2018 First Quarter

Welcome to the first newsletter of the Sustainable Dividends Value Fund. Since January 2016 I am investing according to this strategy. Since March 2106 the results of my investments are visible on the website of Probeleggen. And now the Sustainable Dividends Value Fund has seen the light. In January I started with this new fund, focussing on investing in European companies with a sustainable dividend policy. But actually I am already since 2004 managing assets using a strategy with a focus on dividend paying stocks. At first this was for clients of Dutch bank ABN AMRO. Later our team became part of Fortis and shortly thereafter of French bank BNP Paribas. During all these years my aim was to find European stocks with nice dividends, but also with the potential for price gains. Before moving over to the current market situation and recent developments in the fund, I would like to spend some time on the assumptions underlying my investment policy. These assumptions, or the philosophy, will be leading my choices for the investments in the fund.

The importance of growing dividends
History teaches us that investing in dividend stocks will in the long run lead to superior returns on the stock market. And that these above average returns are structural. Especially if dividends are growing every year. The graph below is exactly showing this. An investor investing one hundred dollar in the US S&P 500 Index in 1972 would have generated 26 times that amount after 45 years. A nice return indeed. However, if our investor would have invested that same 100 dollar in just the dividend paying stocks of the S&P index, he would have gained 50 times that amount. Quite a difference, I would say! Still better returns are possible. Our investor would have made 70 times his investment, if he would have picked just stocks of dividend growing companies. Year-on-year dividend increases are often a signal that point to continuously growing profits and therefore a successful business model. This is the basis of my investment philosophy.

The importance of patience
From the same graph we can draw a second conclusion. It is obvious that share prices are volatile, and periods of price gains are followed by – often short – periods of price declines. This is nothing to worry about. At least not for patient investors. Investors with a long investment horizon will not easily run into permanent loss. There will always be enough time to wait for the economic cycle to turn for the better, and for markets to recover again. Investors with a short investment horizon shouldn’t invest in funds that are investing in just equities. I have a very long investment horizon myself. It will take at least 30 years before my retirement. And that is a comforting idea, given that investors in equities (almost) always make a profit over investment periods of 10 years or more. That’s why I’ve invested the majority of my own assets in the Sustainable Dividends Value Fund. The fund managers participates both in the profits and losses. Hopefully that’s a comforting thought for you as a client.

The investment policy
Now, I would like to take the opportunity to give you a quick overview of the stock selection process for the portfolio. As mentioned before, dividends need to be sustainable. This means that they should be paid out in the years to come as well. Therefore it is important that companies have a business model, which will still be profitable five to ten years from now. And in order to make a clear estimate on the profitability it is important to understand what companies are doing. That’s why I’m only investing in companies where I do understand the business model. Furthermore the company needs to be financially healthy. Investing in companies with a strong balance sheet lowers the risk of permanent loss of capital for investors. And it creates flexibility for companies to take advantage of strategic opportunities, whenever they present themselves. A strong balance sheet ensures that a company will also be able to pay the dividend during times of economic headwinds. And this is what matters to shareholders. Then it is important that management of a company has made significant investments in the shares of the company themselves. For me, this is the ultimate proof of management and shareholders being aligned.

Purchasing at a discount
Not every good company is a good investment. Therefore it is important to choose high quality companies, which are undervalued versus their true or ‘intrinsic’ value. Stocks of these companies offer the opportunity of a relatively high return versus the risk that an investor takes investing in this kind of companies. Different reasons exist for the discount versus the intrinsic value. Examples are a temporary setback in terms of performance for the company, a change in management, a negative sentiment for the sector, reorganizations, or a lack of information, which may lead to less attention from investors for the company. The intrinsic value is determined by looking at prices paid in the market for comparable companies, when they get acquired. This is the value that an acquirer can afford to pay for the company. Before I buy a stock, I want to make sure I’ll buy it at a discount versus the intrinsic value. In future newsletters I will elaborate on my investment policy. From time to time I will also discuss a specific stock in the portfolio, and explain the investment case.

A fine entry point
Back to the current situation. We have had a rather turbulent start of the year. After a first positive week European markets stabilized, and continued to end the month with just a small positive performance. We started investing during the month, and currently stocks have been purchased for about 70% of the assets in the fund. I will use the correction in the market to add to the holdings in the fund. For long term investors this seems to be a nice entry point into the markets. The global economy is growing at a solid pace, and company profits are growing accordingly. Despite the fact that the average valuation of stocks in the markets has gone up somewhat over the past few years, there are still plenty of stocks trading significantly below their intrinsic value. It is my job to track down these stocks for you, and turn the investment ideas into a well-diversified portfolio. This is a challenge that I am more than happy to accept. Once more I would like to thank you for your trust in me.

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