After the best month in the Fund’s history in November, the performance in December was more moderate but again quite positive. Also the relative performance versus the index, the MSCI TR Net Value World Index, was strong and it resulted in an almost flat relative performance for the full year.

While many countries had to announce new lockdown measures, global equity markets kept their optimism as the first Corona vaccines were being injected. As a result, many well-known indices reached all-time highs during the month. There was not a lot of company specific news in the quiet December month.

During most part of 2020 the Fund lagged its benchmark, but a very strong fourth quarter almost made up for all the relative losses. During most of the year, within the value universe we saw a trend where the more expensive companies significantly outperformed which has been a headwind for the strategy. This trend was already less pronounced during the second and third quarter, and since the end of September the trend has clearly turned in favor of more attractively valued companies. Still, the valuation dispersion in the market remains high and we continue to see great stock picking opportunities.

In December, we reduced positions in holdings that had performed well over the last months such as Ferrexpo, Arcelor Mittal and LG Corp. We added to the existing positions in Unilever and Galp. We sold our position in Redwood completely and added a new name: Unipol Gruppo. This Italian insurer is the 85% owner of Unipol-Sai. Unipol-Sai has the highest non-life market share in Italy (around 21%). It is a well-managed midsized insurer with a strong solvency position, the company has a competitive edge by its 30 thousand agent distribution network. The shares of Unipol are attractively valued based on our EPV model.

Strong performers during the month were the three basic material companies Ferrexpo, Western Forest and Arcelor Mittal. Ferrexpo is benefitting from a tight iron ore market. The shares have almost doubled in price in 2020, not leaving a huge amount of upside in our valuation model (like mentioned we reduced the position as a result). Western Forest has performed very well since the lows in March. The company has seen its end market improving, where tight supply has led to higher prices in lumber. The position remains very attractively valued. Arcelor Mittal has seen its quarterly results improving during the year and has now reached its deleveraging target, which opens the floor for higher capital distributions to shareholders. When it reports full-year results, Arcelor will also give a more extensive update on its cost cutting efforts and the sale of the Arcelor US business will be closed. Also here we reduced the position.

Weaker performers in December were CNOOC, ING Group and Texhong. Chinese oil company CNOOC was unexpectedly added to a blacklist of sanctioned companies by the US Trump Government. The accusation is that CNOOC has alleged ties to the Chinese military. U.S. investors are banned from owning or trading CNOOC securities and other blacklisted Chinese companies (35 in total). The underlying operations of CNOOC are not affected. ING lost as banks in general were weak in December as there is still some uncertainty how the ECB will treat the 2021 dividends. Chinese yarn manufacture Texhong had a weaker month without company specific news.

For most part of the year, the market has favored companies with high short-term earnings visibility and sold off companies with short term uncertainty despite of long-term potential. Given the uncertain outlook, part of that short-termism is certainly justified. However, it has resulted in a large gap in valuation within the market which remained also after the November 2020 value rally. While some companies appear priced for perfection, others look priced for depression. We agree that several of the ‘quality’ companies can be very attractive long-term investments, and we have (had) our fair share in the portfolio over time. However, in our view these companies are not great investments at any price. Beyond that, signs of irrational exuberance are starting to appear in the market. This seems to be driven by the return of the retail investor and a fear of missing out. After a decade of success for technology driven companies, we are now seeing ‘concept stocks’ from companies that have little more than a business plan being valued as if they will successfully create and conquer a new market in a matter of years with close to 100% certainty.

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. We continue to purchase our investments based on intrinsic value, while ensuring a margin of safety when we select our stocks. We are confident that the portfolio will show attractive risk return characteristics over the next 3 to 5 years. We continue to diligently execute our investment process. As is the case with every crisis, it also offers attractive new opportunities. We have already added several new attractive companies to the portfolio and are confident that we will find more.

The absolute valuation of our strategy remains 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.