KEMPEN KEMPEN INSIGHT INSIGHT /// /// OKTOBER MAY 2020 2019
Insight Outlook
2020
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Prepared for unexpected risks xx xx
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Low risk, high impact
THE TAIL RISK MODEL
Dutch pension investing EXPORT PRODUCT!
‘More activist leadership please’
DEBATE Jeroen Smit, Daniëlle Melis and Lars Dijkstra
CONTENT Dike surveillance for portfolios /// Risk model for extremes
4
Roundtable
12
/// Author Jeroen Smit, supervisory board member Daniëlle Melis and CIO Lars Dijkstra. ‘Companies can do what governments cannot: act in the same way all over the world.’
More from Kempen /// W hite papers, newsletters: stay informed
Circular zinc /// S mall-caps investment case
21 16 Made in Holland: fiduciary management /// What can the UK learn from us?
carbon neutral natureOffice.com | NL-077-153326
print production COVER PHOTO Weesp, Aerophoto-Schiphol
2
KEMPEN INSIGHT, MAY 2020
‘That never happens’ became ‘what if it does happen?’
Five years of Real Estate, five key success factors /// Thanks to 25 million data points
A peek inside. . . /// The Van Lanschot Kempen Foundation
Media to inspire /// Maximum capacity, Full of plastic, A superhuman mind
Move over US dollar /// Make way for Euro Hight Yield
It sounds so simple /// Column by Dimitri Willems
/// COLOFON MAY 2020 © Kempen Capital Management N.V. Art direction Henrike Beukema Images Aerophoto-Schiphol, Freepik, Academy – Walter Kallenbach, Shutterstock, Speakers Don Wijns Frissewind Fotografie, Mario Hooglander, Phenster, Unsplash , Francois Veraart Text Lars Dijkstra, Andrew Drinkwater Patricia Fernandez Bermudez, Jos Leijen, Stephanie Lewis, Maud de Mol van Otterloo, Marc Paulissen, Frank van der Ploeg, Gerard Roelofs, Gijs Spijkers, Anouk Suwout, Shona von Tunzelmann, Dimitri Willems, Karel Zwaan
8 11 15 19 26
Editorial board Corbijn CS, Kirsten Hertog, Daniëlle Levendig en Charlotte Wilberts 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. This document is for information purposes only and provides insufficient information for an investment decision. This document does not contain investment advice, no investment recommendation, no research, or an invitation to buy or sell any financial instruments, and should not be interpreted as such. The opinions expressed in this document are our opinions and views as of such date only. These may be subject to change at any given time, without prior notice.
Editorial address Kempen Capital Management N.V. to: Secretariaat Kempen P.O. Box 75666 1070 AR Amsterdam marcom@kempen.nl
‘On the night of 31 January 1953, dikes were breached along the entire coastline of the Dutch province of Zeeland. The combination of a spring tide and a severe storm proved too much for the Dutch coastal defences. That night was the starting shot for what was to become the Delta Works. The traditional modus operandi, which worked on the basis of commonly occurring conditions, was exchanged for a focus on the worst disasters. ‘That never happens’ became ‘what if it does happen?’ And Dutch dikes were given a tangible goal: they may only fail once every 10,000 years. Yet how high does the water reach during the worst conditions that only occur once every ten millennia? Measurements only go back to about 1900, less than 1 percent of the data required. In spite of this lack of data, we do agree that it is necessary, and that it is possible! Crashes on the financial markets don’t cost lives or disrupt society in the same way. Yet they can still have a dramatic impact. Three stock market crises have erupted since the turn of the century, in 2001, 2008 and a third caused by the coronavirus. These three events fall way outside the usual models. The reforms to the Dutch pension system would probably not be needed without these unexpected financial disasters. Pension funds are already experiencing high water; this anxiety is warranted. Investors, whether private or institutional, benefit from insight into the tail risk (the statistically tiny risk of extreme events occurring) to which they are exposed. It is precisely this type of risk that disrupts systems. The most recent ‘black swan’ is the coronavirus, which has an impact on the economy and society that is as yet far from clear. Another important issue is the climate. Global warming is a reality and we have to hope that the effect is still reversible. In addition to our social responsibility to restrict their impact, we are also investors and need to seize opportunities. As the Netherlands learned after the 1953 storm, as a country but also as investors, we only become stronger through learning from the past, and thinking about the future. The world is slowly starting to act, perhaps too slowly. No-one knows when the next figurative dike will be breached. Gerard Roelofs Head Client Solutions
Any references in this magazine to ‘Kempen’ are taken to mean Kempen Capital Management N.V.
gerard.roelofs@kempen.com KEMPEN INSIGHT, MAY 2020
3
Is the dike robust enough and high enougph to withstand future storms?
Dike surveillance It only takes a single storm to breach a dike and wipe out all the other days 4
KEMPEN INSIGHT, MAY 2020
/// text MARC PAULISSEN illustration FRANCOIS VERAART
The coronavirus, or a flash crash by a trading algorithm. They’re not the kind of events you want to be surprised by as an investor. How do you deal with changes that could potentially have an enormous imp act on your
investment portfolio when there is a very low risk of them occurring in the first place? Kempen is the first asset manager to apply an additional risk model for extreme events: the tail risk model.
for portfolios indication of this risk, but focus mainly on ‘typical changes’ via, for example, standard deviation and the use of normal distribution. This works well in 90 to 95 percent of cases, but this is not good enough. The biggest error in statistical risk models is that the risk of unexpected, extreme events is grossly underestimated. It is precisely in times such as these, that this is perilous. Equity prices were higher than ever this year and the last genuinely large downturn on the markets Let’s start with the basics: why don’t more common deterministic and
was a long time ago. At Kempen, we believe effective risk manage-
statistical models suffice when drawing up an adequate risk policy?
ment which also examines the risk of extreme events, or tail risks, is
Both methods are based on excessively simplistic analyses. There-
crucial. The acute stress on the markets in early March corroborates
fore they fail to generate a clear overview of the potential for highly
this picture.
negative results. The problem with deterministic models is that they often sketch worst-case scenarios. They show how much a portfolio
THE GREATEST STORMS
will decline if certain investments plummet in value, but they say
It’s perfectly normal to take extreme risks into account outside the
nothing about the risk of this occurring. Statistical models do give an
world of investment. A good example is the dikes for which the
KEMPEN INSIGHT, MAY 2020
5
over the past few years. The question is whether this mechanism will continue to exist in the future. Yet traditional risk models assume that it will. We’ve seen this mechanism function consistently over the past ten or fifteen years, but that doesn’t mean it’s a given. Therefore it makes more sense to incorporate into risk models the fact that the situation can change drastically, and that the elements can collectively turn against you.
