International High Dividend ADR Equity Strategy Q Commentary. Market and Economic Review

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1 S C H A F E R C U L L E N C A P I T A L M A N A G E M E N T International High Dividend ADR Equity Strategy Q Commentary Market and Economic Review Major international equity indices rose in the quarter against a backdrop of gradually improving economic releases, buttressed by multiple tailwinds including the continued accommodative stance on monetary policy by several major central banks, favorable foreign exchange trends for select corporations, falling energy prices which aided consumer spending and sentiment and the continued positive yet modest growth in reported corporate earnings and dividends. A multitude of large exogenous factors continue to have a meaningful impact on asset markets with the recent divergence in the monetary policy outlook for the United States versus other major regions of the world leading to increased volatility for currencies and long-term interest rates. By region, a key theme was the relative attractiveness of equities versus bonds, with Japan and Germany, which have unusually attractive equity risk premiums, well north of 500 basis points, outperforming. This large equity risk premium, which is prevalent in several major international equity markets, provides good overall valuation support to these equities while also creating conducive conditions for large scale mergers, acquisitions and corporate restructuring activities. So far in 2015, nearly $1 trillion of mergers and acquisitions activity has been announced by corporations to complement and accelerate organic growth. By style class, growth outperformed value and small caps outperformed large caps. With confidence high and stimulated markets melting up in the absence of meaningful corrections, adhering to the price disciplines of low price earnings and high dividend yield has become all the more important in providing satisfactory absolute and risk-adjusted returns. We believe that our strategy of buying shares in strong companies, at attractive valuations and holding them for the long-term (i.e. 5 years) remains attractive in this environment. In the quarter, we underperformed the strong 4.9% increase in the MSCI EAFE, as our conservative, blue-chip, world leading, dividend-paying companies trailed behind more operationally and financially leveraged companies which disproportionately benefited from quantitative easing in Europe. We were also hurt by our underweight exposure to Japan which was the second best performing country in the quarter, returning more than double the index, despite having among the lowest dividends yields of any major country globally at 1.6%. Portfolio Performance The SCCM International High Dividend ADR Composite was +2.7% (net) in the 1st quarter versus +4.9% for the MSCI EAFE. Q1 YTD 1 Year 3 Year 5 Year Since Incept* SCCM Intl High Div ADR (net) MSCI EAFE S&P *June 30, Performance for periods greater than 1 year is annualized Fifth Avenue New York, NY Tel Fax

2 Sector Attribution The largest contributor to relative performance was our superior stock selection across non-cyclical sectors such as Telecommunication Services and Consumer Staples and cyclical sectors such as Energy and Basic Materials, where our more attractively valued companies with strong prospects for shareholder value creation outperformed. Outperformance here was led by a diverse list of well positioned companies which offer significantly higher income streams than those on their respective local sovereign bonds and include Nippon Telegraph & Telephone, Deutsche Telekom, Orkla, Japan Tobacco, CNOOC and Rexam. Our overweight allocation to Healthcare and our underweight allocation to Basic Materials, aided performance. The largest detractor from relative performance was our overweight allocation to non-cyclical sectors which underperformed, including Telecommunication Services and Utilities and our underweight allocation to cyclical sectors which outperformed, including Consumer Discretionary, Information Technology and Industrials. Select companies in the Consumer Discretionary sector should be key beneficiaries of lower energy prices and improving consumer sentiment, and this view is thus well reflected by our recently increased allocation to the sector. Otherwise, we remain comfortable with our allocation decisions based on valuations and the long-term prospects for our portfolio companies despite headwinds to near-term price performance from stimulative measures which are driving market participants further up the risk curve. Stock selection hurt us in Financials, Utilities, Industrials and Healthcare as our companies here, which have a more certain earnings stream and have less financial and operating leverage, underperformed peers in the current risk-on environment. Cash was a drag on performance during the quarter. Source: Bloomberg

3 Country Attribution The largest contributor to relative performance was our superior stock selection across several major countries including the United Kingdom, Switzerland and Japan, where our high quality, blue-chip, global multinational companies outperformed peers. Outperformers here include GlaxoSmithKline, Unilever, Novartis, Zurich Insurance and Nippon Telegraph & Telephone. Rexam in the United Kingdom also performed strongly following a takeover approach from Ball Corp. of the US. Our overweight allocation to Germany and our underweight allocation to Spain, Netherlands and Australia, aided performance. The largest detractor from relative performance was our more diversified geographic exposure relative to the benchmark given our overweight allocation to Canada, Singapore and South Africa which underperformed and our underweight allocation to Japan which outperformed. Performance was also hurt by our overweight allocation to the United Kingdom, where our largely global multinational exposure was held back by weak overall sentiment towards this market. Stock selection hurt us across several core European markets, including France, Germany and the Netherlands, as our more conservative, dividend-paying companies lagged behind peers against a backdrop of stimulus-induced reflation. Cash was a drag on performance during the quarter. Source: Bloomberg

