October was positive month for the strategy both in absolute and relative terms. The Fund outperformed the MSCI World Value Total Return Net Index. However, year-to-date the Fund still lags the index despite the strong absolute performance. The valuation dispersion in the equity market remains very high. Investors are searching for safety and earnings visibility irrespective of the valuation. Two sets of companies are perceived safe. First, there are the growth companies where investors expect continued growth, independent of economic developments. Second, there are the so-called ‘defensives’ such as consumer staples, companies where the underlying business is less impacted by the economic cycle. Cyclical companies on the other hand are eschewed.

Strong performers this month were easyJet, Euronav and Bed Bath & Beyond. EasyJet started the month weak. Despite results that met expectations, investors were disappointed that the company did not give a 2020 outlook. Later in the month the shares recovered sharply. Belgian shipping company Euronav performed well as tanker day rates increased sharply during the month. Bed Bath & Beyond rallied sharply after the announcement of a new CEO and a change in the board structure. The company is in the middle of a retail transformation and needs to adapt itself to succeed to the rapidly changing retail landscape.

Weaker performers in October were Nokia, L Brands and Ferrexpo. Telecom equipment manufacturer Nokia issued a profit warning and cut its dividend as it struggles with the roll out of their 5G equipment. The CEO mentioned several headwinds with higher production costs being the main issue. The dividend cut came as a surprise as cash flow generation was positive. There was no specific news to clarify L Brands weak performance this month, although the owner of Victoria’s Secret announced a layoff of 15% of its head office employees. Iron ore producer Ferrexpo lowered its full year production guidance. Weakness in European steel production appears to have prompted the company to marginally adjust its production expectations. Also, its CEO stepped down due to an ongoing criminal investigation involving him in the Ukraine, he will be replaced as acting CEO by the CFO.

During the month we sold the position in National Grid and invested the proceeds in Engie. UK utility National Grid had performed well and was not very attractively valued anymore. French utility Engie is more attractively valued, has a high dividend yield and can benefit from positive ESG developments.

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.