April was a positive month for the Fund in an absolute sense. The performance was in line with the performance of our investment universe (Morningstar Developed Markets DY > 3%) and the Fund was substantially ahead of the broader market index. Besides strong stock selection, the relative performance versus the broader market index was mainly driven by avoiding technology stocks as the tech-heavy NASDAQ index declined by 13% in USD. The sector that contributed most to the absolute performance was the consumer staples sector (Danone performed well). The financials sector detracted from our absolute performance (Blackrock did poorly). The sector that added most to the relative performance was the IT sector (avoiding the tech sell off). Stock selection within healthcare was strong (GlaxoSmithKline and Merck did well). The sector that detracted most from the relative performance was the real estate sector, although the effect was negligible.

One of the best contributors was Repsol (+20% in April). This integrated energy company reported strong first quarter results. Production is increasing and refining utilization rates are moving up. These developments lead to higher than expected free cash flows. The company positively surprised investors by announcing additional share buy backs. Consensus earnings estimates for 2022 and 2023 have been rising for several months now . Despite the 67% strong run-up of the shares since the summer of 2021, the shares still only trade at 6 times 2023 earnings.

One of the detractors from performance was Blackrock, declining 20%. The American asset management company reported quarterly earnings. Although earnings were in line with expectations, investors are worried that the recent weakness in capital markets will lead to lower fee income. We believe that Blackrock is able to adjust their cost base to potentially negative fee income developments. Also, assets continue to grow, driven by passive products. The shares currently trade at a price/earnings ratio of 14 times 2023 consensus earnings. For a cash generative business with long term growth prospects, this is too low. The dividend yield of around 3% remains attractive.

In April we have added 2 new positions to the portfolio. The first new position is Telefonica. Telefonica is active in fixed and wireless telecommunication across Europe (Spain, Germany and UK) and Latin America. They currently are market leader in their home market Spain, which is also their largest market (~30% of revenue). The Spanish market is seeing consolidation in the market, which we believe this will lead to a more stable pricing environment. Brazil is also a consolidating market, which should eventually lead to improving profits. Telefonica has lowered its debt levels by selling infrastructure and non-core assets. These developments are not yet fully reflected in the share price. The current dividend yield of around 7% is attractive. The second addition to the portfolio is Chesapeake Energy. This US shale gas producer is benefiting from very high natural gas prices. The high natural gas prices result in substantial free cash flow generation, which are not reflected in the share price. We have carefully evaluated Chesapeake’s ESG profile. The company has various policies that are clearly better than industry standards. E.g., it uses 3 walls of casings around the wellbore, it provides details about greenhouse gas emissions, and management compensation is dependent on achieving environmental and safety standards. Natural gas can be seen as a transition fuel in the move towards renewable energy. We actively engage with management to further improve the ESG profile of the company.

To finance our new positions we have sold our positions in SK Square and Redwood Trust. SK Square is a spin off from our holding in SK Telecom. The position was therefore relatively small. After analyzing the SK Square business in more detail, we concluded that a larger position was not warranted. We have sold our shares in Redwood Trust, which is an American specialty finance company focused on several areas of housing credit. We have sold Redwood Trust for two reasons. We expect that higher interest rates will put pressure on mortgage refinancing volumes. Additionally, margin pressure is expected as the result of intensifying competitive pressures.

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.