January 2020

Looking back and looking ahead
The fourth quarter turned out to be a very positive quarter for the investors in the Sustainable Dividends Value fund. Due to a nice rally during the last few months of the year the 2019 return added up to more than 19%. The quarterly results, but also the favourable political developments, sparked renewed optimism amongst investors. First and foremost we saw an end to the uncertainty in the United Kingdom. The clear victory of the Tories gave Boris Johnson the mandate to lead the British people out of Europe. Despite the fact that a new trade deal with the remaining 27 member states is still very much beyond the horizon, financial markets for now appreciated the clarity. On January 31st for the first time in history, we will see a member state leave the European Union. Those in favour of further European integration might shed some tears on that day. Those against will once again point to the disadvantages of the EU, and might even advocate a further break-up of the union. Anyway, we did see some nice gains on the London stock exchange before and just after the elections. And at the same time the British pound had a good run versus other currencies like the euro and US dollar.

Finally a trade deal
Meanwhile, outside Europe investor were mainly preoccupied by the first phase of a trade deal between the United States and China. The negotiations have lasted for more than a year. Time after time, the date for signing the deal was postponed, but finally, the signatures have been placed. Both Trump and his Chinese counterpart have promised to lower existing tariffs, and also diminish the number of new tariffs. However, it does look like as if they have discussed the easiest subjects first. After this ‘low hanging fruit’ more difficult subjects will come to the table over the coming months. Negotiators will for instance have to discuss the Chinese subsidies for the steel industry, and how to deal with intellectual property. News on the ongoing negotiations will for sure keep financial markets busy over the quarters to come.

And Europe got its Green Deal
In Europe the new European Commission has entered the stage. The European Parliament has voted in favour of the climate plans of Dutch Commissioner Frans Timmermans. This means that the EU will go at length to make Europe ‘climate neutral’ by 2050. This will be quite a challenge for governments, companies and the public. The good news is that there is a lot of money available. The European Commission has labelled one trillion euro in funds for creating a more sustainable society. Companies that offer products or services in this field of expertise, will certainly profit in the years to come. Allow me to introduce some of the companies in our fund that will do so. According to the new plans the CO2 emissions of the transport sector should drop by 90% in 2050. More electric transport is the solution. This is very good news for a company like Neways, producer of charging cables for electric cars. Biological agriculture will be promoted and the use of chemicals and antibiotics should go down. These are areas were nutrition/chemical company DSM is playing an active role. In 2030 all packaging in the EU should be either reusable or recyclable. Norwegian Tomra will for sure profit from a huge increase in demand of sorting machines and reverse vending machines. To summarize, these climate plans will be very favourable for the companies in our Sustainable Dividends Value fund.

Performance of the Sustainable Dividends Value fund
As mentioned before our fund performed well in the fourth quarter of last year. The return of 7.4% for the fund was well ahead of the 5.7% return of the MSCI Europe index. Since the start of the fund early 2016 the return adds up to 41%. That is quite a bit higher than the 27% of the MSCI Europe index over the same period. Needless to say that sustainable investing does not have a negative impact on the return of your investment.

What worked and what didn’t work in the portfolio?
The nice return of the Sustainable Dividends Value fund over the past quarter was due to some specific stocks making good gains. Winner in the fourth quarter was Brembo, the Italian producer of braking systems for the car industry, as the stock added some 24%. This company was able to improve its margins, despite disappointing new car sales globally. On balance, we saw the cash flows increase for this company in the third quarter report. Swedish Biotage, producer of medical equipment for laboratories, reported record sales and a profit increase of more than 40%. As a result the share price went up by 21%. British Bloomsbury also gained 21%, after the publisher of amongst others Harry Potter books, announced a new cooperation with a Chinese publisher targeting to publish its books in Chinese. On the other hand, we also saw some stocks with a disappointing price performance. Telecom operator Telenor fell 14% after the quarterly results came in below expectations. Main reason were adverse economic developments in Pakistan, leading to lower revenues and profits in that country. The Italian operator of toll roads ASTM fell 8%. After the all-share merger with its subsidiary SIAS, many investors with holdings in both stocks sold part of their holdings. At the same time sentiment was hurt by the fact that the Italian government is contemplating to take measures against competitor Autostrade, on the back of the incident with a high way bridge in Genoa, that collapsed in the Summer of 2018.