4 Portfolio Strategy and Changes Purchases Honda Motor Japan Consumer Discretionary Honda Motor is a leading global manufacturer of automobiles with strong positions in North America and Japan and a growing presence across several emerging markets. The company is also the leading manufacturer of motorcycles globally with a strong franchise of products in key emerging markets including India, Indonesia and Brazil. Honda has had a long track record of engineering excellence, based on a culture of prioritizing investments in research and development. This is reflected in the company s vehicles long known for having industry-leading resale values and fuel efficiency. Despite this strong long-term track record, the company has run into design and manufacturing issues of late. In the latest economic cycle, Honda has misread consumer demand by introducing barebone vehicles which did not meet consumers aspirational needs. Further, the company has had manufacturing issues related to products such as airbags from third party suppliers and software glitches with its latest generation of gasoline-electric hybrid vehicles. Honda should be able to achieve a successful turnaround, as evidenced by its peer, Toyota, which has already been able to successfully turnaround operations related to similar manufacturing issues some years ago. Under the reigns of newly appointed CEO, Fumihiko Ike, we expect Honda to overcome these operational issues over the next 18 months and to introduce a vastly improved lineup of models for the Accord, Civic, CR-V SUV and Fit. In the motorcycle business, we see good trends for growth in emerging markets, driven by the falling cost of vehicle ownership given lower crude oil prices and interest payments. If Honda is able to successfully return operating margins to the level that they have been at in previous economic cycles, group-wide earnings could be 50% higher. Given the company s fixed payout dividend policy and rock-solid A+ rated balance sheet, dividend payments would also keep pace with higher earnings. Honda trades at 10.5 times forward earnings and offers a 2.6% dividend yield. Michelin France Consumer Discretionary Cie Generale des Establissements Michelin (Michelin) manufactures all-purpose tires, wheels, steel cables and other tire products used for automobiles, trucks, aircraft and other vehicles. Michelin is the most diversified tire producer globally with a significant presence in Europe, North America and several emerging markets. The company has 69 production sites in 18 countries in addition to a vast distribution network of 3,300 fully-owned dealerships and service centers. The company boasts strong technological leadership and brand recognition as the number two tire manufacturer globally with global market share of 14%. Michelin enjoys global market leading positions in highperformance and fuel-efficient car tires, radial and retread truck tires, and specialty tires (earthmover, agricultural and aircraft). With 40% of its sales from developed Europe, the company is well positioned to benefit from a recovery in the European auto market as auto sales remain depressed relative to historical standards and as the advancing age of the cars on the road furthers replacement demand. In addition, due to the company s sizeable 60% exposure to markets outside of Europe, Michelin is also well-positioned to benefit from the cheaper Euro which makes the company s products more competitive. The recent decline in energy prices provides an additional tailwind to growth as consumers discretionary income and propensity to drive increases while energy related manufacturing input costs decline. Over the long-term, Michelin s exposure spanning China, India, Brazil, Turkey, Thailand and other emerging markets should drive growth as the company expands its presence in these fast growing markets where auto penetration remains low compared to developed markets and consumer incomes are growing. The company boasts strong dividend growth attributes with a net debt/capital ratio of only 12%, a low dividend payout ratio at

5 31% of projected 2014 earnings, high and growing free cash flows and a strong historical track record of dividend growth. Michelin trades at 12.3 times forward earnings and offers a 3.1% dividend yield. UBS Group AG Switzerland Financials UBS Group AG is a leading global wealth and investment management bank with 60% of its operating income coming from wealth and asset management, 30% from investment banking and 10% from retail and corporate banking. UBS is the largest wealth manager globally with a strong and improving brand perception, a broad and diverse set of product offerings and a management focused on cost-cutting and efficiency. The wealth management business follows a strong and sustainable business model owing of its low volatility and recurring fee income structure. Assets under management tend to be sticky and there are high switching costs for clients. This segment also offers exceptional growth opportunities for the bank in Asia, Emerging Markets and Europe. As income levels in Asia and Emerging Markets rise, the need for financial advisors and product offerings such as those of UBS will be in greater demand. UBS is also well positioned to benefit from a recovery in European asset markets which are still depressed compared to the rest of the world. Adverse regulation and potential litigation risks have held the shares back but we believe that these risks are well priced into the current valuation. The bank has demonstrated greater foresight than peers in anticipating the changing operating and regulatory environment by restructuring in order to generate higher and more stable returns on equity with a simpler and less risky business model. Employee compensation is also well-aligned with shareholder interests as the cash component of bonuses is capped at 30%. UBS has a history of having been shareholder friendly and is well capitalized with a Basel 3 Common Equity Tier 1 ratio at 13.4%, allowing the company to offer industry-leading prospects for dividend growth. UBS trades at 12.4 times forward earnings and offers a 4.3% dividend yield. Sales Lukoil Russia Energy We sold our position in Lukoil after mounting political risk, domestic economic weakness, falling energy prices and currency depreciation weakened the long-term sustainability of dividend payments. While the company s commitment to its dividend policy has been strong in the past, it has deteriorated recently and a continuation of the current policy could compromise Lukoil s financial position. An additional factor compelling the sale is that while the company s corporate governance and transparency remains superior to other Russian companies and several large emerging market integrated energy companies, it too has worsened relative to the past. Reckitt Benckiser United Kingdom Consumer Staples We successfully exited our position in shares of Reckitt Benckiser which have re-rated sharply since our initial purchase three years ago when the company was valued at 13 times forward earnings to a far less compelling current valuation of over 20 times forward earnings. The new management at Reckitt Benckiser, under CEO Rakesh Kapoor, have done a good job at refocusing the company efforts on faster growing areas such as Health and Hygiene and Emerging Markets, though at current valuations we believe that this improved outlook is fully priced in.

