December was a positive month for the strategy both in absolute and relative terms. The Fund outperformed the MSCI World Value Total Return Net. However, for 2019 the Fund lagged the index despite the strong absolute performance. The valuation dispersion in the equity market remains very high. Investors continue to search 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 ‘low vol’ stocks 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 John Wood Group, Samsung Electronics and Dixons. Wood Group was sharply up without specific news, but the shares had been weak most of the year. Samsung performed well in line with the rest of the technology sector. Dixons reported better than expected first half results and the company reiterated both their 2020 and their longer term (2024) guidance.

Weaker performers in December were Cardinal Health, Orange and Tutor Perini. Cardinal Health was weak without specific news, the shares had performed strongly the previous months. Orange was under pressure as the guidance for 2020 was a bit softer than expected. Orange did announce a cost reduction plan that should lead to substantial savings by 2023. Tutor Perini reported that it will book a charge related to the unexpected adverse jury verdict in the Seattle Tunnel Partners case.

We sold some positions completely this month (Lukoil, Boskalis, Roche, Limited Brands, Valeo and Invesco), while also adding new positions (CNOOC, Wartsila, Reckitt Benckiser, Prudential and Renault). Lukoil, Roche and Valeo were sold after the strong rise in the share price resulted in a less attractive valuation of the shares. Boskalis was sold as the expected improvement in profitability was already reflected in the share price. Limited Brands was sold after its Victoria Secret brand continued to perform poorly with negative like-for-like sales. Invesco was switched into a more attractively alternative, U.S. insurer Prudential Financial. Finnish industrial Wartsila has strong market positions in power generation and marine markets, while the valuation is quite attractive. The share price has been weak as the order intake is under pressure. CNOOC is an attractively valued Chinese oil company that has exposure to one of the most promising oil projects globally. Reckitt is one of the few staple companies with a relatively attractive valuation. There are plans to split the company in two divisions, consumer health and hygiene home products which in our view could create additional shareholder value. Finally we added Renault. Despite the turmoil around the previous CEO and the weakened relationship with alliance partner Nissan we believe there is long term value in the company.

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.