What does the fund look like?
The fund’s assets are invested in companies of which we expect that they will grow profits and dividends in the coming years. We have invested in 22 different companies in eight European countries. By choosing stocks in 14 sectors we have made 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 and ultra-low interest rates. 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.

Ørsted: Market leader in offshore wind
As in the previous quarter, we will discuss one of the stock in our fund. Today we will focus on Danish Ørsted, owner of more than 25% of all offshore wind parks globally. This makes the company the biggest manager of this type of assets. Ørsted is active in North Western Europe, the US and Taiwan. At the end of this year, the company will generate energy for about 16 million Europeans. All in all the offshore wind mills will generate some 6.8 giga Watt (GW) in energy. But the ambitions of Ørsted are bigger. Over the next few years they will open up several more wind parks. And the new turbines will be bigger than ever before. This means significant revenue growth in the years to come. Between 2020 and 2025 the management of Ørsted expects offshore revenues to increase by on average 17% a year, and the offshore capacity will grow to 15 GW by 2025. As demand for clean energy will continue to grow globally, we estimate that production will have doubled once more by 2030.

Growing Dividends
Cash flows for the next few years can be predicted reasonably well due to long term contracts with clients and governments. As a result management is also able to make clear predictions regarding the dividend. They expect dividends to grow by 8% annually. This implies that the stock very well fits our portfolio of companies with predicable and growing dividends. Despite the fact that the management of Ørsted owns less than 1% of the shares, the dividend policy is a clear signal of alignment between management and shareholders. Let’s have a look at the other selection criteria for our fund. One of them is a strong balance sheet. Ørsted has little debt outstanding, compared to the market capitalisation of the company. And the interest level that the company is paying is very low. The management has committed themselves to a minimum credit rating of BBB+. The sustainability score of Ørsted is high. The company commits itself to the sustainable development goals of the United Nations, especially to ‘Clean energy’ and ‘Fighting climate change’. Developing and managing offshore wind parks certainly helps delivering these goals. Ørsted is one of the leading companies involved in green energy in the world.

Risks and valuation
No proper investment case without looking at the risks involved. In the case of Ørsted we list the following risks: First of all, for its revenues the company is depending on the price of energy. However, in many cases, but not all of them, this price has been fixed in long term contracts with governments or large clients. As wind power cannot be controlled, the production of electricity by a specific wind park will fluctuate from one period to the other. However, in the long run we expect the average output per year of the company to be quite predictable. Delays and cost overruns could occur when the company is constructing new offshore wind parks. Finally currencies do play a role, for instance with regards to the wind parks in the UK or the US. In order to valuate the company we should look at what the market has being lately for comparable assets. Over the last few years infrastructure investors have paid between 15 and 20 times the cash flow for wind parks. Ørsted currently trades just over 12 times the expected cash flow for next year. This means that, despite the recent good run in the share price, there is still enough further upside for the stock. The expected dividend yield for Ørsted is about 1.5%. More information about the company is available in the annual report using the following link:

Outlook Statement
With on average just 8% annual 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. For investors looking for income from their wealth, dividend paying stocks can be an interesting alternative for savings accounts, that currently pay zero, or sometimes even negative interest rates. More information on our the fund can be found on www.sustainabledividends.com. However, we encourage you to call (+31 20 244 36 54), or email us on info@sustainabledividends.com with any questions you might have. The share price development of the Sustainable Dividends Value fund can be found on our website or via Bloomberg (fund code SUSDVDV NA).

Investor Event
A few weeks ago we organised the Sustainable Dividends Investor Event in the CIRCL-building in Amsterdam. The most circular building in the Netherlands was the perfect location to present our sustainable investment fund. We are proud to mention that representatives of DSM and Tomra were presenting at our event. DSM is the Dutch leader in sustainability with products in food, energy and health care. Tomra is the Norwegian world leader in reverse vending machines and waste sorting machines. The company presented its view on sustainable recycling solutions. Both DSM and Tomra have made excellent returns for the investors in our fund. As a result of the event we have welcomed several new participants. They truly support our goal of investing together for a sustainable society. More and more often we can share our story with interested investors, which means lots of nice conversations. If you happen to know people who might also be interested in our strategy, we would be glad to talk to them as well. Gaining trust by speaking with investors directly is most important for us. We 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. Thank you very much for your trust and support!

Yours sincerely,

Simon van Veen – Founder & Fund Manager
Jasper Oeberius Kapteijn – Business Development & Sales Manager

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