EXTREME INTEREST RATE SCENARIOS Let’s look at interest rates as an example of an extreme scenario. Given their current levels, almost everyone assumes that central banks will not cut rates further. Yet this is a possibility. After all, ten years ago interest rates already stood at historically low levels of around 4 percent. If interest rates are cut further, this will have a huge impact on pension funds. If yields of -1 percent don’t put investors off buying government bonds, why would yields of -2 percent do so? Traditional models don’t analyse these types of extremes, and they ought to. And what if, as is often predicted, interest rates sudIt's essential to be well-prepared and remain altert to changes
denly rise sharply? This would hit private investors hardest, especially if equities are also affected. Pension funds will be hit less hard in this case, as their liabilities will fall more sharply in value than
Netherlands is so famous. When constructing these, engineers don’t
their portfolios.
work on the basis of normal water levels, but on very extreme levels. Our dikes need to be able to withstand these extreme levels, even if
FOCUS ON EXTREMES
they occur very rarely. Only a dike that is built according to that prin-
How can we analyse extreme investment scenarios so that we can
ciple, offers sound long-term protection.
anticipate them? The answer lies in the tail risk model, which Kempen developed last year in conjunction with Casper de Vries, Professor of
NOTHING LASTS FOREVER
Monetary Economics at Erasmus University in Rotterdam.
In the same way that engineers take extreme conditions into account,
This model doesn’t work on the basis of all outcomes and the usual
we believe that risk management for investment portfolios also needs
normal distribution, but instead focuses purely on the worst outco-
to consider extreme scenarios. These extremes can cause existing
mes. To illustrate this, let’s return to the example of dikes. The fact
patterns to look completely different.
that a dike is able to withstand 99 percent of water levels, is irrele-
For instance, we’re used to equity prices rising when interest rates
vant. It only takes a single storm to breach a dike and wipe out all
fall, as central banks have been prepared to act when necessary
The tail risk model shows investors where their tolerance limits for extreme outcomes lie 6
KEMPEN INSIGHT, MAY 2020
the other days by causing lasting damage. That’s why you need to focus on the biggest outcomes you’ve observed. And extrapolate the trend you can identify within these, to even less likely risks.
FOR USE IN SHOCKWAVES The tail risk model enables us to generate predictions about extreme downturns that occur in the wake of sudden major events, such as policy shocks. Take a radical Green Deal that could have a huge impact on the European Union’s economy. Another highly topical example of a tail risk is the coronavirus outbreak that erupted at the start of this year. At the time of writing, it was already having a significant impact on the investment markets and no end was yet in sight. It’s precisely this type of shockwave that the model focuses on. The tail risk model is not suited to events that evolve more slowly, such as climate change. Everyone understands the problem there, but it’s enormous and plays out across the very long term. This makes it difficult to incorporate into investment policy. That doesn’t alter the fact that extreme climate risk ought to be part of investment policy, but forecasts of long-term trends are probably more significant here. The upward potential of such trends is important as well.
Ready for the future
The best opportunities in terms of climate can currently be found among European equities, as the European Union is a global leader
investors’ stress levels. Over a longer horizon, from about one year,
via its climate policy.
the model shows that the impact of tail risks is often not that severe, as markets often bounce back after a downturn. That’s another
IMPORTANT TO THE INVESTMENT MIX
aspect that traditional models have difficulty mastering.
Both private and institutional investors benefit from the tail risk model, although they are affected in different ways by sharp down-
Our goal is to help investors keep a cool head, even during stressful
turns on the markets. Private investors are hit by both falling equity
periods. And this should enable them to keep it above water as well.
and bond markets in the event of acute market stress. Institutional investors suffer most during a flight from equities to bonds, as the lower yields make their liabilities extremely expensive. Both dynamics can be analysed using the tail risk model. We believe the model can play an especially significant role in the strategic phase of portfolio construction. It helps all kinds of investors to clarify where their tolerance limits for extreme outcomes lie. The use of tail risk models is new to the financial industry. The model has not been introduced before because asset managers find it too complex, or simply think that existing methods suffice. We now take a different view. Kempen is the first asset manager to use the tail risk model. In that sense, its application can certainly be described as innovative. We are incorporating the tail risk model into our investment advice and have recently started to apply it in practice.
REDUCING STRESS LEVELS We use the tail risk model at the earliest possible stage in our invest-
Wilse Graveland
Frank van der Ploeg
ment decision-making, so that clients can see early on what could
Head of Fiduciary Management Institutional
Fiduciairy manager
wilse.graveland.kempen.nl
frank.vanderploeg@kempen.nl
happen to their portfolios, if extreme events occur. The model can therefore affect the portfolio composition. It may also help to reduce
KEMPEN INSIGHT, MAY 2020
7
KEMPEN GLOBAL PROPERTY STRATEGY
Five years of real estate, five factors for success The enormous database containing information on 200,000 buildings. That’s the key to the success of the Kempen Global Property Strategy. Jorrit Arissen explains the fund’s performance by listing the five factors for success.
Kempen launched its Kempen Global Property Strategy at the end of 2014. The goal was simple: to beat the benchmark. Putting that into practice was more complex. Yet thanks to a sophisticated approach, based on Kempen’s in-house expertise, it proved to be a success. Since inception, the strategy has outperformed the benchmark by an average of 210 basis points after the deduction of fees*. Senior real estate portfolio manager Jorrit Arissen is unsurprised. He explains the fund’s performance by listing the five factors for success. The primary success factor is that Kempen possesses an enormous database containing information on 200,000 buildings. This database holds ten to fifty data points on each individual property. The information varies from energy consumption and sustainability to local and regional infrastructure and the presence of amenities. This enables analysts to assess in a consistent manner the risks and opportunities of each building from the comfort of their own computers. ‘What constitutes a good building depends partly on the local context,’ Arissen explains. ‘In the case of a property in Tokyo, for instance, we look at its accessibility via public transport, as this is the most important connection. For a building in Detroit, on the other hand, whether there are highways and junctions nearby weighs much more heavily. There it’s largely irrelevant whether there’s a train station in the neighbourhood. We examine the proximity to ports and airports when it comes to industrial buildings.’
Jorrit Arissen Co-Head Real Assets jorrit.arissen@kempen.nl
*
8
Retail experience
Kempen’s investors don’t just look to the past, but also at today and into the future. ‘In retail real estate, for example, visitors are incre-
Kempen occupies the number one spot in the Morningstar database for the 5-year track record of the Kempen Global Property Strategy NV, share class N, in the Real Estate Equity Sector universe – global indirect, in EUR, as of 1 October 2019. The value of your investment may fluctuate. Past performance provides no guarantee for the future.
KEMPEN INSIGHT, MAY 2020
/// tekst JOS LEIJEN foto SHUTTERSTOCK
We love volatility because it presents us with opportunities on a daily basis. Tokyo
asingly spending large amounts of money at the same location,
mic or political trends. You can see that we have a tracking error of
perhaps because they are having lunch in a restaurant or taking in a
less than 2 percent. We don’t speculate against macroeconomic trends.
film. The experience is the magnet. Retail centres that have few ameni-
It’s impossible to calculate the impact of a Brexit, and gambling can be
ties therefore need to invest in them. This has an impact on a complex’s
costly.’
value.’
