KEMPEN INSIGHT /// JULY 2017
Insight
An idea
becomes reality #how
The economy normal service resumes
Case: Moncler model for engaged shareholdership
CONTENTS Normal service resumes /// Economic activity is picking up; Ruth van de Belt believes we no longer need emergency measures
6 How to construct a fund /// The Kempen (Lux) Global Small-cap Fund celebrates its third birthday
Case: Moncler /// Engaged shareholdership in practice
4 Kempen with a € /// How did we come up with our new image?
LE TURNING THE EXTRA MI
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KEMPEN INSIGHT, JULY 2017
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Turning ideas into reality In front of you is a magazine packed with articles on new
Impact investing
products, projects and cases on which Kempen has worked very hard over the past few months. Yet we have also worked
/// For a better world
on ourselves. You might already have noticed: our logo and website have been given a face-lift. We will continue as Kempen with our signature K in a new shade of blue. As part
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of the process, we also took a fresh look at our values: who are we and what do we stand for? There is a theory behind this and everyone knows how hard it is to turn theory into something tangible. What does help turn ideas into reality is practice: doing something frequently. At Kempen we have always encouraged new initiatives. Over the past few months, this has
Books that inspire
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/// Putting ideas into practice
Selective risk-taking /// Valuation
Dancing towards the door /// Roelof Salomons’ column
yielded a number of innovative investment strategies and solutions. Some are very recent, such as structured credit, the impact investing pool and the European High Yield Fund. Other ideas have been given time to evolve and flourish, such
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as the Kempen (Lux) Global Small-cap Fund and the Kempen Global Real Estate Fund, both of which achieve their threeyear track records this summer. A wonderful milestone for their dedicated teams.
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Change Time often plays a crucial role in thinking up new things. Yet do we allow ourselves enough time to daydream, to let ideas pop into our heads spontaneously? Patience is required to allow a project to mature, and this may occasionally go against the prevailing mood. Courage is another essential, not being afraid to admit it when something you had expected great things of does not yield the result you wanted. You need to be prepared
/// COLOPHON
to start over time and again, and not be afraid of change. The core values we have formulated, for which Kempen stands,
July 2017 © Kempen Capital Management Editorial address Kempen Capital Management to: Secretariaat KCM P.O. Box 75666 1070 AR Amsterdam The Netherlands T 31 (0)20 348 8700 redactie@kempen.nl Collaborators Bram Belloni, Getty, Mario Hooglander, Philip Jenster, Kessels Kramer, Jos Leijen, Daniëlle Levendig, Stephanie Lewis, Tahmïna Mannan, Esther Mariman, Anouk Suwout Cover image: Van Santen & Bolleurs
are ‘modern craftmanship’, ‘highly selective’, Editors Ruth van de Belt, Anja Corbijn van Willenswaard, Lars Dijkstra, Charlotte Wilberts
‘absolute dedication’ and ‘made for pro-
Artdirection Henrike Beukema/Dieke Hameeteman
do this alone but together with
Kempen Capital Management N.V. (KCM) is licensed as a manager of various UCITS and AIFs and authorised to provide investment services and as such is subject to supervision by the Netherlands Authority for the Financial Markets (AFM) and De Nederlandsche Bank (DNB). This information should not be construed as an offer and does not provide sufficient basis for an investment decision.
Any references in this magazine to ‘Kempen’ are taken to mean Kempen Capital Management N.V.
gress’. This mindset and modus operandi enable us to make the successful leap from idea to reality. We never really our clients: the best ideas come from working together. I wish you a warm, sunny summer with plenty of time to daydream. Lars Dijkstra CIO Kempen lars.dijkstra@kempen.nl KEMPEN INSIGHT, JULY 2017
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Back to the  The quantitative easing implemented by the central banks is slowly being scaled back. According to investment strategist Ruth van de Belt, this is possible because the financial markets are again in a position to function independently.
Ten years ago, the credit crisis hit in the United States and spread like an oil slick to the rest of the world. Policymakers threw everything they had at combating the financial crisis and the subsequent economic crisis. Politicians took measures to safeguard financial stability, gave a free rein to automatic stabilisers such as unemployment benefits and introduced packages of stimulatory measures. Central banks slashed their policy interest rates to unprecedentedly low levels and applied unconventional policy methods such as purchasing programmes for government bonds and credits (i.e. quantitative easing). A decade on, the global economy is once again enjoying a period of reflation. Economic activity is picking up and an upward trend is visible in inflation (forecasts), although this is partly due to higher oil prices. Yet not all the consequences of the monetary policy experiment are positive. The prices of financial assets have been pushed up, causing a potential misallocation of capital. Bubbles could well develop, and they always burst at some point. Creative destruction (incessant technical innovation as a source of economic growth, Ed.) is declining due to the continuous roll-over of loans to non-viable companies. Moreover, interest rate margins at banks have been affected. Now that there is less need to pursue an extreme monetary policy, and the negative impact is becoming ever clearer, policy normalisation is coming ever closer.
