During the first three weeks of the month, equity markets continued their upward path. Although coronavirus already forced parts of the Asian economy into shut-down, equity markets around the world were hitting new highs. When the virus hit Europe, and started to spread even further, markets corrected sharply. The fear is that it might have a significant negative impact on company earnings and the broader economies. During the last week of February, many indices posted their worst week since the 2008 crisis. Several companies already warned that their businesses will be affected in the short term.

The Fund ended the month sharply down, but outperformed its benchmark, the MSCI World Value Total Return Net Index. During a panic sell-off it is often indiscriminate, equity investors basically sell-off almost everything. The most striking fact is that the ‘Quality Bubble’ has become even more extreme in February. Already for a while there is a huge valuation dispersion in the market, which now has reached levels not often seen before. You need to go back to the IT-bubble at the start of this century to find similar valuation dispersions. The valuation of growth and low vol stocks has increased further versus value stocks. So far this year this has been a major headwind for the strategy. Going forward, we see this as a huge opportunity when the market will focus more on attractively valued shares.

Strong performers this month were Tutor Perini, Gilead and Sino Land. Tutor Perini was strong despite reporting somewhat disappointing Q4 results. After month end the company announced that it is in talks with a potential acquirer of the company. Gilead performed well as its medicine Remdesivir is a front-runner in the search for a coronavirus treatment. Hong Kong real estate company Sino Land did well after it reported in line results. Although it kept its dividend stable, it reiterated the aim to increase it going forward.

Weaker performers in February were AIB Group, WPP and easyJet. AIB was weak in the first half of the month as the Irish election outcome was perceived as negative for the company. The broader banking sector was also weak in February. Because of the coronavirus, it is possible that banks are forced to take up front provisions as soon as the economy weakens which could weigh on the results in the first half year. Advertising agency WPP was under pressure as it reported lower than expected Q4 results and gave a disappointing 2020 outlook. easyJet was weak as airliners are affected by all travel restrictions that are implemented by governments and companies. easyJet announced additional cost cutting measures to offset some of the impact.

We implemented a couple for trades in February. We sold Danish Bank Sydbank and used the proceeds to increase some of our other positions. We added telecom company PLDT from the Philippines as a new name. The valuation is quite attractive as the shares have been weak due to more competition in the telecom market. We think that this is now priced into the shares.

Our focus is on finding companies 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 analyze 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 Kempen Global Value strategy follows a disciplined valuation approach. We assess companies based on long term earnings power, and seek a margin of safety in the price we pay when we select our investments. In summary, the current environment offers the opportunity to buy a well-diversified portfolio with solid earnings power at an attractive valuation. Historically, value has outperformed growth over the long-term, but value has underperformed growth for an unprecedented period by now. As we believe in reversion to the mean, value investing could offer an attractive investment opportunity going forward. Like we wrote earlier, the current environment offers the opportunity to buy a well-diversified portfolio with solid earnings power at an attractive valuation.