Compared to the previous months, May was a relatively quiet month for equity markets globally. They continued the upward path after the sharp rebound in April. In many countries the severe lockdown measures are being eased which should help economies to gradually recover. The Fund booked a positive absolute performance over the month. Year-to-date the Fund still has an negative performance and is underperforming the index.

The most striking fact of the last months is that the ‘Quality Bubble’ has become even more extreme. A huge valuation dispersion between quality- and value stocks has been present for some time in the market, which has now reached levels never seen before. You need to go back to the IT-bubble at the start of this century to find comparable valuation dispersions. Going forward, we see this as a huge opportunity for the strategy when the market will focus more on attractively valued shares.

Strong performers this month were Ferrexpo, Tutor Perini and ALD. Iron ore producer Ferrexpo mentioned trading has been strong also recently during the crisis. Its pellet production from own ore is strongly up this year. Construction company Tutor Perini reported better than expected results and mentioned the effects of the current crisis on its business are limited. Also French vehicle leasing company ALD reported resilient results and the shares recovered from the decline in March.

Weaker performers in May were Sino Land, Simon Property and AIB Group. Real estate developer Sino Land was under pressure after the unrest in Hong Kong re-emerged in May. For Simon Property see below. AIB Group released a trading update that did not contain a lot of surprises. The shares were mainly weak as they were removed from an important index.

During the month we implemented some trades. We sold our position in Simon Property Group. Shopping malls are obviously being hit severely by the COVID 19 crisis. Although the economy is slowly reopening, Simon Property could see its rental income permanently decline by 20% as occupancy declines and tenants attempt to negotiate lower rents as traffic is permanently lower. Taking these developments into account the company no longer offered an attractive valuation. We used the proceeds to add two new positions: Redwood Trust and Atlas Corp. Redwood is an internally-managed specialty finance company; its valuation is very attractive after the weak share price performance. Atlas Corp is the world’s largest containership lessor and recently acquired a power generation leasing company (ARP). The valuation is quite attractive and it is well positioned to grow via acquisitions.

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, as our long-term track record indicates. We continue to purchase our investments based on intrinsic value, while ensuring a margin of safety when we select our stocks.

After the sharp selloff of the equity market during the year, our return expectations for the broad market have increased. Valuation dispersion between, and within regions and sectors have further increased this year and are now close to the peak of the technology bubble (please see the slide below for the valuation difference of growth versus value). The value strategy trades at an exceptional discount versus the market. Historically, this has led to a strong relative performance on the medium term. Also, the absolute valuation of the strategy is compelling. 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.