend yield threshold. Western Forest Products are also buying back shares. We are in active dialogue with the company on how the free cash flows can be used to further enhance shareholder value.

In addition to Western Forest Products, we have started a position in Komatsu. This is a Japanese mining and construction equipment manufacturer. Products include excavators, dump trucks, and bulldozers. For a number of years, the mining cycle has been weak. Commodities had come down and therefore miners did not invest in new equipment. Commodities have been going up, which is now triggering an upswing in the mining capex cycle. Combined with a weak Japanese yen, we believe that earnings will be stronger than is generally expected. The shares trade on a modest 12 times consensus earnings and provide a dividend yield of almost 3%.

We currently expect a dividend yield of around 4.5% 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 approximately 6%. 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 flow 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.