In August, the NAV of the Fund (I-class) decreased by 8.8% (net of fees) while the MSCI Europe Small-cap index decreased by 6.9%.

After the euphoria on global stock markets in July, financial markets lost some ground in August. The combination of data pointing at ongoing tight labour markets and further rising energy prices (due to the further capacity limitation of the NordStream 1) make further rate hikes by central banks inevitable. The United States are ahead of Europe in this respect and seem to maintain their lead in the short term. The renewed weakness in the Euro against the US Dollar and further weakening of the European Purchasing Managers Index (below 50 for the second month in a row) underline that the possibility of a recession is still present. Reaching Europe's gas storage goal on time is welcome news. The most negative economic scenarios therefore seem less likely. Yet, according to Bloomberg gas storage only covers 25-30% of fuel consumed during the European winter. In these uncertain times, our focus remains unchanged on companies with a proven strong position in the value chain and a solid balance sheet so that the company can maintain or even strengthen its market position even in the current environment.

By now virtually all portfolio companies have reported their half-year results. Supported by historical high orderbooks most companies are cautiously optimistic about medium-term prospects and see little evidence of an economic slowdown. At the same time companies flag that the range of possible outcomes is much wider than usual thereby highlighting the ongoing uncertainty on the direction of the economy going forward. Irrespective whether economies are heading into a (light) recession or not, a long-term investor knows that economic downturns will come sooner or later. They are part of any long-term investment horizon. In our view, the important thing in such instances is to have the ability to endure them. Long-term investors need to exhibit staying power and make sure they themselves and the companies they invest in do not get liquidated in such a downturn. The timing of a bottom in equity markets is impossible to consistently determine correctly. The market recovery of July has been almost neutralized by the developments of August. A new 2022 low for the MSCI Europe Small Cap Index is in sight. July seems more and more like to enter the history books as a bear market rally. But just like day follows night or the changing of the seasons, an economic downturn will eventually be followed by an economic upturn. As the future is full of pleasant and unpleasant surprises, we hope you find comfort in the fact that your and our long-term interests are aligned. We will continue to execute our diligent, fundamental process, continue to be a partial owner of a number of high quality, attractively priced companies and continue to make portfolio adjustments if and when required with the dual goal of generating long-term investment alpha and support sustainable development.

During the month neither new names were added nor entirely sold.

In August Software AG, ASR and Beazley delivered the strongest contribution to the portfolio. The defensive and more predictable nature of the business helped Software AG (+3.0%) to outperform the broader market. Also the takeover of MicroFocus and rumoured interest of private equity in SimCorp underline that there is good value in the predictable cash flows of European software companies, that private equity is willing to pay for. Ultimately the negative impact of both the February storms and the lifting of the COVID-19 lockdown measures (causing higher claim frequency) was more than offset by strong underlying improvement and caused ASR’s (+2.3%) 1H22 results to exceed expectations. Despite only 6 months in the execution of the 2022-2025 strategy the targets already look too conservative and an increased share buyback budget (€100m annually) seems likely. Without company specific news flow Beazley (+4.3%) shares still benefited from the stronger than expected 1H22 results (reported in July) in which the FY22 combined ratio target was increased and management confirmed that growth prospects into FY23 look healthy.

The companies that delivered the weakest contribution to the portfolio in August were Coats, Travis Perkins and ASOS. Coats Group (-21.2%) landed its second acquisition this year in the structural footwear component market. After the acquisition of Rhenoflex Coats will be the undisputed market leader in this area. The second acquisition also allows Coats to unlock more synergies in the short term and create additional opportunities for footprint optimization in the longer term. The company issued 10% new shares to finance this deal, which we see as positive ahead of a potential slowdown in demand. Travis Perkins (-21.8%), a distributor of building materials, published disappointing results. In our view, the developments at Toolstation were the culprit. The Toolstation business unit is a fast-growing supplier of tools for professionals and serious do-it-yourselfers. After a period of temporary higher COVID-19 related sales, this business showed further sales normalization in combination with higher operating costs due to the expansion of its store network to facilitate future growth. After the strong share price increase in July, ASOS (-35.3%) shares lost ground in August. As inflation continues to increase, it is widely expected that consumer discretionary spending will be under pressure, impacting companies like ASOS. This headwind comes in a period where ASOS’ management is in a complete restructuring as the company announced in August that the CFO/COO, Mat Dunn, will also leave the company later this year.

In August we met the management team of ASR to discuss its approach to climate change. ASR has set the ambition to become net-zero in 2050 and is combatting climate change through its investments, real estate portfolio and mortgages. It also promotes preventive measures and compensates for climate-related damage through its insurance policies. Nevertheless, measuring the carbon footprint of ASR’s insurance activities poses a challenge that the insurer is actively trying to solve. Internal working groups are developing a methodology alongside its peers in the Net-Zero Insurance Alliance. How could ASR actively decrease emissions through its policies? Measures could include minimum sustainability requirements for materials that are used to repair cars and real estate after accidents or fire. By 2025, ASR aims to have 50% of fire damage and 85% of vehicle damage repaired sustainably. To support the energy transition, ASR is also constantly adjusting its product range and policies. For example ASR is developing insurance policies which specifically cover potential damage to solar panels, charging stations and green roofs.

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.