In September the Fund (I-class) decreased by 1.0% (net of fees), thereby underperforming the MSCI Europe Small-cap index which decreased by 0.6% (for the performance of the other shareclasses please check the performance tab on the website https://www.kempen.com/en/asset-management).

The combination of very low interest rates and the diminishing uncertainty surrounding COVID-19 gives companies confidence to raise capital or even consider an IPO what we consider positive. Despite the fact that valuations of a number of IPOs seem elevated, investor appetite is enormous. During the month, financial markets were also confronted with the increasingly harsh tone of the upcoming United States presidential election. The chaos during the first debate and the unconventional statements will not contribute to strengthening the confidence of financial markets in the course of the elections and the possible economic consequences thereafter. After a long period of rising stock prices in the technology sector, these stocks corrected in September for no immediate reason. With share price rises exceeding the estimate upgrades by a wide margin, it seems in particular that the valuation elastic cannot be stretched indefinitely. In contrast to the impact of the COVID-19 lockdowns on the financial markets in the spring, stock markets do not seem to be too concerned about the worrying trends in the number of infections and hospital admissions in many countries. The expected ‘second wave’ has arrived, but earlier than widely anticipated. With more targeted government measures and better preparation by many companies, the economic damage appears to be limited to a number of sectors for the time being.

We added Jost Werke to the Portfolio and fully sold the remaining positions in Durr and SSP Group. It remains difficult to predict the future development of the COVID-19 virus, its economic consequences and the for some sectors long path of normalization. We remain in close contact with the management teams of the companies we invest in. We still see strong long-term potential for our portfolio holdings but 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.

In September Fabege, Fagron and CIE delivered the strongest contribution to the portfolio. After some weakness in the share in August, Fabege (+16.0%) traded higher in September. Early in the month the company announced that it has started the share buy-back program approved by the AGM on 2 April 2020. This buy-back sends a strong signal to the market that Fabege management believes that the shares are undervalued. Fabege has also been included in the sustainability index Global Challenges (GCX) as the first real estate company. The shares of Fagron (+13.2%) showed a strong performance in the month which in our view was driven by investors appreciating the defensive characteristics of this business in an environment of increasing COVID-19 infections. Attractively valued CIE (+11.2%) shares performed relatively strongly following lockdowns-related weakness during previous months, in line with the overall auto sector. In a recent call, the company confirmed industry data that global car production in Q3 was better than previously forecasted and that the car industry continues to be on the road to recovery. A consequent recovery in earnings and free cash flow would abate investors’ concerns about CIE’s balance sheet that is quite levered following a number of sizeable acquisitions in recent years.

The companies with the worst contribution to the portfolio in September were Beazley, Hibernia and BESI. Beazley (-30%) announced an additional GBP170m charge as the recent worsening of COVID-19 trends increases the likelihood of (earlier delayed) events to be fully cancelled. Although the company’s capital position remains within the guidance range and should be sufficient to further grow the business, the room to absorb above average natural catastrophic losses has reduced. Hibernia (-16.3%) traded lower in September. There was no company specific news, but according to sources Google walked away from its plan to lease 202k square feet in Dublin, which could accommodate 2,000 employees. Technology company tenants have been a very important driver for the Dublin office market. Meanwhile Hibernia continued to steadily buy back its own shares and early October the CFO bought 40,000 additional shares, which might indicate that the shares are undervalued. BESI's (-8.4%) share price was under pressure in September, in line with the global chip sector. Sentiment deteriorated due to further measures taken by the American government to prevent the Chinese government from having (American) semiconductor technology. The requirement for a US license to sell products to the Chinese SMIC did not help sentiment around the sector and the BESI stock. BESI is a strong player in China, where it delivers to local customers.

ESG commentary
It is almost five years since the Paris Agreement was signed and we are seeing countries, cities and companies across the globe reaffirm their commitment by pledging to reach ‘net zero’ emissions by 2050. At Kempen we believe it is critical that investors take a leadership role in driving the low carbon transition by aligning their portfolios with a net zero path. This month we put our money where our mouth is by launching an updated Climate Change Policy that explicitly commits us to have net-zero emission investments by 2050. We also set a short term objective to align the portfolio with the pathway of the Paris Agreement (and the Dutch Klimaatakkoord goals) by 2025. Furthermore, we encourage our investee companies to make net zero commitments and take on science-based emission reduction targets through active engagement. We were pleased with the recent announcement of Tate & Lyle that its GHG reduction goals were approved as science based targets in September.