The following texts refer to the fourth quarter of 2018.

Performance
In the fourth quarter of 2018, KOP’s Net Asset Value (NAV) declined by 14.9% from €196.48 to €167.29 per participation. This brings the return over 2018 to -21.1%. The average return over the past three years is 14.2% per year. Following a number of strong years, the market prices of most of our companies succumbed to the negative global market sentiment and fell in 2018.

Trading
As of 2 January 2019, the fund’s trading price was €168.13, based on the NAV as of that date and including a premium of 0.5% as a result of net inflow into the fund. This brings the size of KOP to about €600 million, with the number of issued KOP shares increasing by 2% as a result of trading on 2 January. We were again able to welcome new participants to the fund, including in the new holding company Loire. We continue to see interest from prospective and existing clients, especially now that prices are being squeezed. For the next trading date of 1 April 2019, an instruction deadline of 4pm on 28 February 2019 applies for orders in KOP (via Euronext) and a few days before that for the holding companies (via the Kempen transfer agent).

Market review
Macro-economic and political news caused sharply negative results on the financial markets in the fourth quarter. The main triggers for a fresh sell-off came from the US. Although Fed chairman Powell raised interest rates by 0.25% to 2.5% in line with the consensus, his comments regarding two forecast interest rate hikes in 2019 did not go down well with investors. This is due to the risk of the sound economic recovery in the US and the fragile upturn in Europe reversing and becoming a slowdown. The comments clearly also touched a sore spot with President Trump, who alluded to firing the Fed chairman, exacerbating the situation further. Later, more conciliatory remarks and reassuring comments about the good progress being made in negotiations on the trade agreement with China ultimately led to a brief rally at the end of 2018.

The poorer market sentiment had a particularly adverse effect on the prices of European small caps. In times of risk aversion among investors, small caps perform worse in relative terms than the more liquid large caps. On top of this, international institutional investors turned their backs on Europe, as can be seen from the substantial outflow that European equity funds faced in 2018. Finally, cyclical equities performed relatively poorly due to the (expected) slowdown in economic growth in Europe, China and to a lesser extent the US. This led to companies in the automotive, business services, semiconductor and constructions sectors coming under pressure.

The above also squeezed the prices of equities in the KOP investment universe (European small caps, often with a cyclical nature) and the companies held in KOP saw their market prices fall as well.

In talks with participants and prospects we regularly discuss the volatile nature of the market prices of our participations and in turn the volatility inherent to the value of KOP shares. In the less liquid portion of the market in which KOP invests, market prices can deviate sharply from the fundamental trends at the companies in which we invest and this can sometimes last for several months or even quarters. The prices in our investment universe therefore have a tendency to overreact upwards or downwards, while we cannot always take advantage of these movements in our capacity as portfolio managers due to the lower level of liquidity in these equities. That is why it is important to focus our attention on the fundamental trends at our companies and to apply a long-term investment horizon. On a three and five-year basis, KOP has noted sound annual returns of 14.2% and 14.7%.

The fundamental trends at our companies are generally positive. In strategic terms, our companies make the right decisions, although external factors may sometimes temporarily squeeze profitability.

We did not complete any new participations in the fourth quarter. However, we did increase our position in BESI substantially in the wake of the price correction. We made minor adjustments to our positions in other participations on the basis of liquidity and valuation.

We expect Coats, Interroll, AvonRubber, Lectra and Nedap to display a sound increase in earnings in 2019.

Coats continues to increase its market share in threads and yarns for clothing and footwear, as well as in what are known as performance materials for high-end applications. Our visit to the factory in China in October served to confirm our positive impression of the company and its products. Interroll has the highest growth profile in the KOP portfolio thanks to the global trend for automating distribution centres, partly prompted by the rise of e-commerce. The company continues to invest large sums in order to facilitate this growth. Avon Rubber is profiting from the growing global demand for its gas masks and respiratory protection systems, for the military as well as the police and fire service. In the Dairy division, the company continues to increase its market share via its unique Farm Services concept. The launch of new machines and software over the past few years enabled Lectra to enjoy persisting earnings growth in 2018. Finally, earnings at Nedap have been boosted by recent measures relating to cost control, focus and scope.

We expect Washtec to report little earnings growth in 2018; this is linked to its strong earnings in 2017, when it delivered a very high number of large orders in the US. In underlying terms, Washtec’s growth profile remains intact.

A number of companies in the KOP portfolio also faced earnings pressure in 2018 as a result of external or cyclical factors.

For instance, ForFarmers is unlikely to equal its earnings from 2017 due to rising logistics costs (low water levels in rivers) and one-off transaction fees relating to recent acquisitions in Poland, the Netherlands and Belgium. We anticipate a significant upturn in earnings and acquisitions in 2019, funded by a solid balance sheet.

In the course of 2018, BESI saw the semiconductor cycle decline in the wake of several strong quarters. This is a common pattern in the industry in which BESI operates: about six quarters of upward movement followed by six quarters of downward movement. This means that in all probability the cycle will be negative in 2019 and the short-term profitability of BESI will be squeezed as a result. However, we are convinced that BESI is becoming stronger with each cycle, enabling it to continue increasing its market share in the cyclical growth market for semiconductor equipment through a combination of product innovation and cost control.

SAF Holland had a tough year, in which its European and Asian activities flourished but its US earnings were squeezed. This is due to the decision - in hindsight an unfortunate one - to implement a radical reorganisation of its US activities at a time of an unexpected and very sharp upturn in the end market for trailers and trucks. This led to SAF Holland experiencing delivery problems and rising costs and ultimately seeing its US profits evaporate. However, we believe that the (cost) pressure on the company will ease over the course of 2019 and its profitability will recover, assuming that the end markets remain sound. In December, SAF Holland consolidated its management team by appointing a new COO and adding the new role of Chief Procurement Officer.

Oeneo is another company experiencing a temporary squeeze on earnings, driven by the sharp increase in the price of cork. Cork trees are harvested (have their bark removed) once every nine years and 2018 felt the aftermath of the 2008/09 financial crisis when a lack of money saw fewer trees being planted in Spain and Portugal, causing low supplies of cork now. The higher cork price is slowly being passed on to customers by Oeneo and the company recently repeated its forecast that its profitability would normalise in the next few quarters.

El.En experienced a headwind from an unexpected source. Sales of one of its most profitable products (the Mona Lisa machine) were halted by a letter the US Food and Drug Administration (FDA) sent to all players in this specific market segment. Some players were making claims in their marketing material that breached FDA guidelines. Although El.En was not one of the guilty parties, it caused a sharp drop in sales, partly because El.En sells its products via partner Hologic, which had just increased its stocks of Mona Lisa machines in the wake of a difficult merger with Cynosure in 2017. Here, too, we expect sales of Mona Lisa machines to normalise once more over the course of 2019 and El.En’s profitability to recover. In addition, the trade war and uncertainty surrounding economic growth in China are having an impact on industrial activities.

Valuations
The earnings growth at the majority of our companies and the lower equity prices led to a more attractive valuation for the KOP portfolio in the fourth quarter. The portfolio’s cash-adjusted price/earnings growth (EV/EBIT 2019E) decreased from 13 at the end of September 2018 to 11 at the end of December 2018. This translates into an increase in the portfolio’s price potential.