In December the NAV of the Fund (I-class) decreased by 0.8% (net of fees) while the MSCI Europe Small-cap index decreased by 2.5%.

The month got off to a good start on the basis of better-than-expected inflation figures and thus rising expectations that the steepness of the path by which central banks will raise interest rates would level off somewhat. However, statements from both the ECB and FED pointed to a continued tightening of monetary policy, resulting in weakness in financial markets in December. In addition, the initial enthusiasm surrounding the lifting of COVID-19 restrictions in China has given way to concerns regarding the sharp increase in the number of infections in China and abroad. During the COVID-19 period, the companies in the portfolio have demonstrated their ability to respond quickly to new market conditions, to operate resiliently and to be financially sound. Although the path of economic recovery will not be a straight line, the portfolio contains high-quality companies with sufficient financial strength to emerge stronger from a potential recession.

With a -22.5% decline in the MSCI Europe Small cap index in 2022 and current valuations, investors in European small caps seem to assume a prolonged period of slump in demand and structurally lower margins, in our view. However, with the exception of labor costs, the prices of raw materials and logistics are falling noticeably. Additionally, the improved availability of components/materials translates into higher plant utilization rates. Increasingly, governments are announcing energy price caps to alleviate the pressure on consumer budgets. Long-term investors know that they will eventually face periods of economic decline. This is inherent to investment horizons exceeding the duration of economic cycles. Clearly, it would be preferrable to sell at the peak and invest again at the bottom of equity markets. This approach seems very attractive in theory. In practice however, history has shown that it is impossible to consistently do so. In our view, the most important thing is that companies and investors can withstand such economic downturns. Just like day follows night or the changing of the seasons, an economic downturn will eventually be followed by an economic upturn. While the world is full of surprises, you can be sure that we will continue to execute our diligent, fundamental investment process as we continue to be a co-owner of a selection of high quality, attractively priced companies and continue to make portfolio adjustments when required with the dual goal of generating long-term investment alpha and support sustainable development.

During the month Alten was added to the portfolio whereas Subsea 7 and TAG were entirely sold.

In December Befesa, Ipsos and Bekaert delivered the strongest contribution to the portfolio. Befesa (+11.3%) is a world leader providing recycling services to the steel and zinc industry. China’s new COVID policy allows for reopening of the economy, which should drive economic growth and consequently increased demand for metals like steel and zinc. The company has been investing to expand in China, an effort that was delayed due to the country’s COVID restrictions. Also in December Ipsos (+7.1%) continued its strong year to date share price performance. While there was no company specific news in the month, the shares potentially benefited from the capital allocation decisions of previous months, where Ipsos launched the first tranche of the share buy back and announced a small divestment. Bekaert (+7.4%) shares enjoyed a strong December as the lifting of its tight COVID policy allows for reopening of the economy, which should drive economic growth and demand for steel wire, including those used in tires. In 2022, China was by far the weakest geography within the Bekaert portfolio with other areas holding up relatively well.

The companies that delivered the weakest contribution to the portfolio in December were Zaptec, Huhtamaki and NCC Group. Across the board, companies in the electric vehicle (EV) value chain had a difficult December. Shares of vehicle manufacturers like Tesla and Rivian respectively declined by 39% and 44%. In our view this was due to generally high valuations of these shares combined with still very significant yet lowered growth expectations due to macroeconomic concerns. In this environment, EV charging equipment companies like Wallbox and Chargepoint but also our holding Zaptec declined by respectively 39%, 26% and 29%. The main news specific to Zaptec was positive in that the group transferred its listing to Oslo’s main stock exchange while the costs of said transfer had been flagged previously. Huhtamaki (-8.8%) shares were weak without company specific news. The company has successfully battled inflationary pressures over the past 18 months, allowing for solid profitability over the past few quarters. With energy, plastic and paper prices below their recent peaks, the company is likely to see revenue pressure as it will have to adjust its prices going forward and investors are keen to see how margins will hold up in such an environment. NCC Group (-8.5%) shares traded lower during December. While the strengthening of the Dollar compared to the British pound was a tailwind in the first three quarters of 2022, the tailwind partly reversed in the final quarter. As NCC Group revenues and earnings are predominately in US Dollars, this fourth quarter reversal results in a negative translation effect. NCC Group will report half year earnings early February, in combination with a strategic update from the newly appointed CEO. We hope that NCC Group will announce that the Software Resilience business will be up for divestment, as we don’t believe that NCC Group is the right owner of this asset and we think that NCC Group should focus on its fast growing cyber security activities.

ESG
Sustainability is important to us. But what does it mean? The word itself is subjective and can mean different things to different individuals. The Oxford Dictionary lists one interpretation of the word as ‘the ability to be maintained at a certain rate or level’. This maintaining or longevity element is what has to be important to all long-term investors. Without it companies and investors alike will not be able to reach this long-term, faraway future. This holds for natural and social resources but also and potentially even more so for financial performance. Therefore, in our view, the best examples of sustainable companies are those that are able to offer products and services that are sustainable in themselves and/or produced in a sustainable way while generating a positive and attractive cashflow and earnings profile. In the electric vehicle value chain, Zaptec is one of the few companies that generate positive earnings and cashflow combined with a solid balance sheet. German charging peer Compleo Charging Solutions who reported the intention to file an application for opening of insolvency proceedings in December does not have the same attributes. Due to losses and insufficient financing the company will potentially not be able to achieve the long-term despite offering a ‘green’ product.

The Fund has a CO2 revenue intensity that continues to be significantly below the benchmark. Furthermore, the portfolio is on course towards achieving its net-zero emissions climate objective aligned with the Paris Agreement, Dutch Klimaatakkoord and the EU Climate Transition Benchmark in line with the 1.5°C scenarios from the IPCC in 2050 and our intermediate target set for 2025. Moreover, the Fund’s strict exclusion criteria for controversial activities, ESG integration in the investment process and active ownership including engagement result in a better Morningstar Sustainability Rating than 90% of its peers.