An end to quantitative easing in the Eurozone
In June, the European Central Bank (ECB) adjusted its forward guidance with a view to gradually preparing the market for a further tapering of the purchasing programmes for government bonds and credits. The market consensus is that the ECB will announce in September
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KEMPEN INSIGHT, JULY 2017
beaten path that these programmes are gradually to be
mortgage backed securities in a gradual and
of macro-economic put option, which prompted
scaled back further as of January 2018 and
predictable manner. Not via active selling but,
investors to take more risk. It will soon become
ceased completely at the end of 2018. The big
if the economy continues to perform as
clear whether risk levels are excessively high.
question remains: what impact will this policy
expected, the proceeds from bonds that are
Yet there is no reason to predict a doom sce-
change have on the financial markets?
redeemed on their expiry date and released
nario as the reason for terminating quantitative
The ECB’s quantitative easing has caused
coupons will no longer be reinvested in new
easing is simple: the economy can now func-
peripheral EU country spreads against
bonds. A cap will be applied here.
tion without emergency measures.
Germany to tighten, to levels that are not justified purely on the basis of fundamentals. A resumption of normal service may cause credit
Impact of tapering
Investors are already fiercely debating the
spreads on government bonds to widen
potential impact of tapering on bond yields.
slightly. Moreover, term premiums for core EU
According to the Fed, quantitative easing has
government bonds are likely to increase,
led to the term premium for 10-year govern-
pushing up long-term bond yields and steepen-
ment bonds, and consequently also yields,
ing the yield curve. Yet we do not anticipate
dropping by about 100 basis points. The Fed
bond yields reverting to the levels we saw prior
expects the effect to decline by about 15 basis
to 2007.
points a year. We believe that the impact may
In the short term, ending the purchasing pro-
be smaller. The decline in the term premium
grammes is only likely to have a minor impact
can probably not be fully attributed to the
on the credit market. Given that the reflation
Fed’s quantitative easing, as the ECB and Bank
phase has only just begun, it is even possible
of Japan’s bond-buying programmes have also
that credit spreads will initially tighten slightly.
played a part. Furthermore, it is unlikely that
For the longer term, however, the prospects are
the Fed will reduce its balance sheet to the size
less rosy as ultimately we expect defaults to
it was prior to the crisis as a larger balance
increase and leverage ratios to rise.
sheet is currently required. Not only is there
Fed balance sheet reduction
greater demand for money, the Fed also has more short-term liabilities in the shape of reserves held by commercial banks. In addi-
The US system of central banks, the Fed, is
tion, policy normalisation has already been
already a step ahead of the European Central
partly priced in to the market.
Bank. It has already halted its purchasing programmes and policy interest rates are slowly being raised. In March, it also became clear
No reason to predict a doom scenario
We do not expect the reduction of the balance
Ruth van de Belt
balance sheet later this year by reducing its
sheet to trigger high outflow from equities and
Investment Strategist
portfolio of purchased government bonds and
credits. Quantitative easing was chiefly a type
ruth.vandebelt@kempen.nl
that the Fed is considering reducing its swollen
KEMPEN INSIGHT, JULY 2017
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From the drawing board to a track record THREE YEARS OF THE KEMPEN (LUX) A global small-cap fund was a natural next step for Kempen, following the Kempen Orange Fund and the European small-cap strategy. Three years later, a strong track record is established.
INVESTMENT PHILOSOPHY Our core beliefs form the basis for the investment philosophy. First of all, this is a people-based business. We believe in a team-based approach in which team members are complementary to each other. We follow a consistent, structured and transparent process and believe in focus. We allocate as much of our risk budget as possible to bottom-up stock selection. For us, a
Performance of the strategy versus the benchmark *
stock is an ownership stake in a business rather than a speculative object. Our assessment of the long-term
30% 26.2%
20% 15%
16.1%
10%
11.6% 8.9%
11.0%
5% 0%
4.4%
3.1% H2 2014
1.5% 2015
2016
2017 YTD
Kempen (Lux) Global Small-cap Strategy (class I) Benchmark (MSCI World Small Cap Index) * The value of your investment may fluctuate. Past performance is no guarantee for the future.
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KEMPEN INSIGHT, JULY 2017
Source: JP Morgan, KCM, 30 June 2017, returns after costs
quality of the business is key here. Our style is to invest
25%
in high-quality companies that are trading at a discount against their intrinsic value. ÎÎ We view a stock as an ownership stake in a business. ÎÎ We judge the long-term quality and sustainability of the business. Î Î We look for a margin of safety between price and value. ÎÎ This requires in-depth analysis, a disciplined process and independent thinking. ÎÎ Portfolio managers co-invest in the fund.