The fund managers did not, for instance, allow themselves to be
Thanks to a total of 25 million data points, the team knows the portfo-
tempted into deviating from the benchmark around the time of the
lios owned by every listed property company. ‘We don’t let anyone
Brexit referendum, speculating against a ‘yes’ or ‘no’ from the British
pull the wool over our eyes,’ Arissen says. ‘If a company reports
people. UK property companies make up 6 percent of the benchmark.
average vacancy levels of 3 percent, then that sounds great. Yet if
The same applies to Kempen’s real estate strategy. ‘We’re talking
those 3 percent are caused by a small number of complexes, that sud-
about 25 companies. Of those 25, we have selected three that offer the
denly reveals a totally different picture. Companies are keen to show
best opportunities for earning an above-average return according to
us their best properties, but we can see what the rest are like with the
our data points and analysis.’
aid of our data.’
Taking advantage of volatility
Restricting risk
Keeping a close eye on price trends and taking advantage of the vola-
A second success factor for outperforming the benchmark is restricting
tility in the market wherever possible, is important. ‘We love volatility
risk. ‘We mimic the benchmark’s regional allocation,’ the portfolio
because it presents us with opportunities on a daily basis,’ Arissen
manager explains. ‘We are experts in real estate, not in macro-econo-
admits. Volatility, he explains, can cause property company equity prices to fluctuate sharply, while the underlying value of the real estate remains stable. ‘The real estate market is by definition inefficient. Listed real estate lends itself even better to active management
USTAINAB SS IL RD
TOWARDS
S
INABILITY TA US
YIT
FEBELFIN SUSTAINABILITY LABEL
than regular equities in our opinion. That’s our third success factor.’
The Kempen (Lux) Global
referendum and the Brits’ surprise ‘no’ to the EU, the equity prices of
Property Fund is entitled to carry
many property companies plummeted by 30 to 35 percent. Irrespective
the Febelfin sustainability label.
of the sector in which they operated, the quality of their real estate or
The label guarantees that the
their capital positions. That was the right time, taking into account the
funds invest in a sustainable and
weight in the benchmark, to expand the portfolio’s interests in a
socially-responsible manner.
number of funds. ‘We were convinced that prices would rally, and that’s
As an example he again names the UK and Brexit. In the wake of the
exactly what happened.’
KEMPEN INSIGHT, MAY 2020
9
TOW A
5 Factors for success
1. Capitalising on our unrivalled database of property information 2. Focusing entirely on real estate risk 3. Exploiting volatility in an inefficient market 4. Considering ESG and climate change 5. Always looking to the future
Kempen Manhattan Office Property Quality Analyses Source: Kempen Capital Management
Room for improvement
of homes that were poorly insulated and therefore had a high carbon
ESG (environment, social & governance) factors have been an integral
footprint. We advised them to do something about this, but they
part of Kempen’s investment strategy for years. Real estate is no
decided against it because of the low gas prices and relatively high
exception. This is the fourth success factor. In particular over the past
level of investment it would involve. We viewed this as a risk. That risk
few years, sustainability and climate change have played an incre-
manifested itself when the province of Alberta imposed stricter stan-
asingly important role in decisions on whether or not to invest. ‘We
dards and Boardwalk ended up having to invest heavily in improving
analyse the carbon footprint, social impact and corporate governance.’
the residential properties.’
This doesn’t mean that Kempen only invests in companies that earn
Climate change is another key theme. As an example, Arissen and his
excellent scores on all these aspects. If a company rates less well on
team have mapped out the risks relating to hotels in Key West, Florida,
one of these, this means there is room for improvement. And improve-
owned by property companies. Insurance claims resulting from hurrica-
ment can in turn lead to a higher return. ‘Poorer performances are
nes were higher than ever in the sunshine state in 2017 and 2018. This
often reflected in lower equity prices. The question is: what is the price
potentially makes the location less attractive to tourists, while higher
at which are you investing and how much value can you subsequently
insurance premiums are at the expense of earnings. This is not in itself
unlock? We encourage companies to create value. We enter into dialo-
a reason to avoid an investment in this area, but it needs to be taken
gue with them on these changes. This engagement policy is applied in
into consideration. If the return is not high enough to compensate for
other sectors as well.’
the climate risk, it’s not a sound investment. How climate risk will evolve is uncertain. Yet investors need to look to
Engaged shareholder
the future, and Arissen names this as the fifth pillar shoring up the real
The role of engaged shareholder can yield some ‘fun discussions’,
estate strategy’s success. ‘Meetings with the managers of property
Arissen continues. Sometimes leading to the desired result, sometimes
companies and in-house thematic research help the real estate team to
not. ‘Boardwalk, a Canadian property company, owned a large number
formulate an outlook for the future.’
Disclaimer – This article was written in Februari 2020. The Kempen (Lux) Global Property Fund (the“Sub-fund”) is a sub-fund of Kempen Alternative Investment Fund SICAV (the “Fund”), registered in Luxembourg. The Fund is licensed in Luxembourg and is monitored by the Commission de Surveillance du Secteur Financier. Kempen Capital Management N.V. (KCM) is the manager of the Fund. KCM is a licensed manager and is monitored by the Authority for the Financial Markets. The Sub-fund is registered with the Authority for the Financial Markets under the Fund’s license. This information constitutes an insufficient basis for an investment decision. You should therefore read the Key Investor Information and the prospectus. These documents, as well as the articles of association, the annual report and the semi-annual report, can be obtained free of charge from the Fund’s offices at 6C. route de Trèves, L-2633 Senningerberg, Luxembourg, and from the website of KCM (https://www.kempen.com/nl/asset-management). The Sub-fund is registered for offering in a limited number of countries. The countries where the Sub-fund is registered are listed on the website. The value of your investments can fluctuate. Results achieved in the past do not constitute a guarantee for the future.
10
KEMPEN INSIGHT, MAY 2020
/// text MAUD DE MOL VAN OTTERLOO
SUPPORT THE LANSCHOT KEMPEN FOUNDATION
Art for all, time for young and old The Van Lanschot Kempen Foundation coordinates and
Museum with children from the IMC Weekendschool.
supports a wide range of different activities and initia-
Each year we also contribute to a number of different
tives. One example is an art exhibition in collaboration
charities in which our employees are involved in their
with the Employee Insurance Agency (UWV) showca-
free time.
sing a variety of works by artists with a disability. We
We close each year with a reception for all the volun-
also facilitate Pitching Power, a pitch contest as part of
teers within Van Lanschot Kempen, to catch up on the
a young enterprise scheme for school pupils.
latest news and encourage even more colleagues to
Employees enjoy department outings with senior citi-
participate. Everyone involved is happy to be able to
zens to Artis Zoo in Amsterdam or visit the Van Gogh
give something back to society via the Foundation.
The entrance hall of Van Lanschot’s Apollolaan office in Amsterdam hosted an exhibition of works by four visual artists with a disability.
Twelve Van Lanschot Kempen employees accompanied a group of senior citizens to Artis Zoo in Amsterdam.
During the Pitching Power contest in ’s-Hertogenbosch we helped out with Jong Ondernemen’s ‘Junior Company Competition’. A programme in which secondary school pupils spend a year setting up their own company.