6 Outlook As clearly seen this quarter, stimulated equity markets have a tendency to rise in value over the short to intermediate-term, driven in large part by multiple expansion, which accounted for all the recent move in the MSCI EAFE in This is a departure from the long-term convention of equity markets as seen below. In a study covering over 44 years of data, dividend yield (blue bar) and earnings/dividend growth (brown bar) have accounted for the lion s share of total returns over the long-term across major global equity markets, whereas the change in price multiples (light grey bar), which is currently driving markets, has had a fairly limited role. Our strategy since inception has specifically targeted dividend yield and dividend growth and thus we believe that we are well positioned over the long-term especially as we have a higher dividend yield and a more sustainable dividend growth profile relative to the benchmark MSCI EAFE. Source: Societe Generale As Of 1/31/2015 Near-term, however, the size, extent and eventual effect of stimulative monetary policies globally should not be underestimated. The current European Central Bank asset repurchase program is meaningfully larger than the latest equivalent US program and it has pushed long-term interest rates in Europe down to unimaginably low levels, while also causing the Euro to be substantially weaker. Given that the ECB program is likely to extend until September 2016, asset prices in Europe, for now, should thus remain well supported. Record low interest rates are also leading to elevated equity risk premiums which, along with improving business sentiment, are driving increased mergers and acquisitions activity. Also supportive of equity markets is the greater acceptance by corporate managements in Europe and Japan of efforts by shareholder activists to enhance shareholder value. Going forward, we believe that risk and reward are well balanced in the opportunity set of international equity investments. Following its recent re-rating, the MSCI EAFE is fairly valued at 15.7 times forward earnings, which is close to its long-term average valuation. On a relative basis, however, a strong argument can still be made for international equities given that the dividend yield on the MSCI EAFE is 49% and 55% higher than yields available for the S&P 500 and for US 10 Treasuries, respectively. The contrast for our portfolio holdings against sovereign 10-year bonds in their underlying countries is even starker, with our companies on average having dividend yields at

7 nearly three times the level of these bonds. Going forward, trends in earnings will be key and in this regard, Europe s earnings, which over the last fifty years have tracked those in the United States, have lagged meaningfully in the latest market cycle and have room to surprise. Supporting this recovery in earnings, which would push forward price multiples lower, is a trifecta of tailwinds including monetary stimulus, favorable foreign exchange trends and falling energy prices. In addition, a key question to grapple with going forward is the long-term trajectory of equity markets once underlying stimulus is eventually withdrawn. A number of potential scenarios could be conceived of and a consistent and focused approach to risk management remains crucial in navigating through this environment. One potential long-term risk of asset reflation is rising political tensions on the back of growing social inequality. In this regard, we are paying careful attention to general elections in Europe this year, including in the United Kingdom, Spain and Portugal and to debt renegotiations between Greece and the rest of the European Union. As disciplined value investors, we view rising price multiples as a growing risk and have been proactively addressing this issue as is evidenced by three recent purchases of world leading companies at a modest average forward price/earnings ratio of under twelve times, a meaningful discount to broad equity indices. While performance is one yardstick to measure the attractiveness of an investment manager, another equally important factor to consider is risk. In this regard we believe that our portfolio is markedly more defensive than the benchmark as our companies have stronger balance sheets with far less cyclicality in reported earnings and dividends, positioning us well across a number of potential economic environments. Since the inception of our strategy we have been able to outperform our benchmark, the MSCI EAFE, despite taking less risk as measured by beta and standard deviation. Outperformance, instead, has been driven by an annualized alpha of 1.42%, much of which was achieved during more difficult market environments. In our view, value investing is the art of outperforming by taking less risk and not more. We feel that if clients can truly understand this message, they can largely block out any short-term noise from stimulus driven rallies. So far this year, 69% of our companies which have reported dividends have raised their dividend payments by an average of 6.4%. Five companies have reported double digit year-on-year increases in their dividend payments and we have experienced no dividend cuts. With strong balance sheets and continued earnings growth, we anticipate that this trend will continue in 2015 and beyond. Best Regards, Jim Cullen Portfolio Manager Rahul Sharma Portfolio Manager Pravir Singh, CFA Director of International Research