GLOBAL SMALL-CAP FUND Over the past three years, we have talked to the companies we invest in over 750 times via conference calls, visits and conferences.
Diversified across regions and sectors
ESG criteria were integrated into the investment process from the start. ESG integration not only means taking risk into account but also entering into dialogue with companies. Thirteen companies in our portfolio have received takeover bids in the past three years. This underlines the long-term value and strategic market positioning of the companies in our portfolio. The combined market value of the companies in the portfolio of 170 billion as of 30 June 2017, is comparable to the value of Coca-Cola.
Consumer Discretionary (20%, BM: 14%) Consumer Staples (2%, BM: 5%) Energy (3%, BM: 4%) Financials (10%, BM: 14%) Health Care (5%, BM: 10%) Industrials (26%, BM: 18%) Information Technology (16%, BM: 14%) Materials (5%, BM: 8%) Real Estate (10%, BM: 11%) Telecommunication Services (2%, BM: 1%) Utilities (0%, BM: 3%) [Cash] (2%)
KEMPEN INSIGHT, JULY 2017
Source KCM, FactSet, 30 April 2017  BM = benchmark (MSCI World Small Cap Index)
The assets of the Fund have grown from 6 million at the start in July 2014 to 145 million in June 2017.
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Experienced, dedicated and complementary team Jan Willem Berghuis • At Kempen since 1999, experience since 1999
• Team member since July 2014 (Inception)
• Sectors: Financials, Healthcare • Background: Small-caps research and portfolio management
Maarten Vankan • At Kempen since 2014, experience since 1999
• Team member since July 2014 (Inception)
• Sectors: Consumer Discretionary, Consumer Staples, Technology
• Background: International equity portfolio management
Chris Kaashoek Disclaimer
Kempen (Lux) Global Small-cap Fund (the “Sub-Fund”) is a sub-fund of Kempen International Funds SICAV (the “Fund”), domiciled in Luxembourg. This Fund is authorised in Luxembourg and is regulated by the Commission de Surveillance du Secteur Financier. Kempen Capital Management N.V. (KCM) is the management company of the Fund. KCM is authorised as management company and regulated by The Netherlands Authority for the Financial Markets.
• Re-joined Kempen in 2015, experi-
ence since 2006 (started at Kempen)
• Team member since March 2015 • Sectors: Industrials, Materials • Background: Small-caps research and private equity investing
Paying agent and representative in Switzerland is RBC Investor Services Bank S.A., Esch-sur-Alzette, Zweigniederlassung Zürich, Badenerstrasse 567, P.O. Box 1292, 8048 Zürich. The Sub-Fund is registered with The Netherlands Authority for the Financial Markets under the license of the Fund. The information in this document provides insufficient information for an investment decision. Please read the Key Investor Document and the prospectus. These documents of the Fund are available at the registered office of the Fund located at 6C, route de Trèves, L-2633 Senningerberg, Luxembourg and on the website of KCM (www.kempen.com/investmentfunds). The Sub-Fund is registered for offering in a limited number of countries. The countries where the Sub-Fund is registered can be found on the website. The value of your investment may fluctuate. Past performance provides no guarantee for the future.
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KEMPEN INSIGHT, JULY 2017
Luuk Jagtenberg • At Kempen since 2012, experience since 2012
• Team member since November 2015 • Sectors: Energy • Background: Investment strategist allocation team
Books that inspire TURNING IDEAS INTO REALITY
The loss of the American dream In three generations from dirt poor to Yale Law School graduate: this is the story of author J.D. Vance. Hillbilly Elegy is a personal history that offers a glimpse into the closed ranks of white working-class Americans. In an honest and perceptive narrative, Vance relates the occasionally hilarious and heart-rending story of upward mobility in the US. His grandparents moved from Kentucky to Ohio to escape dreadful poverty. There, they hauled themselves into the middle class and ultimately saw their grandson graduate from the prestigious Yale Law School. Yet behind this success story lurks a heritage of struggle, alcoholism and a sense of never really being able to escape the past. This applies not only to the Vance family but to the majority of this section of society. Hillbilly Elegy offers valuable insights for those of us on the other side of the ocean who wish to understand better why Trump enjoys so much support from ordinary people. After all, his ideas have been made reality in part due to the dissatisfaction felt by many working-class Americans.