The mission of Van Lanschot Kempen Foundation (founded in 2016) is to promote social projects for the generations to come, and to help create a better world around us. We aim to achieve this by putting the financial resources, knowledge and time of Van Lanschot Kempen employees to use, as well as the knowledge and networks of our clients. The Foundation focuses on four specific themes that are a good match for Van Lanschot Kempen and essential to a stable and healthy society: financial education, talent development & enterprise, art & culture, good health & social cohesion through sport. You can find more on the foundation on: www.vanlanschotkempen.com/vlkf This article was produced before the corona-virus outbreak KEMPEN INSIGHT, MAY 2020
11
Learning from a pioneer with a purpose It’s difficult to interpret a crisis when you’re in the midst of it, but Jeroen Smit, Daniëlle Melis and Lars Dijkstra give it their best shot. In what was originally planned as a roundtable but instead became a conference call, they discuss what we can learn from the past and reveal a shared sense of optimism.
JEROEN SMIT, we’ve read your book on Unilever with interest. Looking back, what can we learn from your profile of Paul Polman and his book Het grote gevecht & het eenzame gelijk*?
courage to point out the undesirability of this
pension fund boards are fearful of anything
split between personal and professional inte-
that is hard to quantify.’
‘In the book I’ve tried to reconstruct the
that it’s not easy to be the trailblazer. He
years between 2009 and 2019, when Paul
thought the world of 2016 would understand
DANIËLLE MELIS, what is your experience as an independent board member at pension funds? What can we learn from the past?
Polman was trying to promote the message
that we all ought to work together. A global
‘In my view shareholders need to play a
that multinationals need to be a force for
tax on carbon emissions, a living wage and
major role in improving the world. However,
good. The world is still ruled by: if it’s possi-
combating poverty, the Climate Accord etc.
are all shareholders able to take on that
ble, if it’s permitted, then you should do it.
Instead, we got Brexit and President Trump.
role, and indeed, do they want to? The will is
Otherwise you’re a poor businessman.’ Smit
To top it all, Kraft Heinz then made an offer
there and many recognise the need to do so.
cites the example of Tim Cook, CEO of Apple,
for all Unilever shares. What particularly
But do all shareholders have the opportu-
who in an interview with The Guardian said
frustrated Polman at the time was the know-
nity? This fits in with Polman’s frustration: do
he wanted to pay more tax: ‘We desperately
ledge that the influential major Dutch
you allow yourself to be ruled by quarterly
need a fair tax system’. It’s very interesting
pension funds (which usually praise Unile-
figures and regulators? Or do you opt for
that, although he genuinely believes this, he
ver’s sustainable leadership) were willing to
long-term engaged shareholdership? It’s not
can’t really get away with saying so in his
sell their stakes in the Anglo-Dutch multinati-
a homogeneous group.
role as CEO. In 2009, Paul Polman had the
onal if the price was high enough. Many
You have the age-old dual agency problem:
*
12
grity. Your personal integrity needs to be front and centre of what you do. Another thing we can learn from Polman is
Het grote gevecht & het eenzame gelijk (The great fight & the lonely night) van Paul Polman, published in October 2019 and currently only available in the original Dutch
KEMPEN INSIGHT, MAY 2020
/// text CORBIJN CS
JEROEN SMIT
DANIËLLE MELIS
LARS DIJKSTRA
Jeroen Smit is an
Daniëlle Melis is
Lars Dijkstra is
investigative jour-
an independent
Chief Investment
nalist and the
board member
Officer at Kem-
author of several
and supervisory
pen. Dijkstra is a
bestsellers, inclu-
board member in
member of the
ding The perfect
the
financial
300 Club, an inter-
prey: The fall of
sector and achie-
national group of
ABN AMRO, or: what went wrong in the
ved her doctorate focusing on the role of
CIOs, advises a range of investment com-
banking industry. Since 1990 he has
shareholders in corporate governance. As
mittees and joined the board of Eumedion
written on leadership in industry. He
such, she is involved in several initiatives,
in 2018. He graduated in macroeconomics
earned a degree in Business Studies from
both in the Netherlands and internationally,
from the University of Groningen.
the University of Groningen and started his
on long-term engaged shareholdership.
career in consultancy. His most recent
Her current positions include a seat on the
book is a profile of Unilever CEO Paul
Supervisory Board of Kempen Investment
Polman, Het grote gevecht & het eenzame
Funds.
ting back in a totally
available in the original Dutch version.
‘This crisis will
unexpected way’
‘Your personal
hopefully yield the
integrity needs to
insights that we need
be front and centre’
to accelerate our
gelijk van Paul Polman, currently only
‘Nature is now figh-
actions’ shareholders are the principals who vote at
guard their funding levels and financial
long term. Ultimately they all come together
shareholder meetings and are in touch with
returns. I don’t believe the constant search
and merge. It wouldn’t surprise me if this
the company’s management. At the same
for yield and the threat of having to cut pen-
crisis acts as a major wake-up call: we can’t
time, they’re the agents of the ultimate bene-
sions mean you can’t focus on sustainability.
go on like this.
ficiaries of the pension funds, the members.
Fear and turmoil in the short term certainly
Our first truly sustainable portfolio dates
So you have a responsibility towards corpo-
don’t help though.’
from 2002. We know that in practice you can
rates, but also to the pension scheme
exert great influence on companies, even if
tems in a single world. We still have a long
LARS DIJKSTRA, as an investor, how do you view our current rollercoaster ride in terms of lessons from Paul Polman’s story?
way to go in this respect.’
DIJKSTRA: ‘The current situation is exceptio-
incentives at all the parties involved also
Smit is curious to understand what lies
nal and very scary, although economically
need to be better aligned. I’m not naive
behind the slow pace of change.
you can also say: never waste a good crisis.
about this, it could take ten years, but still.
MELIS: ‘Some board members still view soci-
How do major changes occur? It’s the classic
It wouldn’t surprise me if we use this crisis
ally responsible investment as a trade-off
S-curve. It often takes about twenty years to
o change such things.’
between doing good and performance. They
traverse the entire curve. First you have the
think that sustainability costs money. The
pioneers, then a growing group of like-min-
context in which you operate also matters.
ded people and separate initiatives that are
Take the plummeting financial markets.
really the same. You can see this now with
There is pressure on pension funds to safe-
the focus on climate, sustainability and the
members you serve. I see issues arising from this dual role in my position as an independent board member. They are two ecosys-
you’re not a major player. But you all need to believe in it: the entire value chain of asset owners, asset managers and corporates. It’s about personal integrity, but the
Greater cooperation between asset managers, asset owners and businesses seems to be part of the solution. What adjustments would this require?
