August was a weak month for equities. Investors are more and more convinced that the global economy is in a recession or is heading towards one. In light of this slowdown, the general expectation was that central banks would reduce the speed at which interest rates are raised. Comments by central banks, most notably the Fed, clearly indicate that fighting inflation is on top of the priority list at the moment. Curbing inflation by increasing interest rates will further increase the possibility of a recession. Rising rates, lower growth, and still high inflation is a combination that makes investors more cautious on equities. Within this negative environment, the Fund outperformed the broader market. The Fund performance was in line with the MSCI World Value Index.

The sector that contributed most to the absolute performance was the energy sector, which benefited from rising energy prices. Shares of companies like Weatherford, Chesapeake, and BP performed strongly. The worst performing sector was the communication services sector (WPP did poorly).

One of the largest contributors was Cardinal Health (+20% in August). Cardinal Health is an American company that focuses mainly on the distribution of pharmaceutical products. A part of the business is also involved with manufacturing, sourcing and distribution of branded and private label surgical and laboratory products. This division is loss-making at the moment. Recently, Elliott Advisors acquired a stake in Cardinal Health. This activist shareholder has been able to appoint 5 of the 11 board members. This provides Elliott with substantial power to change the strategic direction of the company. There are two obvious ways in which the activist can change the value of the company. The first way is to sell the loss-making medical division. Based on a recent transaction of a similar company, the potential price of Cardinal’s medical division could well be in excess of Cardinal’s market value. The second way to change the company for the better is to reorganize the distribution business. If Cardinal can improve its below average margins towards the margins that are achieved by direct peers, substantial value is created. In anticipation of a strong uplift in earnings, the shares have moved up substantially. Despite the strong price performance in August, the shares trade at 12 times expected 2023 earnings. The shares provide a dividend yield of around 3%.

One of the detractors from the Fund’s performance was Taylor Wimpey, declining 17%. Taylor Wimpey is one of the largest housebuilders in the UK by volume. There are three negatives that are driving the disappointing share price performance, which are inflation, rising interest rates, and deteriorating consumer confidence. The housebuilders have successfully battled with inflation for a couple of months now as building materials like cement, bricks, and wood have become more expensive. So far, most of the cost inflation could be passed on to the home buyers. However, investors are increasingly worried that consumers will see their budgets squeezed by higher cost of living (e.g. food and energy) and higher interest rates. We believe that the demand/supply balance in the UK housing market remains healthy, which creates a strong pricing tailwind for UK homebuilders. Recent company results were reassuring, and Taylor Wimpey’s 2022 profit guidance was raised. Both price/earnings ratio (6 times expected 2023 earnings) and dividend yield (~10%) indicate that the shares are offering good value at current levels.

Portfolio activity over August was limited.

The valuation dispersion between, and within regions and sectors remains at a very high level. We are still able to find companies that are cash generative, have market leading positions and embrace and benefit from digitalization and ESG trends. These companies are definitely not priced for that and are in our view a very interesting investments both in relative and absolute terms. 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.