December was quite an end to the year 2018. It was the weakest month for global equities since February 2009. The Fund outperformed the market, but slightly lagged the benchmark for the full 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. Nevertheless, stock selection within the energy sector was positive (although allocation negative). Overall, the Fund did relatively well in this weak market. Stock selection was positive in most sectors. Particularly within information technology and communication services selection was strong. 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 names: Babcock International, Sun Life Financial and Two Harbors. Support services company Babcock International is encountering the risk of negative revisions of its contracts with the UK government. Two Harbors was sold as the increasingly flat yield curve is no good news for the company and this was not reflected in the valuation. Sun Life was sold as there is an increased risk of its asset management division to show an eroding profitability.

We added six new names: BP, Valeo, easyJet, SKF, Fidelity National Financial and Valero. 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 into the share price. easyJet is an internationally operating low-cost airliner, also here the share price weakness offered a good entry point. SKF is a Swedish industrial company that underlying is doing well, but its share price was under pressure. Fidelity National Financial is an US insurance company that provides title insurance. Valero is one of the biggest US refiners and the weak share price offered an attractive opportunity.

The more volatile financial markets of 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 revenue 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 5.6%.