Fail to succeed
Title: Hillbilly Elegy - A Memoir of a Family and Culture in Crisis Author: J.D. Vance ISBN: 9789038804019
In this book, Erik Kessels,
Emotions are a factor
Creative Director and Co-Founder of KesselsÂ
Modern financial theory states that financial markets are
Kramer, describes the importance of imperfection in creative and other
efficient and rational. Behavioural economists, on the other
processes. Using over 150 lively descriptions,
hand, view the markets as just as irrational and inefficient
including illustrations, Kessels explains how impor-
as the people who work in them. Yet does the one neces-
tant falling down and getting back up on your feet
sarily exclude the other? Andrew W. Lo, author of Hedge
is to progress. In his eyes, it is chiefly our fear of
Funds and co-author of A Non-Random Walk Down Wall
imperfection and of making mistakes that curbs our
Street, adds a behavioural science voice to the debate, arguing that rationality and
potential and consequently innovation and growth.
irrationality can coexist.
Failed it! is a collection of examples illustrating how
His theory of Adaptive Markets draws on several fields, such as neuroscience, evo-
experimentation can yield better and more surpris-
lutionary biology, artificial intelligence and psychology. Both the financial markets
ing results than sticking to a rigid plan. The art of
and human behaviour are constantly changing and adapting to one another. If the
failure involves dealing with it in an understanding
markets are unstable, investors react instinctively, creating inefficiencies for others
and creative manner. If nothing ever goes wrong,
to exploit. The book offers an interesting perspective on market dynamics: if
people never learn to think differently and more
humans are evolving and the markets are run by people, shouldn’t we also assume
creatively. And thinking differently is essential to
that evolution plays a part in the markets? Such an analysis of the markets might
progress in many situations.
well help explain the past and prevent future crises.
Title: Failed it! - How to turn mistakes into ideas and other advice for successfully screwing up Author: Erik Kessels ISBN: 9780714871196
Titel: Auteur: ISBN:
Adaptive Markets: Financial Evolution at the Speed of Thought A new, evolutionary explanation of markets and investor behavior Andrew W. Lo 9780691135144
KEMPEN INSIGHT, JULY 2017
9
MONCLER
H ow as We see a growing appreciation for the value of integrating Environmental, Social and Governance (ESG) aspects in investing – both from a philosophical and financial perspective. For over 15 years ESG factors have formed a critical part of our in-depth company research in the Kempen (Lux) European Small-cap team – our diligence covers everything from the governance culture of a business to its balance sheet. Disclaimer Kempen (Lux) European Small-cap Fund (the “Sub-Fund”) is a sub-fund of Kempen International Funds SICAV (the “Fund”),domiciled in Luxembourg. This Fund is authorised in Luxembourg and is regulated by the Commission de Surveillance du Secteur Financier. Kempen Capital Management N.V. (KCM) is the management company of the Fund. KCM is authorised as management company and regulated by The Netherlands Authority for the Financial Markets. The management company has entrusted, under its control and responsibility, Kempen Capital Management (UK) Ltd. with the execution of the investment policy of the Subfund. This investment firm is subject to regulation of the Financial Conduct Authority and registered under no. 166063.The information in this document provides insufficient information for an investment decision. Please read the Key Investor Document and the prospectus. These documents as well as annual report, semi-annual report and the articles of incorporation of the Fund are available free of charge at the registered office of the Fund located at 6C, route de Trèves, L-2633 Senningerberg, Luxembourg, at the offices of the representative in Switzerland and on the website of KCM (www.kempen.com/investmentfunds). This document is prepared by the fund managers of Kempen (Lux) European Small-cap Fund. The Sub-Fund currently holds shares in the subject company. The views expressed in this document may be subject to change at any given time, without prior notice. KCM has no obligation to update the contents of this document. As asset manager KCM may have investments, generally for the benefit of third parties, in financial instruments mentioned in this document and it may at any time decide to execute buy or sell transactions in these financial instruments. The information in this document is solely for your information. This document should not be considered to constitute an investment recommendation and it is not intended as an offer or a solicitation to buy or sell any financial instrument mentioned in this document. This document is based on information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. The views expressed herein are our current views as of the date appearing on this document. This document has been produced independently of the company and the views contained herein are entirely those of KCM.
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KEMPEN INSIGHT, JULY 2017
CASE STUDY
Every company faces material ESG risks that can have a direct impact on long-Âterm share price performance
we engage an investor Our belief is that a concentrated portfolio of
companies by actively promoting the impor-
and what controls the company has in place
quality smaller companies, combined with
tance and materiality of ESG issues. We
to address them. Throughout the engagement
proactive ESG engagement, drives sustaina-
engage with companies before, during and
process we typically recommend areas for
ble outperformance. There are three criteria
after investment.
improvement while seeking to justify why
for investment:
such a change would be of value.