KEMPEN INSIGHT, MAY 2020
13
MELIS: ‘Organisations like Eumedion [repre-
up a plan for 2020 in 2010. It would certainly
MELIS: ‘It may be the optimist in me, but
senting the interests of institutional investors
be a bold step to make a plan for 2030 now.
you’ve always got time. You can start making
in areas such as corporate governance and
It’s proof you’re confronting the problems:
tomorrow slightly better today. This crisis
sustainability] have taken up the gauntlet in
healthcare, the climate. Very few CEOs dare
will hopefully yield the insight that we need
the Netherlands. This gives you a wider reach.
to do that.’
to accelerate our actions. If you want to
And we’re very good at it in the Netherlands,
MELIS: ‘That’s interesting. Why do you think
leave behind a better world in ten or fifteen
although we’re too modest about it. The
leaders aren’t doing that?’
years’ time, you need to act now, involve
system needs to reinvent itself though. That’s
SMIT: ‘Because leaders are trained to be not
educational institutions and young people.
another thing I like about Jeroen’s book, the
vulnerable. You need to be in control. A long-
The second aspect is, again, cooperation.
frustration is almost palpable.’
term plan makes them vulnerable. Inciden-
How can you channel all these wonderful ini-
SMIT: ‘It’s a classic example. The brave
tally, you unleash a great deal of energy if
tiatives so that the process can speed up and
pioneer is by definition somewhat tragic.
you do dare to make one. Unilever received
take us in the right direction quicker?’
They are the first to tread where no-one has
two million job applications. Amazing! All
DIJKSTRA: ‘If we want to link this discussion
gone before, and that’s when you encounter
inspired by Polman’s long-term vision.’
to the current crisis, we’ve been concerned
obstacles. The next person to come along
DIJKSTRA: ‘Our long-term vision is what we
about the climate for a long time. Nature is
can reap the rewards. That’s what happened
call the Real Active. It transcends the debate
now fighting back in a totally unexpected
to Polman.’
on active versus passive investment and out-
way. The global impact is many times
performing benchmarks. We’re shifting from
greater than from natural disasters such as
These are our roaring twenties. We ought to be there in ten years’ time, in 2030. Are you optimistic about that?
shareholder focus to stakeholder focus.
tornados or droughts, in which everyone
Using concentrated portfolios to create abso-
faces a different local threat. Our children
lute real value for all stakeholders. The Real
are all at home at the moment, including
DIJKSTRA: ‘Yes. There are innumerable good
Active also stands for the link between the
students. In our house this has already trig-
initiatives that will converge and accelerate
real and financial economies. That’s our
gered further discussions on capitalism,
as a result of this crisis (phase three of the
target for 2030, that’s where we want to be.
nature and our climate.’
S-curve), such as on the integrated reporting
Of course even some of my colleagues at
SMIT: ‘We’re fundamentally connected to one
of ESG (environmental, social and gover-
Kempen are critical of this. We’re a listed
another. The pressing need to work together
nance) aspects. One thing we do need is an
company and the desire to be in control is a
and commit to things is being underlined by
International Financial Reporting Standard
familiar one here too.’
this crisis. Let’s hope it acts as a catalyst. Yet
for non-financial factors. And in terms of the
SMIT: ‘What you need then is a CEO who
if everyone only thinks of themselves, we’ll
climate, carbon pricing needs to happen at
says: in 2030 everything at our bank will be
be further from a solution than ever. There’s
least at European level.’
invested in line with the Real Active. It would
no way of knowing, but I’ve always been
MELIS: ‘All the initiatives serve to help us
be great if a bank such as Van Lanschot
irrepressibly optimistic.’
speak the same language. Although I wonder
Kempen were to lead the way; that’s the kind
whether a price needs to be attached to it or
of leadership needed.’
a way of measuring what we can’t currently
MELIS: ‘It is starting to happen though. Exhi-
quantify. You want to appeal to the personal
biting vulnerability by talking about purpose,
THE REAL ACTIVE
drive, motivation of people. To their sense of
attracting talent based on purpose and inspi-
Kempen aims to clarify the
purpose. If you can do that as a company,
ring loyalty in specific clients for that reason.
difference between real active
you can inspire loyalty in people, sharehol-
These are the effects I see as a supervisory
investment and traditional
ders and other stakeholders.’
board member, including at Kempen. Training
active investment, hence our
courses for executives and supervisory board
name for this investment style.
members used to make fun of purpose. That’s
Real active investment entails
no longer the case. But it does take courage.’
long-term stewardship as well
What or who do we need to be successful in future, which is by definition uncertain? SMIT: ‘My real theme is leadership. To me, a true leader is someone who dares to plan for ten years’ time. This is a distinguishing feature of Polman’s leadership, as he drew
14
KEMPEN INSIGHT, MAY 2020
as real economic return. The
Do you think the current crisis will yield a better or a fairer system? And are we in time to turn the tide on climate targets?
real active isn’t just about performance in terms of returns; it also makes a positive contribution to sustainability.
Media to inspire In this section, Kempen professionals share their favourite media and speak about their views. Andre Keijsers, Head of Kempen UK, starts off with media to inspire.
Full of plastic I came across this brilliant, and sometimes troubling documentary thanks to a chance meeting at an airport with the man who made the film, Craig Leeson. We were both waiting for a delayed flight. He’s an award-winning TV film and documentary maker who teams up with free diver Tanya Streeter and an international team of scientists and researchers to explore the terrible impact our addiction to single-use plastic is having on the oceans. Some of the statistics are mind-boggling. Between manufacture and transportation, about 63 billion gallons of oil are used to supply the United States with plastic bottles each year. There are also some very moving examples of the
Maximum capacity
impact plastic is having on our wildlife. Big birds like albatrosses pick up food out of the ocean to feed their chicks. But with all these coloured pieces of plastic floating in the ocean they think it’s edible, causing some of these chicks to die because their whole stomach is just full of plastic. It’s something close to home for us at Kempen where our Global Impact Pool
Peter Millican, an Oxford
focuses on sustainable development goals (SDGs). SDG 14 aims at getting our
professor, sets out to explore the challenges and implications of
oceans clean. This documentary just makes you realise the size of the problem
the quest to create the first universal quantum computer. It’s a
and the many ways it affects us all.
complex subject and this excellent podcast helps you process information about quantum computing by breaking the discussion down into bite-sized chunks.
Documentary: A Plastic Ocean Netflix https://www.imdb.com/title/tt5203824/
In essence a universal quantum computer would be able to perform tasks that would be far beyond the capacity of current super computers. It’s an exciting prospect because the data processing capahuge implications for research in many areas including pharma,
A superhuman mind
industrial processes and even financial services.
This book tackles a rather uncomfortable idea. We know
In finance there is a huge amount of data processing which is
that computers are very good at narrow tasks but not
something Kempen is very focused on. A working quantum compu-
(yet) very good at broad tasks or adaptability. However,
bilities would be far beyond what we know today and could have
ter would allow this to be accelerated substantially. However, we
once they reach human intelligence the implications are
are still several years away from this point. If you’re not that fami-
huge, as they subsequently are likely to rapidly overtake us. The idea behind the
liar with the concept of quantum computing this is a great starting
book is ‘how can it happen? What are the considerations if it happens? How should
point.
we deal with it? And what should be done beforehand?’
