January 2019

Looking back and looking ahead
The Sustainable Dividends Value Fund had a good start of the new year. However, the first three months of the year 2019 promise quite a bit of excitement on the financial markets. The political chaos in the United Kingdom resulting from the Brexit is unheard of. At the moment of writing the proposed deal with the EU has been voted down by the British parliament. None of the other options has the consent of a majority of the British MP’s. At the same time it doesn’t feel like the 27 EU member states are willing to do any more concessions to the Brits. Just 8 weeks remain till the day on which the UK is supposed to leave the EU. A no-deal Brexit is threatening the markets. At the same time the battle in the US between Trump and the House led by the Democrats continuous. Both parties seem very reluctant to change their views. Trump is adamant to build a wall between the US and Mexico, while the Democrats refuse to pay for it. It seems that the record long US government shut down is now negatively impacting the economic growth in the country.

Economic Growth
Elsewhere we also see clouds on the horizon. Recent numbers show that the trade conflict between the US and China does slow down the Chinese export machine. Apart from China, consequences are also felt in the US. We have for instance seen that the prices of American steel products have increased sharply as a result of the lack of cheap Chinese steel. The Chinese government has pumped almost 75 billion euro in the banks, in order to fire up the slowing economic growth. Finally, Europe is also dealing with the fall out of the trade conflict. The growth outlook for the German economy has been lowered considerably. The country was on the brink of a recession, but barely escaped in the fourth quarter of last year. The economic reforms of French president Macron have come to a halt due to the street protests by the ‘Yellow Jerseys’. And the Italian government can only hope that the hard fought budget deficit of 2% – as agreed with Brussels – will kick start the economic spending in the country.

Performance of the fund
The fund has a strong start in the new year. Investors have realised that markets had priced in too much bearishness by the end of 2018. Trump will have to create a positive environment in the equity markets in order to secure being re-elected in 2020. In Europe people realize that chances of a soft Brexit are increasing. Looking back at the fourth quarter of 2018, we had a lacklustre ending of an economically and financially tough year on global markets. As the graph below shows, the MSCI Europe Index, benchmark of the Sustainable Dividends Value Fund, lost almost 11% in 2018. The fund itself outperformed as it decreased ‘just’ 7.5% in value. Over the past three years the Sustainable Dividends Value Fund showed very strong results. With a total return of 21% for the period starting on January 1st 2016 till December 31st 2018, the fund was much more successful than the MSCI Europe Index. This benchmark only gained 1% over the same period. The aim of outperforming the benchmark by on average 2 to 4% a year was clearly attained. The fund outperformed the MSCI Europe Index in nine out of twelve quarters.

Gainers and losers
Two stocks in the portfolio that clearly underperformed were Swedish SKF, manufacturer of ball bearings, and Italian manufacturer of braking systems Brembo. SKF reported a profit increase over the third quarter. However, the share price fell as investors fear an upcoming recession. The early-cyclical company could be impacted by the trade war between the US and China. Given the specialist nature of the products of SKF, the fall in the share price seems overdone. Brembo suffers a similar fate. The increase of production capacity in the US and Poland will most certainly lead to a significant growth in revenues in 2019. Gainers in the fund were British developer of infrastructure projects John Laing and Norwegian telecom operator Telenor. John Laing was up 6% in the quarter as the company announced new investments in solar parks in the US and Australia. John Laing is often able to sell these type of projects with large gains, as there is a huge demand for them from institutional investors. Telenor was up 5% during the fourth quarter as the company is rapidly growing its business in countries like Pakistan and Bangladesh. As the same time it realizes increasing margins in the home markets in Scandinavia.

What does the fund look like?
By far the largest part of the fund’s 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 21 different companies in seven European countries. By choosing stocks in 13 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. Below you’ll find the five biggest holdings in the fund and their weights in the fund.

Outlook Statement
With on average just 1% return over the past 3 years European stocks are 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 or call with any questions you might have.

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