With one of the weakest December months on record, the stock market ended 2022 in style. Investor sentiment was driven by worries about a weakening economy. According to the International Monetary Fund (IMF) 2023 is going to be tougher on the global economy than the one we have left behind. The economies of the EU, the US and China are simultaneously slowing down. The IMF expects that about one third of the world economy will end up in a recession. Tech-related stocks had strongly negative returns. At the start of 2022, these stocks were priced for perfection. Now that the growth outlook of these companies are deteriorating, the stocks are experiencing a substantial derating. Given our disciplined valuation-driven approach to investing, we were able to sidestep much of the downturn in these tech-related companies. Investors have clearly changed their attitude towards value stocks. Value stocks in general did substantially better than growth stocks. In this environment, the performance of the Fund was ahead of the broader market. The performance was also better than the performance of the MSCI World Value Index.

Despite the falling market, the Fund showed positive performance in financials (SMFG, +16%), industrials (ALD, +16%), and Real Estate (Sun Hung Kai Properties, +10%). Sumitomo Mitsui Financial Group is one of the largest Japanese banking groups. It provides retail, corporate, and investment banking; asset management; securities trading; and lending. The Japanese Central bank announced in December that it would allow the yield on 10-year government bonds to rise to a maximum of 0.5%. Previously, the maximum was set at 0.25%. This change in central bank policy makes it much more attractive for banks to provide loans. As a result, earnings estimates for 2023 and 2024 are moving up substantially. Despite a 40% return (in JPY) over the past year, the shares are still not expensive. The shares trade at around 9 times consensus expected earnings for 2023. The shares have a dividend yield of 4.3%.

Another strong performer was ALD (auto-leasing). Earlier in 2022, ALD announced the acquisition of LeasePlan, which would almost double the size of the company. To finance this acquisition, ALD announced a rights issue in November. The rights issue was a success and the transaction will proceed as planned. An important reason for a lowly rated share price had been the limited free float of the shares. I.e., Societe Generale owned 80% of ALD, which made it hard for institutional investors to buy a sizable position in ALD. After the rights issue, the free float will be substantially higher. Societe Generale’s ownership has been reduced to just over 50% of ALD. On our estimates, earnings per share could be 1.65 EUR within the next two years, which would leave the shares trading at less than 7 times earnings. For a market-leading company in and a strong management team, the shares are substantially undervalued. With the increased liquidity in the shares, we believe that the shares will benefit from a strong re-rating over the next two years.

The communication services sector detracted most from the performance of the Fund. Vodafone, Nexstar Media and Warner Brothers Discovery were to blame. One of the worst performing stocks in the portfolio was Sysco (-15% in December). The US based company is the world’s largest foodservice distributor and caters food and related non-food items to for example restaurants, schools and hospitals. The company is recovering from the covid-pandemic. In December, the Chief Financial Officer (CFO) of Sysco unexpectedly announced his retirement. Although there appears to be no direct impact on the business, investors were disappointed by the news. We still believe that Sysco will continue its long term track record of growing its earnings and dividends steadily over time. The current dividend yield of Sysco is around 2.6%.

In December, we built up positions in Medtronic. Medtronic is one of the largest medical technology companies in the world. It has four business lines, which are Cardiovascular (e.g., pacemakers, catheters, stents), Medical Surgical (e.g., surgical stapling devices, robotic-assisted surgical products, and inhalation products), Neuroscience (e.g., spinal cord stimulation, neuro stimulators, implants), and Diabetes (e.g., insulin pumps and monitoring systems). With this wide portfolio of products and an aging population, Medtronic will benefit from strong industry-wide growth. The shares have done poorly over the last years as a result of the covid-pandemic, which has led to a reduction in surgical procedures. Medtronic also suffers from hiccups in their supply chain and from input cost inflation. Over time we expect Medtronic to fully recover from these temporary setbacks. The shares trade at historically modest multiples of earnings (~14x versus 18x), and provide a dividend yield of ~ 3.5%. Once Medtronic recovers from the temporary setbacks, we expect the shares to benefit from growing earnings and multiple expansion.

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.