Material ESG risks
To ensure integrity of the process and to
tials that allow them to generate sustaina-
It all starts with an interesting investment
avoid potential conflicts of interest, our ESG
bly high returns on capital employed.
idea. We collect and analyse all available
research is externally validated by an inde-
Reinvesting at high returns drives eco-
ESG data before engaging with company
pendent organisation. Engagement is an
nomic value creation and share price per-
management. The focus is on material ESG
ongoing process, but all holdings are formally
formance.
risks – how these might affect the business
reviewed periodically.
1. Companies must display quality creden-
2. Companies must clearly demonstrate how ESG considerations are embedded in their business strategy. Every company faces material ESG risks that can have a direct impact on long-term share price performance. 3. There must be an investment case. A quality company that embeds ESG is only a good investment where a valuation opportunity exists. One key issue facing many small companies is the inability to allocate sufficient resource to ESG matters. It is rare to see a dedicated internal Corporate and Social Responsibility team. Our experience helps us to understand where and how a smaller company is most vulnerable. Through working together, positive impacts can be achieved with small-cap
The Kempen (Lux) European Small-cap team, left to right: Karen McGrath, Michael Gray, Vivienne Taylor, Tommy Bryson, Erika White, Mark McCullough, Kathleen Dewandeleer.
KEMPEN INSIGHT, JULY 2017
11
MONCLER CASE STUDY Moncler SpA is a good example of how engagement on mate-
ESG processes and practices. In 2015 it produced its first
rial ESG concerns works in practice. Moncler is an interna-
Sustainability Report and Sustainability Plan. To further
tionally renowned luxury fashion brand with a strong herit-
advance the retailer’s transparency, we encouraged Moncler
age in down-filled jackets. It had a successful European stock
to assess its supply chain in a bid to ensure that animal
market debut in 2013 and the shares have performed well
welfare was a top consideration.
since.
Continuous improvement
Quality, value & ESG integration
One of the key areas of engagement was (goose) down
We followed Moncler with interest during the first year of its
sourcing given the material risk to the company – brand
IPO which gave us time to develop our understanding of the
strength is key to the investment case and consumers, par-
company. The strength of the brand, its competitive position-
ticularly millennial consumers, take these issues seriously.
ing, the excellent management track record and the high
The company has published its animal welfare and traceabil-
returns on capital that emerged from these factors convinced us that it is a high quality company. Simultaneously, we needed to be satisfied that
ity protocol and has established a
‘We pursue sustainability and responsible behaviour not only
ESG concerns are embedded into
with the purpose of being
Moncler’s corporate culture and busi-
competitive today and even more
ness strategy, such that the material risks are duly mitigated. We were pleased to find that Moncler has in place a Code of Ethics which
so in the future but, above all, because we judge the value of our results by how we achieve them.
encompasses environmental and
We believe that success is durable
social issues. This, coupled with posi-
only if it contributes to creating
tive engagement with management on the subject, ensured that it met our threshold ESG requirements for investment. The investment case is fairly
multi-stakeholder forum with an approved Down Integrity System and Traceability (DIST) Protocol that all suppliers must comply with. We are delighted with the progress that Moncler continues to make in its social and environmental performance. The Sustainability Plan is a clear expression of the Group’s commitment to sustainable and responsible growth. The Plan is updated each
shared value.’
year to report on the status of projects
REMO RUFFINI, MONCLER CHAIRMAN AND CEO
improvement. There is a real aware-
simple; the market is not giving
and to set new targets for continuous ness that sustainability is an ongoing challenge, and this increases our
Moncler due credit for its superior growth potential, which is
investment conviction by way of reducing downside risk.
being driven by careful international retail store expansion.
Beyond Moncler, we firmly believe that challenging and
We invested in late 2014.
assisting smaller companies on their ESG journey will help
As with every investment in the Kempen (Lux) European
improve understanding of potential risks and pitfalls, and will
Small-cap Fund engagement on ESG factors is a journey of
ultimately highlight the long-term benefit of embracing ESG.
continuous improvement and adapting to a changing environ-
Engagement is fundamental to this journey.
ment (for example in recent years we have focused more on cyber security). Since first meeting Moncler we have had regular contact through conference calls, company meetings and a site visit to Italy in 2016.
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Karen McGrath
The Moncler management team has been very responsive
Head of Sustainability
and shown a real willingness to integrate and implement
karen.mcgrath@kempen.co.uk
KEMPEN INSIGHT, JULY 2017
/// by JOS LEIJEN photo BRAM BELLONI
Impact investor takes people and the environment into account
Investing for a better world while seeking a return in line with the market. That is what Kempen and
‘Many people think that investment that takes people and the environment into account is at the expense of return,’ Van der Peet says. ‘Impact investment assumes that the one does not exclude the other. Return and a positive contribution to society can easily go hand in hand.
