The positive sentiment in the financial markets and the rotation towards value equities that started in November 2020 with the announcement of a working COVID vaccine, has continued in 2021. This trend has so far benefitted the Fund, as March was another strong month for the Fund in absolute terms. After five months of sharply outperforming its benchmark (the MSCI TR Net Value World Index), the Fund performed in line with its benchmark this month. The market remains optimistic that economies will normalize as an increasing number of people receive a COVID vaccine. This, despite the negative short-term news that several European countries renewed lockdown measures due to an increasing number of infections. Another trend supporting equity markets is the amount of retail investors have started to invest. The lack of investment alternatives and fewer opportunities to spend money on other items during the COVID crisis are mentioned as reasons to start.

In March, we reduced positions in several positions that performed very well since the start of the year such as Tapestry, Capital One Financial and AIB. We added weight to lagging positions like Merck, Gilead and Samsung. We also disposed of one position entirely being Customer Bancorp. The shares had more than tripled in value since September last year. Customer Bancorp successfully spun off BankMobile, making the bank easier to model and understand. It boosted the share price which recently traded at a small premium to book value. We added two new positions: GBL and Cisco. GBL is a holding company trading at a 25% discount versus its underlying investments (being Adidas, Pernod Ricard, SGS, Lafarge Holcim). The discount has widened compared this long-term average, which offers an attractive entry point. Cisco is the leading provider of network solutions. The company develops, manufactures and sells networking and communication hardware, software and services to the global IT industry. There are signs that enterprise IT spending is recovering, which should benefit the company.

Strong performers during the month were Tutor Perini, MTN Group and Arcelor Mittal. Construction company Tutor Perini performed well without company specific news. The American Institute of Architects’ so-called ABI score was positive for the first time since February 2020, which can be seen as an indicator for increased construction spending in the U.S. South African telecom company MTN rose sharply after the company announced plans to separate its fiber and fintech units as part of a plan to unlock value and raise capital to fund expansion. The shares jumped to their highest level in more than a year. Steel producer Arcelor Mittal performed well without specific news in March. In February the company already announced a new and attractive capital return policy, while it also stated market conditions are strong and showing an improving trend.

Less than 10 holdings (out over 50 investments) within the Fund showed a negative performance in March. Weaker performers were John Wood, CNOOC and Wärtsilä. Engineering and project management company John Wood reported in-line results, but its new dividend policy was postponed again. The company wants to see more improvement in its end markets (oil & gas, infrastructure) and prefers to deleverage the balance sheet further. CNOOC fell back after a strong February performance. The stock remains volatile, after the U.S. Government has applied sanctions on the company (like some other Chinese companies), prohibiting U.S. investors from buying the shares. Wärtsilä also fell back after a strong February share price performance, without company specific news.

In our investment process, we spend 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. 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 a diversified portfolio, 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. We continue to purchase our investments based on intrinsic value, while ensuring a margin of safety when we select our stocks. We are confident that the portfolio will show attractive risk return characteristics over the next 3 to 5 years.

For most part of 2020, the market has favored companies with high short-term earnings visibility and sold off companies with short term uncertainty despite of long-term potential. This resulted in a large valuation dispersion within the market, which remains despite the value rally that started in November last year. We are convinced that this continues to provide a unique opportunity in terms of stock selection. Although the return to a more normal situation remains uncertain, there seems to be light at the end of the tunnel as vaccines are rolled out. In our view this should help to close part of that valuation gap and is encouraging to see the first signals for some months now.

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.