Podcast: The Futuremakers Could quantum computing change the world? Oxford University https://podcasts.ox.ac.uk/could-quantum-computing-change-world
What’s crystal clear is that we should start dealing with it now because at some point things could develop quite quickly with major implications. Some people think there’s a 10 percent chance of reaching human levels of intelligence by 2030. Others says there’s a 90 percent chance of it happening by 2075. But even if it happens by 2100, the more important issue is ‘what should we have put in place by the time it happens?’ It’s a challenging book but an enlightening one. There are people thinking about this, but not enough of them are in the mainstream. As the author says: ‘will the brightest minds on this planet please stand up’. Book: Superintelligence Author: Nick Bostrom https://en.wikipedia.org/wiki/Superintelligence:_Paths,_Dangers,_Strategies
KEMPEN INSIGHT, MAY 2020
15
What can the UK learn from the Dutch approach to fiduciary management? (and vice versa!) AS UK PENSION TRUSTEES GRAPPLE WITH
Historically Holland has been a hotbed of
also used by insurers, foundations, family
THE CHALLENGES OF FINDING THE RIGHT
innovation. And its contribution to the
offices and so on, particularly in the
FIDUCIARY MANAGER, CATHY LEWIS, A
financial world continues today with the
Netherlands – it’s important to understand
DIRECTOR IN KEMPEN’S FIDUCIARY
creation of fiduciary management around
that there are different priorities for each
MANAGEMENT TEAM IN LONDON, LOOKS AT
twenty years ago. Strictly speaking you
country. The majority of Dutch pension
WHAT WE CAN LEARN FROM THE DUTCH
could say that fiduciary management
schemes are still open and so their priori-
PENSION SYSTEM AND HOW THEY HAVE
began in the UK in 2003, but the big diffe-
ties and investment strategies are diffe-
EMBRACED FIDUCIARY MANAGEMENT, AND
rence is that only a tiny minority of sche-
rent. Another big difference is the scheme
HOW WE CAN USE AND TRANSLATE THOSE
mes were using it. In the Netherlands it
size, the Dutch market has been much more
SUCCESSES TO THE UK.
started with big schemes and was adopted
successful consolidating driven by finding
much more quickly.
efficiencies whereas the UK is only just looking at this approach.
Many of our UK readers may not know this,
THE NETHERLAND LEADING THE WAY
but the Dutch have invented many things
That’s twenty years of road-testing that the UK
we take for granted today – the micro-
can learn from and adapt in a way that suits us
DUTCH BENEFITS ARE NOT GUARANTEED
scope, the eye test, wi-fi and even orange
best. The Netherlands has led the way in deve-
And another major difference is that Dutch
carrots*, to name but a few.
loping and refining fiduciary management. But
benefits are not guaranteed. Increases are
It’s also appropriate, given what I’m about
(and most importantly) it operates under a dif-
discretionary, and pensions can be redu-
to discuss, that the Dutch also invented the
ferent set of rules than the UK.
ced this is a big difference that and very
stock market. The first stock exchange
So, I thought it would be useful to look at
much drives investment approaches. The
emerged in the Netherlands in the 17th cen-
the two systems to understand what we
Netherlands is also further ahead than the
tury as a way for everyone to invest in the
can learn from each other.
UK in cost transparency and incorporating
trading adventures of the Dutch East India
Since fiduciary management is largely
ESG given their Regulator is much more
Company.
applied to pension funds – although it’s
involved in investments generally. Much of
*
16
Before the 17th century they used to be white, purple or yellow. A genetic mutation resulted in the carrot colour we know today. The Dutch Royal Family, the house of Orange, loved them for obvious reasons, and so decided to cultivate them.
KEMPEN INSIGHT, MAY 2020
/// text CATHERINE LEWIS image SHUTTERSTOCK
The microscope is another Dutch invention
the focus of UK pension schemes over the last
REGULATORY STANDPOINT
Whilst in the Dutch system only the implemen-
ten years has been on liability management
The major difference is from a regulatory
tation of the asset allocation can be delega-
given that the majority of our schemes are
standpoint. In Holland a fiduciary manager
ted. The beauty is that in the UK there are lots
now closed. However, that is rapidly chan-
cannot replace the mandated investment con-
of different options. We could mimic the Dutch
ging and Dutch schemes are increasingly
sultant; a pension scheme can only delegate
system – our client could keep their consul-
focusing on liability management especially
the implementation. Whereas in the UK, gene-
tant and we could just do the implementation.
in this very low interest rate environment and
rally when people think about fiduciary
Alternatively, the trustees could fully dele-
this is a good example of where (for once!) our
management, they generally expect to dele-
gate where we both provide the strategic
UK expertise can help our Dutch brethren.
gate the strategy setting too.
advice and follow through with the implemen-
The Dutch pension system is widely admired and
What we at Kempen bring to the market is an
tation.
regularly tops the charts of the world’s most
understanding of both systems and an ability to
Or, alternatively, Kempen can do something
effective pension schemes. They’ve been very
tailor a governance solution that truly fits any
halfway between. This means we might create
successful at navigating the economic land-
individual trustee board. As part of the decisi-
a governance structure that allows more par-
scape and adapting as circumstances change.
on-making process when appointing a fiduciary
ticipation for the trustees where we agree that
So, what are the main differences between
manager, a trustee needs to decide how much
they can for example have a veto on choosing
how fiduciary management works in the
they want to delegate not just to whom. One size
underlying managers or can keep existing
Netherlands and the UK?
does not fit all. That’s where we can help.
managers.
KEMPEN INSIGHT, MAY 2020
17
Fiduciary management is principally about
but they still want to be heavily involved in all
taking over the heavy lifting of implementing,
decision making/manager selection.
maintaining and evolving an investment strategy through the lifecycle of a pension
FINDING THE BALANCE
scheme. The fiduciary manager chooses the
Pension fund trustees have a tricky balance to
underlying managers. They continually moni-
find between handing over control to experts
tor them and disinvest in a timely and efficient
while having a strong oversight on perfor-
manner if circumstances changes both for the
mance. Either way they’re still ultimately res-
scheme and/or the manager. It’s all about
ponsible. What we can offer in the UK can be
having an experienced and knowledgeable
a lot more fluid and just what the trustee
team that knows the asset class.
board is comfortable with especially given the very different levels of trustee investment
CMA'S FINAL ORDER
knowledge
In the UK, the Competition and Markets Autho-
While the Dutch system has its strengths –
rity (CMA) final order relating to investment
and some weaknesses, we can cherry pick the
consultancy and fiduciary management has
best of both to tailor a solution that suits our
seen a flurry of activity not least because of
clients’ needs. It’s not a question of one sys-
the new rules on tendering.
tem being better than the other. It’s about
Trustees have some tough choices to make as
taking the best of both and applying them in a
different fiduciary managers have very diffe-
way that suits each individual client.
rent delegation models and as part of the tendering process they need to fully explore what works best for them. What gives Kempen an advantage is the experience we’ve gained from working in the Dutch system and applying those lessons to the UK market. Our experience in both environments is already paying dividends. For example we have one UK client that has adopted a very much ‘Dutch-style’ set up while the majority fully delegate and then we recently gained another client that is more somewhere in between – they do not have a separate strategist
18
KEMPEN INSIGHT, MAY 2020
/// text KAREL ZWAAN image SHUTTERSTOCK
‘When you invest in High Yield you need to be able to withstand a strong headwind’
European junk bonds have grown up Junk bonds. That’s the rather off-putting name for high-yield bonds. In contrast to its US counterpart, the market for European junk bonds was barely taken seriously for many decades. Yet times have changed. Senior portfolio manager at Kempen Rik den Hartog is responsible for Euro High Yield together with his colleagues in the Credit Team. For years, high yield was the territory of the US dollar. ‘The European market was simply too small to act as a robust fund universe,’ Den Hartog says. He believes that those days are over and that it’s now too big to be ignored. The market for Euro High Yield has grown enormously since the 2008–2009 financial crisis. ‘As of year-end 2019 it had quadrupled in size to over 300 billion euros and the number of issuers had doubled . This is of
HIGH YIELD BONDS
course also because companies wish to reduce their reliance on traditional banks
High yield bonds are credits with ratings of
and increasingly arrange financing via the capital market.'