Van Lanschot aim to offer their
‘Institutional clients at Kempen and private investors at Van Lanschot
clients via impact investment.
world. We are currently working on what is known as an Impact Pool
Senior Portfolio Manager Marjoleine van der Peet explains how the investment selection process works.
explicitly ask for investments that have a positive impact on the that will meet this demand. We aim to include a number of impact investment funds and fund managers spread across several themes (such as water, food and climate).’ The portfolio manager explains that impact investment will involve the following three characteristics. The first is an intention to make a positive contribution, for instance good healthcare for more people in Ghana. The second is that the impact can be and is indeed measured.
KEMPEN INSIGHT, JULY 2017
13
Return and a positive contribution to society can easily go hand in hand.
In the example of Ghana, you can measure whether the healthcare
for this measurement. Each impact measurement relates to one or
does indeed reach more people. Finally, the investment needs to
more of these goals. We often agree with institutional investors which
earn a return in line with the market, related to the benchmark for
goals are devoted special attention. A client from the food industry,
investments in the relevant asset class.
for instance, has a preference for the responsible consumption and production development goal.’
Not charity
Most measurements apply the Impact Reporting and Investment Standards (IRIS), a framework of indicators that enables the team to
‘Without a required return it becomes charity,’ Van der Peet says. ‘Not
quantify the impact and compare it to the impact of other invest-
that there’s anything wrong with that, but pension funds for example
ments. IRIS was developed by the Global Impact Investing Network
need to earn a specific return in order to be able to continue paying
(GIIN), a non-profit organisation working to increase the scale and
pensions to their members.’ This required return of course excludes a
efficiency of impact investment. Van Lanschot Kempen is affiliated to
fair number of investment funds, but there are plenty left over from
this network.
which to construct a sound portfolio. ‘We possess a great deal of in-house expertise when it comes to fund selection. Our ESG (Environmental, Social & Governance, Ed.) team supports the investment teams of all the Kempen investment funds. We also apply this
Pool
You will encounter some obstacles if you wish to make impact invest-
expertise to impact investment.
ments as an institutional client or private individual. For instance,
In doing so we don’t just examine the composition of a fund but also
impact investments are often small investment funds, they are hard to
the nature of the investments, the quality of the fund management
track down and comprise a broad range of often illiquid asset
and the investment process. Which parent company is behind the
classes. In-depth knowledge of investment and due diligence is
fund, what the track record is of this investment fund and others
required for investment in these.
managed by the same fund manager are also taken into account.
In creating a pool containing high-quality impact investment funds,
We examine relevant documents and conduct many meetings with the
Kempen aims to remove these obstacles for its clients. Further advan-
parties involved,’ Van der Peet continues. ‘All this enables us to reach
tages are that institutional investors can achieve a broader impact
a thorough value assessment. Investors need to be able to rely on
and that impact investment may become accessible to Van Lanschot’s
the fact that only those impact funds that have made it through this
private investors.
selection process end up in the Impact Pool.’
We plan to launch our Impact Pool for institutional clients around 1 January 2018, with a starting capital of at least €50 million.’
Measuring impact
Measuring impact is important. ‘This is a science in itself, for which
Marjoleine van der Peet
we have in-house ESG specialists. The seventeen international Sus-
Senior Portfoliomanager
tainable Development Goals set by the United Nations form the basis
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KEMPEN INSIGHT, JULY 2017
Marjoleine.vanderpeet@kempen.nl
Kempen
with a
KesselsKramer is housed in a 19th century church on Amsterdam’s Lauriergracht: in conjunction with this communications agency, we have adopted a new positioning and a new logo for Kempen, as you can see from the cover of this Insight magazine and elsewhere. KEMPEN INSIGHT, JULY 2017
15
/// by ANJA CORBIJN photo KESSELSKRAMER
We talked to Olaf Kampman, responsible for brand and communication strategy, and art director Krista Rozema about their exploration of Kempen’s core values
Olaf: ‘Kempen isn’t an entirely new company to me: I regularly used
Krista: ‘The decision to stop using the Kempen sun was also an
to cycle past your old offices on Herengracht. Moreover, I
obvious one; it is a classic image but says more about the
have always worked a great deal with and for financial insti-
past than the future. What was tricky for us is that a sun is
tutions. We started off with a survey and by talking to lots of
very generic. The extended Kempen € that you will now be
people. The basic values at the asset manager and merchant
using is a more distinctive image. Furthermore, the new
bank proved to be largely the same. This is remarkable. You
corporate style is more future-proof: you will be able to use it
yourselves often say that there are major differences
for a long time.’
