This is the second monthly report for the Kempen Global Value Fund. The Fund continued the positive absolute January performance also this month, but underperformed its benchmark, the MSCI World Value Total Return Net Index.

The investment objective of the Fund is to invest in a portfolio of listed companies worldwide that trade at a discount to their intrinsic value. When investing, the focus will be on strong valuation discipline, cash generation and rational capital allocation. We conservatively estimate the fundamental value of a business and buy with a sufficient discount to create a margin of safety for potential mistakes. The Fund combines a business owner’s mindset with a rational investment process. 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.

The market was still in a positive mood because of the same reasons mentioned in January. In particular the announcement by the Fed (about a slower path of potential interest rate hikes) continued to boost sentiment. In addition, the earnings season has been better than expected.

As mentioned, the Fund lagged its index, mainly because of negative stock selection. Among the weaker performing stocks in February were Leopalace21 Corp and Antero Resources. Japanese Leopalace21 constructs and leases apartments. Before we bought a position, the share price had dropped significantly as the company had issues with a range of its apartments which would create additional costs to fix the issues, and reduce occupancy rates in the meantime. Taking into account the elevated expenses and lower occupancy rates we entered this position as we continued to have a margin of safety for further headwinds. This month the company announced that it would have to take additional provisions as the company found more apartments with issues. Although the additional provisions have decreased the intrinsic value of the company, after the share price drop we believe the risk reward is interesting and we added some to our position. US oil & gas company Antero Resources was weak as one of the main shareholders sold part of its stake which created some selling pressure. Furthermore, the company did not benefit from the stronger oil price as their exposure to NGL’s (National Gas Liquids like Propane and Butane) decoupled a bit from the oil price in February. The strongest performer was Arcadis, the Dutch engineering firm. The company announced strong fourth quarter results with improvements in cash flow and balance sheet because of this, after which the shares rallied.

We believe overall global stock market valuations are elevated, although Emerging and European markets still offers some pockets of attractively valued opportunities. The North American market is quite expensive. 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 our investment process we spent 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.

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.