In June the Fund (I-class) increased by 1.9% (net of fees), thereby outperforming the MSCI Europe Small-cap index which increased by 1.3% (for the performance of the other shareclasses please check the performance tab on the website https://www.kempen.com/en/asset-management).

Initially the strong stock market recovery seen in the second half of May continued in the first week of June, before reversing part of the initial share price gains. The positive sentiment turned around based on the fact that COVID-19 does not seem to be under control in a number of (Latin) American countries. In addition, new regional lockdowns were announced in China and Europe to fight COVID-19 outbreaks. Consequently discussions about the ‘second wave’ have flared up again. Finally, Central Banks are cautious and point to the risk that the economic recovery may be slow. We saw a string of companies using the recent share price strength to issue new shares. We have participated in some of these issuances. Despite the dilution share prices responded positively as the investment cases are derisked to a large extent. Although the earnings season has not taken off yet, the preliminary trading updates are mostly inline with earlier comments and expectations and suggest a cautious recovery of business activity after the low seen in April.

During the month we completely sold one UK real estate name for tax reasons and added three new names to the portfolio. It remains difficult to predict the future development of the COVID-19 virus, its economic consequences and the green shoots of normalization. We remain in close contact with the management teams of the companies we invest in. Depending on the individual circumstances, companies are working through the slowdown in economic activity, the relaxation of lockdown measures and are preparing for the new normal. We believe that equity markets increasingly price in a fairly quick normalization scenario. We still see strong long-term potential for our portfolio holdings but remain focused on near-term earnings risks and their balance sheet strength. As flagged earlier we continue to focus on the margin of safety in our valuations and remain cautious in estimating a recovery scenario in our models.

The best performing stocks in the portfolio in June were Dialog Semiconductor, Bunzl and BESI. Dialog Semiconductor shares rebounded another 14% in June. In May the company guided Q2 materially ahead of consensus and at the end of June Dialog stated that Q2 results would even come in above the high end of the previously guided range. Dialog also made positive comments on the Q3 report which we see as an indication of the confidence management has. Our investment case has not changed. We have a lot of trust in Dialog's management team and the stock remains attractively valued, while the strong balance sheet provides downside protection in an uncertain environment. Bunzl (+13.6%) released a good trading statement in June. While several companies report revenue reductions driven by the effects from COVID19, Bunzl reported organic growth of 2% as demand in safety, cleaning & hygiene and healthcare has offset declines in foodservice and retail. Due to this mix change and more demand for private label solutions there will also be a positive effect on the margin. BESI (+15.5%) held a presentation during an analyst session. Besides what we already know that BESI performance is best in class, the company gave more details on its technological roadmap and future growth opportunities. Higher accuracy, greater miniaturization and increased complexity will continue to drive demand for advanced packaging. We believe BESI is excellently positioned to reap the benefits from these trends with new (generation) systems and strong customer relations.

The worst performing stocks in the portfolio in June were Hikma, Fagron and Greggs. In the risk-on mood of global and European equity markets at the beginning of the month, the shares of Hikma Pharmaceuticals (-14.5%) had a negative start. The share price recovered as the mood of investors turned. However, on June 22 a larger shareholder sold its entire 16.5% stake in the company. The shareholder in question, sector peer Boehringer Ingelheim, received this share package as part of payment for an acquisition in 2015. Hikma shares have lagged the index since the sale as, in our view, investors are cautious with respect to the reasons behind the disposal of this larger shareholder. In line with the close relationships that we have with the companies that we invest in, we have since been in contact with Hikma Pharmaceuticals and see no particular reasons for concern. We have seen another disposal of shares from an existing shareholder at Fagron (-13.0%). Alychlo, the investment vehicle of Marc Coucke sold 4.2% of the company but remained a 10.7% shareholder after this transaction. In our view, the disposal served to generate cash which could subsequently be injected into other investments held by Alychlo like a zoo and a football club which are more troubled by the consequences of COVID19. We are also mindful of currency fluctuations in the countries where Fagron is active but believe that the company can apply several mitigating actions to soften the resulting impact on its profitability. Although it is positive that Greggs (-13.2%) announced to reopen 800 out of 2.050 shops in the course of June, the company’s key challenge remains how to reach its pre COVID-19 productivity during peak hours (breakfast and lunch time) in times of social distancing and low commuter traffic. Click & collect and work from home customers may open up new commercial opportunities but may take some time to offset.

ESG commentary
As a participant of the Platform Living Wage Financials (PLWF) we get together with allied financial institutions to encourage, support, assess, and monitor investee companies with regard to their commitment to paying a living wage to workers in their operations and supply chains. As recognized by, among others, the International Labour Organisation (ILO) and the OECD, living wage is a fundamental human right. With two years of experience in living wage assessment and engagement, the alliance further improved its assessment methodology and engagement priorities for 2020. We continue to work with Coats Group, a UK based yarn manufacturer, on their living wage approach and disclosure. In June we continued our engagement on worker protection during the COVID-19 pandemic, addressing subjects such as prudent financial management, value chain resilience and flexibility around delivery dates, layoffs, part-time working arrangements, sick leave and many more. Furthermore, we are in the process of applying the 2020 living wage methodology to assess Coat's policies and disclosures. The results of the scoring will be made available in the second half of the year.