between the two ‘blood groups’ within Kempen. Yet you really do all share the same four core values: ‘modern craft-
Olaf: ‘We worked well together, were pleasantly surprised on a
manship’, ‘highly selective’, ‘absolute dedication’ and ‘made
couple of occasions and not challenged on every detail. You
for progress’.’
can tell that those who work at Kempen are accustomed to using their instincts in some respects. That was quite a
Krista: ‘I also started out by listening a great deal and working out
surprise for us: Kempen is a more creative company than we
the positioning. Yet when it came to creating the logo I didn’t
had expected, and that makes us a good match. We are also
want to ‘tick all the boxes’ too neatly. In my experience, you
enthusiastic about working with TamTam, the agency that has
then end up with nothing left over and an individual visual
constructed the new website. We are very pleased with the
style is important. It needs to stand out: you serve an intelli-
way they have translated the overall concept.’
gent, business-to-business target group and work at a high level, and we believe your target group wants to see that reflected in the company’s image.’
Krista: ‘It’s particularly good for employees to have fresh new materials to work with. As far as the outside world is concerned, we hope and think that other financials will be rather jealous of
Olaf: ‘Kempen is a financial boutique; this is a clear concept for us and we wanted to make use of it. Ultimately there was little
the new direction that Kempen has chosen. It’s different. That takes courage.’
debate on the core values, although we did consider the exact wording very carefully as it needs to be just as clear outside the Netherlands. For instance, there was some discussion on the associations with the word progress, but we always came up with a solution.’
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KEMPEN INSIGHT, JULY 2017
Take a look on www.kempen.com to see more images, design and a completely new website. We look forward to receiving your feedback!
KEMPEN INSIGHT, JULY 2017
17
It’s up to the markets The tailwind that the financial markets have enjoyed from the economic cycle over the past few months has demonstrated that valuations are not necessarily important in the short term. Yet in the longer term high valuations pose major risks for investors. Which factors are most important right now? Marius Bakker Investment Strategist
From a valuation perspective, the market is
investments unattractive as their value moves
marius.bakker@kempen.nl
becoming less appealing. Investors have been
contrary to interest rates. European govern-
worried about high valuations for some time,
ment bonds will be particularly unattractive.
but so far the market has continued to offer an
US interest rates are already considerably
adequate reward for taking investment risk.
higher and higher coupons will partly compen-
The acceleration in global economic growth
sate for potential price losses. Credits are an
and corporate earnings triggered a substantial
alternative up to a point: rewards on credits
rally in equity markets, causing market risk
are low and will only marginally compensate
premiums to come under pressure.
for the business risk. At the same time, balance sheets are being stretched. Companies are
18
KEMPEN INSIGHT, JULY 2017
CENTRAL BANK POLICIES
increasingly financing themselves using loan
Over the past few years, valuations have been
capital, which is adversely affecting their
kept artificially high by the extreme policies
creditworthiness. Tapering of the European
pursued by central banks. We expect these
Central Bank’s bond-buying programme is an
monetary policies to normalise slowly, which
unknown factor.
will bring an end to the period of historical-
Now that economic growth is picking up in
ly-low interest rates. When interest rates rise,
Europe and the cycle in the US has been giving
in the first place this makes fixed income
a fresh boost, there is a higher chance of
EXPECTED VS REQUIRED RETURN 10%
now
Expected return
8
EM EQUITY
6
EU EQUITY
4 2
EMU BOND 0
2
3
COMPANIES HIGH YIELD
EUR CREDITS 4
5
6
US EQUITY 7
8
9
10%
Required return Source: Kempen Capital Management - 2017
central banks reversing their unconventional
short-term interest rates and lending money at
risk-avoiding investments: government bond
monetary policies. When this happens, the
longer-term interest rates). Yet if interest rates
yields remain at historically-low levels. As a
markets will lose a major source of support.
rise further, this could turn into a headwind for
result, the extra reward for risk-taking has
Corporate earnings will have to keep growing
the economy in the long term. The cost of
been in line with the extra reward we require
in order to justify the high valuations. Earnings
capital will then rise and when the return on
for taking investment risk.
have been ridiculously high over the past few
capital is only marginally higher than the cost
However, the strong rally on the equity
quarters and have brought an end to the earn-
of capital, this creates an unattractive invest-
markets and in other risk-bearing asset classes
ings recession in Europe and the US. Compa-
ment climate for businesses.
over the past few months has further squeezed
nies saw substantial growth in the first quarter
The rising cost of new investments and a
the reward for risk in the market. The US in
in particular: the already high expectations
squeeze on corporate profitability have in the
particular offers little reward from a valuation
were far exceeded. This was chiefly due to the
past proved sound indicators of a slowing
perspective. The expected return on US govern-
upturn in commodity prices and higher interest
economy. In the US, we are seeing the return
ment bonds is higher than that on US equities.