BB or lower. The market’s origins can be
‘And’, Den Hartog continues, ‘the growth in Euro High Yield shows no sign of coming
traced back to the 1970s, when companies
to an end. In the Eurozone banks account for three quarters of lending to companies,
with a high yield rating could only turn to
compared to one third for US companies. This persisting trend of moving away from
banks for loans or to the market for private
financing provided by banks and turning to the capital market instead will boost
placements. This meant higher financing
growth on the Euro High Yield market.’ This is what he believes makes Euro High
costs. The global market for junk bonds is
Yield a solid alternative to its big American brother.
now worth over two trillion US dollars.
*
ICE Bond indices, per 31 December 2019.
KEMPEN INSIGHT, MAY 2020
19
EUROPE VERSUS THE US
outbreak of the coronavirus, however, the market has undergone a
Rik Den Hartog identifies a number of significant differences between
major correction. Spreads have widened sharply, differences in credit
Europe and the US. ‘The rating distribution is the most obvious diffe-
quality are becoming more visible and there are concerns about an
rence. Over 70 percent of the market in Europe holds a BB rating,
upturn in the number of bankruptcies. Den Hartog: ‘When sentiment is
while this figure stands at less than 50 percent for the US dollar high
positive, you should always bear in mind that the market will quickly
yield market. At the lower end of the quality spectrum the portion of
undergo a correction if an economic headwind arises. That’s why
companies with a CCC rating or lower is over 10 percent in the US,
when you invest in high yield you need to be able to withstand a
but this is just 5 percent in Europe.’
strong headwind and always opt for quality. This is truer than ever
The sector distribution is also different according to Den Hartog. ‘The
now that uncertainty is high and while it’s still difficult to estimate the
energy and health sectors dominate the US dollar market, while the
impact of the coronavirus on the creditworthiness of companies.’
industrial and banking sectors are larger in Europe. Moreover, the
The fund therefore focuses on robustly high-quality companies.
Euro high yield market holds a wider distribution in terms of seniority.
‘I believe in the added value of active management when it comes to
In Europe, high yield contains more subordinated loans and hybrid
high yield. On the one hand, we examine major trends and themes in
bonds issued by non-financial companies, while this is not the case in
the market using top-down analysis. We attempt to restrict downward
the US dollar high yield market. In summary, the Euro high yield
risk by also looking at the credit quality of individual companies from
market is higher in quality and more diversified across sectors and
a bottom-up perspective and by identifying and selling credits with
seniorities.’ Furthermore, liquidity levels are sound in Europe, especi-
deteriorating ratings at an early stage. Furthermore, we have fully
ally compared to other high yield asset classes. Den Hartog: ‘There’s
incorporated ESG (environmental, social, governance) into our invest-
an active market in trading high yield bonds. The average sensitivity
ment process. This is important, as we believe that companies that
to interest rates is low, with durations of three to four years.
score well on ESG factors perform better in the long term. Our clients
‘Incidentally,’ Den Hartog adds, ‘fans of US dollar high yield will say
expect us to incorporate these fully, and this is of course in alignment
that European growth is all well and good but that the US market is
with Kempen’s investment philosophy.’
still four times larger. They have a point, but the high yield market in Europe has now grown large enough to demand a specialist approach. Why would you trade regionally in investment grade (credits with ratings of BBB and higher) and not high yield?’
HEADWIND Bond markets have experienced a search for yield over the past few years. This led to tighter spreads and created attractive conditions for companies to finance – or refinance – their debt. Low interest rates also meant that debt is easier to bear and the bankruptcy rate
Rik Den Hartog
in Europe was historically low. The market generally made little dis-
Senior Portfolio Manager
tinction between differences in credit quality at companies. Since the
rik.denhartog@kempen.nl
Disclaimer - this article was written in April 2020. This column is prepared by one of the fund managers of Kempen (Lux) Euro Credit Fund (‘the Funds’), managed by Kempen Capital Management N.V. (‘KCM’). As asset manager KCM may have investments, generally for the benefit of third parties, in financial instruments mentioned in this article and it may at any time decide to execute buy or sell transactions in these financial instruments. This article does not contain investment advice, no investment recommendation, no research, or an invitation to buy or sell any financial instruments, and should not be interpreted as such. The views expressed in this article may be subject to change at any given time, without prior notice. KCM has no obligation to update the contents of this article. This article 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 article. This article has been produced independently of the companies and the views contained herein are entirely those of KCM.
20
KEMPEN INSIGHT, MAY 2020
INVESTMENT CASE WHY THE KEMPEN (LUX) GLOBAL SMALL-CAP FUND IS INVESTING IN A LEADING ZINC RECYCLING COMPANY
Circular Zinc Befesa is a European market leader in collecting steel dust at steelmakers and recycling the zinc content
At Kempen, we have a long history of incorporating ESG (environmental, social, governance) topics when making investment decisions. Sometimes we find investment opportunities where sustainability is at the heart of the company’s strategy. Befesa is such an exam-
ple, even though you may not recognize it at first sight given their exposure to steel markets. Befesa is European mar- ket leader in managing and treating industrial waste from the steel industry. It collects hazardous steel dust and recycles the zinc content out of it.
Steel is one of the most commonly used
handles the hazardous steel dust and pre-
materials in the world, found in various end
vents it from being landfilled; instead it is
uses such as construction, infrastructure,
recycling and selling the zinc content again.
automotive and industrial applications. There
This in turn reduces the need to mine natural
are two ways to produce steel. One way is
zinc resources. Befesa shows that it operates
by mining iron ore, which continuously deple-
right in the center of the circular economy
tes the earth by taking scarce resources.
and contributes to the re-use of steel and
A second, more sustainable, way to produce
zinc.
steel is by using recycled scrap, i.e. turning old cars and washing machines into new steel. In Europe, approximately 40 percent of all steel produced is from recycled scrap, in the US this percentage is even 60 percent.