8 Appendix: Portfolio Exposure And Characteristics As Of 3/31/2015 Portfolio Exposure Sectors % Asset Regions % Asset Consumer Discretionary 4.6 Developed Asia Pacific 18.7 Consumer Staples 19.3 Continental Europe 47.2 Energy 6.3 United Kingdom 24.6 Financials/ REITs 17.1 North America 2.0 Health Care 15.8 Asia Pacific Emerging 0.9 Industrials 8.2 Latin America 0.0 Information Technology 0.0 EMEA 2.0 Materials 2.8 Telecommunications 15.7 Developed Markets 92.4 Utilities 5.4 Emerging Markets 2.9 Other/ETFs 0.0 Other/ETFs 0.0 Cash 4.7 Cash 4.7 Total Total Top 10 Countries United Kingdom Switzerland Germany France Japan Singapore Norway Netherlands Hong Kong Canada Top 10 Holdings Novartis AG Nestle S.A. Nippon Tele & Tel. Deutsche Telekom A.G. Imperial Tobacco Group Unilever N.V. GlaxoSmithKline PLC SSE PLC British American Tobacco Zurich Insurance Group Portfolio Characteristics Forward Forward Q1 15 Est. Est. Q1 15 Price / Dividend LT Debt / LT DPS LT EPS Market Earnings Yield Capital Growth Growth Cap SCCM Intl High Div ADR $88,844 MSCI EAFE ETF $63,451 Source: SCCM Research, BCA Research, Bloomberg

9 Disclosure: Schafer Cullen Capital Management (SCCM or the Adviser ) is an independent investment advisor registered under the Investment Advisers Act of This information should not be used as the primary basis for any investment decision nor should it be considered as advice to meet your particular investment needs. The portfolio securities and sector weights may change at any time at the discretion of the Adviser. It should not be assumed that any security transactions, holdings or sectors discussed were or will be profitable, or that future recommendations or decisions will be profitable or equal the investment performance discussed herein. Investing in equity securities is speculative and involves substantial risk. Past performance is no guarantee of future results. Market conditions can vary widely over time and can result in a loss of portfolio value. Individual account performance results will vary and will not match that of the composite or model. This variance depends on factors such as market conditions at the time of investment, and / or investment restrictions imposed by a client which may cause an account to either outperform or underperform the composite or model s performance. A list of all recommendations made by SCCM within the immediately preceding period of not less than one year is available upon request. The strategy depicted in this report has been managed in accordance with the investment objectives of the strategy as determined by the Adviser. The Adviser has selected benchmarks, which in their opinion closely resemble the style of the securities held in the composite or model portfolio of the strategy (e.g. large cap value, small cap value, international, etc.). The securities held in the composite or model are actively managed while the benchmark index is not. Investors should be aware that the Adviser makes no attempt to match the portfolio securities, or the security weightings of the benchmark. The composite or model s performance will be affected greater by the price movements of individual securities as the composite or model is more concentrated, generally less than 100 securities, while a comparative benchmark will generally have between 500 and 2,500 securities where individual security price movements have a lesser affect. An individual cannot invest directly in an index. In the case where this report displays model results, please be aware that such results do not represent actual trading and that results may not reflect the impact that material economic and market factors might have had on the Adviser's decision-making if the Adviser were actually managing clients' money. Model and actual results reflect the deduction of advisory fees, brokerage or other commissions, and any other expenses that a client would have paid or actually paid (Net of Fee performance) and reflect the reinvestment of dividends and other earnings. Schafer Cullen Capital Management, Inc. makes no representation that the use of this material can in and of itself be used to determine which securities to buy or sell, or when to buy or sell them; SCCM makes no representation, either directly or indirectly, that any graph, chart, formula or other device being offered herein will assist any person in making their own decisions as to which securities to buy, sell, or when to buy or sell them. For comparative purposes, the adviser uses the ishares MSCI EAFE ETF. All opinions expressed constitute Schafer Cullen Capital Management s judgment as of the date of this report and are subject to change without notice.