rates in 2016.
on capital falling steadily due to rising wage
Even if we take into account some uncertainty,
It is unlikely that earnings will continue to
costs and a higher capacity utilisation rate,
the US market offers virtually no reward for
grow at the same pace now that these effects
while the cost of capital is increasing due to
investment risk. Asset classes offering an
are behind us, but the forecast earnings
rising interest rates. There is therefore little
attractive reward for risk are becoming scarcer
growth for 2017 remains high. These earnings
room for further expansion. When combined
here in Europe too. In this investment climate
will have to become reality in order to justify
with high valuations, this serves to make us
it is therefore essential to be selective when it
the high valuations. The bar is therefore set
cautious.
comes to taking risk. ď Ž
high, but Europe has a longer way to go and
The European economy is far from having
still has plenty of room to grow. This is con-
reached that stage yet. Interest rates are still
trast to the US, where the economy is already
very low and overcapacity at companies
performing at full capacity.
means that there is still room to maintain the return on capital.
RISING INTEREST RATES & INFLATION So far, the equity markets have responded
WHAT ABOUT RISK?
positively to the rising interest rates and infla-
In an absolute sense, risk-bearing asset
tion forecasts. Financial securities in particular
classes are unattractive from a valuation per-
profited from the steepening of the interest
spective. Expected returns are lower than
rate curve (banks are financing themselves at
required returns. Yet the same applies to
KEMPEN INSIGHT, JULY 2017
19
Inching towards the door ‘Risk, like energy,
planted for the next crisis. I don’t need to
however. The equity markets have not yet
tends to be conserved
tell you that interest rates have been low
reached the euphoria stage, but a signifi-
not dissipated, to
for a long time. Low expected returns on
cant portion of the extremity is invisible to
risk-free assets are ‘forcing’ investors to
the naked eye and ‘hidden’ in apparently
look to risky assets. Yet expected returns
simple products such as Exchange Traded
change its composi-
are currently low there too.
Funds (ETFs or index trackers). An ETF was
tion but not its
And there’s more. Market volatility has
recently licensed that promises investors
quantum.1 ’
dropped to its lowest level in decades. It
four times the return on the S&P 500 index.
is generally assumed that this will not
Over the past few years, institutional
change in the near future. The combina-
investors have again turned to illiquid
tion of free money, low expected returns
investments via non-listed real estate,
This statement by Andy Haldane, Chief
and low volatility always causes the same
infrastructure, private equity and debt.
Economist at the Bank of England, popped
behaviour. Both companies and investors
This is understandable if you enter into
into my head recently while I was teaching.
start to borrow more in order to earn
them with the right expectations. Yet his-
My students were looking at the case of
some kind of return. That’s fine as long as
torical returns are often overestimated
Harvard Endowment with the provocative
things are going well.
and risk underestimated. There is a good
title Liquidating Harvard. In 2008, the uni-
The build-up of debt in the real economy
reason for the premium paid on (il)liquid-
versity fund was forced to slash its spend-
is highly visible to us as investors. For
ity. Investors with a long-term horizon can
ing. Why? Cash was needed, but there was
some time now we at Kempen have
benefit from that.
an enormous mismatch between assets and
noticed that US businesses are accruing
My advice is as follows: keep an eye on
liabilities. Over 55 percent of the assets
ever higher levels of debt. Partly driven
the balance between liquid and illiquid.
were ‘locked up’ in illiquid assets.2 This was
by the wave of mergers and acquisitions,
There will come a time in the next few
the form that risk had taken on.
the same thing is now happening in
years when growth weakens, interest
As we all know, history never repeats
Europe. I expect this to continue for a few
rates rise and equity valuations are
itself precisely. And although I don’t think
more quarters yet.
adjusted downwards. If you have liabili-
that there is euphoria on the financial
It’s not as easy to see how much debt is
ties when that time comes, you will need
markets (yet), I can see the seeds being
building up in the financial economy,
liquidity.
1 2
20
Haldane A., 2014, Halfway up the stairs, Bank of England, speech 751. A Vanity Fair article (Munk, N., 2009, Rich Harvard, Poor Harvard) describes the situation in very lively terms. For instance, it describes a meeting between the CEO of Harvard and a money manager.
KEMPEN INSIGHT, JULY 2017
Don’t expect me to make any promises about timing, however. For now the music continues to play and we have to keep dancing. Yet we must always remember that risk has not dissipated. It can do no harm to inch a bit closer to the door. ď Ž
Roelof Salomons, Chief Strategist at Kempen and Professor of Investment Theory & Asset Management at the University of Groningen roelof.salomons@kempen.nl
KEMPEN INSIGHT, JULY 2017
21
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