Sustainable steel dust
22
KEMPEN INSIGHT, MEI 2020
Opportunity in China: Befesa being the first mover Today, Befesa’s geographical presence is
limited to Europe and South Korea. China, however, is the world’s largest steelmaking country, representing nearly half of the global
When using scrap to produce steel, steelma-
steel output. Today almost all steel volumes
kers run into operational issues. Today’s cars
from China are produced from mined iron ore
for instance are galvanized using zinc in
(and not from recycled scrap). With the
order to prevent corrosion. By using old cars
Chinese government becoming increasingly
in a recycled steelmaking process, these
concerned about the environmental impact of
impurities result in a by-product being gene-
its production footprint, the government is
rated: steel dust. This is a hazardous material
driving a shift in steelmaking towards using
that needs to be handled carefully and land-
recycled scrap. This potentially leaves China
filling is restricted by law in many countries.
with a significant amount of steel dust that can
Fortunately, steel dust contains zinc concen-
– or actually needs to – be recycled.
trates, which can be extracted from the steel
A decade ago Befesa started preparing an
dust and re-used again.
entry into the Chinese market. Now the time
Befesa is European market leader in collec-
seems right. As the first mover, Befesa started
ting steel dust at steelmakers and recycling
building the first two zinc recycling plants in
the zinc content for re-sale. Therefore, sus-
China. The first plant is expected to come on
tainability is at the heart of Befesa’s business
stream at the end of this year (2020), with the
model. It plays a critical role in the recycled
second one expected in 2021.
steel value chain, which is more sustainable
Befesa’s management team conservatively
than steelmaking from iron ore. Befesa
assumes that it can eventually expand its
/// image SHUTTERSTOCK
Conclusion
footprint in China to up to six recycling
financial targets and underlying initiatives to
plants. By building these six plants, Befesa
get there, as well ESG topics. At the end of
would nearly double its total steel dust
the day, we believe a more sustainable
pects of Befesa. We like the company’s busi-
recycling capacity. We believe the potential
company means a better company that
ness model, its sustainability profile, the high
could be significantly larger, but understand
deserves to trade at a higher valuation. This
quality management team, further room for
the management’s cautious approach given
benefits all stakeholders.
improvement on ESG, and the growth pros-
the early stages of the market development
Over the last few months we spoke to Befesa
pects in China.
and its entrance. To put the potential into
several times, visited their offices in
perspective: if the proportion of recycled
Germany and also spoke to a competitor and
scrap and Befesa’s market share in China
joint venture partner. These encounters left
would be similar to Europe, Befesa’s capa-
us with a positive impression of the quality of
city in China would be equal to four times
Befesa’s management team. When reviewing
the current size of its business.
Befesa’s sustainability reports, but also
All in all, we are excited about the future pros-
based on external ESG research by Sustaina-
Active ownership
lytics and MSCI ESG, we identified further
We started investing in Befesa mid-2019, so
room for improvement on ESG at Befesa. We
we are just in the early stages of our invest-
shared a list with proposed improvements
ment. Our investment horizon typically
both with Befesa and Sustainalytics. The first
extends beyond five years. Our fund’s invest-
actions have been implemented, resulting in
ment philosophy is based on acting as long-
a higher ESG rating at Sustainalytics. We
term engaged shareholder. This means we
seek for further improvements on topics such
often talk to the companies that we invest in.
as (reporting on) carbon emissions and waste
Chris Kaashoek
These discussions tend to centre around
control, corporate governance/remuneration
Senior Portfolio Manager
strategic directions of the firm, mid-term
and capital allocation.
chris.kaashoek@kempen.nl
Disclaimer – This article is written in April 2020. This document is compiled by the fund managers of Kempen (Lux) Global Small-cap Fund (‘the Fund’), managed by Kempen Capital Management N.V. (‘Kempen‘). The Fund currently holds shares in Befesa. As asset manager Kempen 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 is for information purposes only and provides insufficient information for an investment decision. This document does not contain investment advice, no investment recommendation, no research, or an invitation to buy or sell any financial instruments, and should not be interpreted as such. The views expressed in this document may be subject to change at any given time, without prior notice. Kempen has no obligation to update the contents of 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 Kempen.
KEMPEN INSIGHT, MAY 2020
23
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from
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24
KEMPEN INSIGHT, MAY 2020
Turning knowledge into understanding
/// image VAN SANTEN EN BOLLEURS
KEMPEN INSIGHT, MAY 2020
25
COLUMN
In times of new energy
26
KEMPEN INSIGHT, MAY 2020
/// foto BRAM BELLONI
Electricity companies don’t enjoy the best of
that wind energy would be one of the energy
reputations. Apart from the high utility bills,
sources of the future. It is now among the
we tend to picture them as smoking and pollu-
top-5 global players and plans to stop gene-
ting coal-fired power stations. Luckily, the
rating electricity from coal completely. Its
latter is changing fast. The dividend funds at
peers at Enel started slightly later, but thanks
Kempen have profited from this transition for a
to a huge effort it is now the largest renewa-
number of years now. We expect positive
bles player in the world.
results in this sector in the future as well. The
It may sound simple: invest in an electricity
outlook for the short term is of course more
company that invests in renewable energy,
uncertain thanks to the coronacrisis, but the
then sit back and reap the financial rewards.
medium and long-term forecasts remain
Unfortunately, the reality is not as simple as
unchanged.
that: the enormous amount of capital that goes
Traditional electricity companies are facing
into renewables and the growing competition
growing pressure to change their ways as a
are squeezing the returns made by these com-
result of the Paris Climate Agreement from
panies. The players mentioned here are able to
society and governments. This change means
maintain their attractive levels of profitability
moving away from fossil fuels towards rene-
thanks to their large scale, by selecting the
wables, such as wind and solar energy. Com-
right projects and by getting external financiers
panies that specialise in these are crucial to
to participate in their projects. If as an investor
the energy transition: without their contribu-
you can identify an electricity company in time
tion to reducing levels of C02 we will not
that is capable of making the transition, it can
achieve the climate goals.
lead to interesting opportunities. These electri-
A few companies started this transition long
city companies are having an enormous impact
ago, well before society at large became
on and playing a crucial role in the energy
aware of it. As a dividend investor, for
transition. At the same time, their approach is
instance, I have followed Portugal’s EDP
having a positive financial impact on the com-
(Energias de Portugal) and Italy’s Enel for
panies themselves.
many years. The Kempen dividend funds
Over the past few years in particular, moun-
invest in these two companies. Such compa-
ting interest in responsible and sustainable
nies traditionally pay attractive dividends,
investment has generated substantial inflow
while their activities have displayed modest
into the abovementioned equities. Proof that
Dimitri Willems
growth in the past. EDP in particular recogni-
dividends and contributing to a better climate
Senior Portfolio Manager
sed at an early stage (over fifteen years ago)
go hand in hand.
dimitri.willems@kempen.nl
Disclaimer – This article was written in April 2020. This column is prepared by one of the fund managers of Kempen (Lux) European High Dividend Fund and Kempen (Lux) Global High Dividend Fund (‘the Funds’), managed by Kempen Capital Management N.V. (‘KCM’). The Funds currently hold shares in Energias de Portugal and in Enel. As asset manager KCM may have investments, generally for the benefit of third parties, in financial instruments mentioned in this article and it may at any time decide to execute buy or sell transactions in these financial instruments. This article does not contain investment advice, no investment recommendation, no research, or an invitation to buy or sell any financial instruments, and should not be interpreted as such. The views expressed in this article may be subject to change at any given time, without prior notice. KCM has no obligation to update the contents of this article. This article 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 article. This article has been produced independently of the companies and the views contained herein are entirely those of KCM.
KEMPEN INSIGHT, MAY 2020
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