2018 Fourth Quarter

October 2018

Welcome to this fourth newsletter of the Sustainable Dividends Value Fund. The fund started at the first of January this year, however, the Sustainable Dividends Value strategy exists already quite a bit longer. Since the start of 2016 I have been investing this way, and as we speak eleven quarters are behind us. Meanwhile investors in the fund have gained some 33%. Like in the previous newsletter I’d like to touch upon the recent market developments and the performance of the fund. Of course I will spend time on what worked and what didn’t work in the most recent quarter. You will get an overview on how the fund currently looks like, and I will finish the newsletter with my investment case on John Laing. This stock is one of the bigger holdings in the fund, and is currently receiving quite a bit of attention due to a global focus on sustainable energy. John Laing is very much equipped to support our battle for a more sustainable society. Enjoy the read!

Market Developments
Despite the rather high volatility on the equity markets in the third quarter, the fund showed a small positive return. The value of the portfolio increased by 0.8% between the start of July and the end of September. As a result the Net Asset Value of the fund increased to 101.41 euro. This small increase masks an increasing volatility in the market. Political problems and increasing nervousness due to the trade war between the US and China overshadowed reasonable macro-economic news flow and in general positive company results. The depreciation of some emerging markets currencies (like the Turkish Lira and the Argentinian Peso) have their impact on companies that are active in those countries. Finally, the slow but steady increased of the US interest rates, and the end to the quant easing program of the ECB, are impacting the markets. Especially those companies with rather heavily financed balance sheets, will be impacted by rising rates. European equity markets gained on average 1.3% during the third quarter. In the graph on the next page you will see the performance of the strategy since the start in January 2016. As a comparison the return of the MSCI Europe Index was pictured in the same graph. During the period shown the strategy returned 33% to its investors, while the MSCI Index gained 14%.

What worked and what didn’t?
Like in the previous quarter I’ll start with the latter category. Continental was the stock with the worst performance in the portfolio during the third quarter. The value of our investment in this company was down 23%. This is the result of a profit warning of the German supplier to the car industry. A combination of increasing costs and disappointing car sales forced the company to lower the expected profit for the year by 10%. The expectations in the long run are better. Continental develops new technology for electric and self-driving cars. For instance cameras and sensors, that should allow automated driving. Of course, this is not something that will happen tomorrow, but investors with a somewhat longer horizon should feel comfortable holding Continental. Finnish Raisio also disappointed. This food company solely focuses on healthy food. The core of the company is formed by products that are based on Benecol, which has proven to lower cholesterol levels. After the company sold its divisions focusing on snacks and sweets, management is now looking for alternative investments in healthy food companies. Investors’ patience is being tested, which caused the share price to drop some 22% during the quarter. Expectations are that management will put the cash to work by acquiring one or two companies in the coming quarters.

Winners in the portfolio
Much more successful was our investment in Tomra, the Norwegian manufacturer of reverse vending machines and sorting machines. This company was discussed in my previous newsletter. As a result of the growing attention for recycling and bottle collection schemes, the stock is in focus with many investors. Last month management announced new targets during their ‘Capital Markets Day’. They plan to grow the sales by at least 10% every year for the next five years. Furthermore they expect margins to rise above 18%. As a result of this positive message the share price increased by almost 19%. British John Laing also showed a nice performance. This company globally develops infrastructure projects, like wind and solar parks. More about the stock further in this newsletter. During the presentation of the half year results management discussed a clear growth strategy for the years to come. This resulted in the share price increasing with 13%.

What does the fund look like?
By far the largest part of the fund assets are invested in companies of which we expect that they will grow profits and dividends in the coming years. The assets are invested in 24 different companies in seven European countries. By choosing stocks in 15 sectors we make sure there is enough diversification in the portfolio. We have a clear preference for sectors that generate stable cash flows. Some sectors were on purpose not chosen in the fund. Banks, for example, are suffering from the ever-increasing regulation of the sector. In general, this is not in their advantage. Pharmaceutical companies are very much depending on the development of new medications. This is hard to predict, making the future cash flows uncertain at best. And most stocks of technology companies seem to be very expensive at the moment. As a result, their dividend returns are often very low. On the next page you’ll find the ten biggest holdings in the fund and their weights in the portfolio.

John Laing: Public Private Projects
Now I’d like to share another investment case with you. This time I will discuss London listed John Laing. This company is a developer of, and investor in several dozens of infrastructure projects in Europe, North America and Australia. In these type of projects, private investors like John Laing, receive a rather predictable cash flow from for instance car drivers (in the case of toll roads) or from governments (like with some Dutch highways). The same applies with wind or solar parks, when governments guarantee a minimum price for the power generated. Similarly John Laing owns rail projects, hospitals and biomass power plants. All of these have long term predictable returns. They use local partners for the construction of the projects. John Laing often sells the projects during the contract period to other investors. This business model leads to sustainable cash flows, which are partly reinvested in new projects and partly paid out as dividends to the shareholders of the company.

Dividends and balance sheet
Next to a sustainable business model there are other important criteria when writing an investment case. One of them is the dividend policy. The management of John Laing has the goal to pay a minimum of 20 million pounds in dividends each year. Furthermore they distribute 5 to 10% of the revenues from the projects sold to investors. This should guarantee a growing dividend for shareholders of the company. The management of the company owns a significant amount of shares themselves. This gives me confidence that they are very much aligned with the other shareholders of the firm. The company has a strong balance sheet with very little debt on it. However, it should be noted that the projects themselves all do have quite a bit of gearing. By investing in sustainable energy and biomass plants John Laing supports a better society. Only recently the company announced new investments in large solar parks in Australia and the United States.

Risks and valuation
No proper investment case without looking at what could possibly go wrong. Here as well, I’d like to take a moment to face the risks of investing in John Laing. First of all this company is relying on long term contracts with governments. Despite the fact that they only do business in Western countries, there is still a risk that a new government will change existing contracts, which could make the returns on any project in the portfolio less attractive. Or which would impact the market dynamics for new projects. Although we currently see the number of available projects growing, this risk is something investors should keep in mind. Next is the risk of exchange rate movements. This risk isn’t limited to the value of the British pound versus our home currency, the euro. Since many of the projects are in the United States or Australia, the exchange rates of the US dollar and Australian dollar are also of importance. Interest rate changes are also important, as a higher interest rate automatically leads to a lower valuation of infrastructure investments. Finally I would like to point to the valuation of the stock. If we compare the value of the projects of John Laing with the market value of the company, then it appears that the stock is valued some 10% below the value of the projects. This is rather low, since most competitors are priced way above the underlying value of the projects. Hence, the John Laing share is attractively priced. The dividend return is currently just over 3%.

So where do we go from here?
European equities gained around 14% over the last 11 quarters. As a result Europe is very much lagging other regions like for example the US. The significant increase in profits for European companies over the last few years does not show in the share prices yet. If we look at popular valuation metrics like the Price/Earnings-ratio or the Dividend Yield, it appears that European equities have become cheaper over the last few years. Both in absolute terms, as well as compared to American equities. This should make European equities an interesting investment for the next few years. Recent market fluctuations probably make for an interesting entry point. I sincerely appreciate your support on this journey to grow the Sustainable Dividends Value Fund. We have only just begun, and a long road full of interesting investment opportunities is ahead of us. More information on the fund can be found on this website. Feel free to email (info@sustainabledividends.nl) or call (+31622469628) with any questions you might have.



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