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, the Fund outperformed the broader market. The Fund performed in line with the style index (Morningstar Developed Markets Dividend Yield > 3% 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 asset managers (e.g. Blackrock) and insurers (e.g. Prudential Financial) were up substantially. The sector that detracted modestly from the absolute performance was the real estate sector (AvalonBay Communities). 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 Sysco (+22% in October). The US based company is the world’s largest foodservice distributor and caters food and related non-food items to for example restaurants, schools and hospitals. The company is recovering from the Covid-crisis as a better company. It has been outgrowing the competition and we believe that they will continue to do so. It is on track to achieve its 2024 operating profit objectives. Sysco has been able to grow its earnings and dividends steadily over time. The current dividend yield of Sysco is around 2.4%.

One of the detractors from performance was AvalonBay Communities, declining 6%. 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. Data shows that wages are going up and that rents are up strongly as well. AvalonBay has a dividend yield of approximately 3.7%. 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.

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 5.0% 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 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.