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 Equity Strategy Q3 2012 Commentary Market and Economic Review Global equity markets rebounded sharply in the quarter with the S&P 500, MSCI EAFE and MSCI Emerging Markets up 6.4%, 7.0% and 7.9% respectively. Driving this move upward was the extraordinary monetary intervention initiated by central banks in Europe, the United States and Japan which benefited in particular the prices of distressed, leveraged and oversold assets. European equities in particular rebounded sharply with markets such as Germany, Norway, Denmark, Finland, Spain, Portugal and Greece all rising by more than 10%. As markets in the quarter moved rapidly from bust to boom, we once again are reminded of the extraordinary volatility that we are continuing to experience in the post-financial crisis, policy-driven world that we live in. Arguably this latest round of global quantitative easing has reduced tail risks to economies and markets, however economic growth in the US and OECD area has been unsatisfactory. Slow progress is being made in reducing unemployment, the low level of demand, and the lack of acceleration in real GDP growth. Furthermore, despite recent progress, the European crisis is far from over and it is not clear whether countries have the resolve to overcome the long-term challenges that they face. While emerging markets continue to produce better overall growth than developed markets, this growth is slowing and there is a risk that this slowdown may accelerate. In the quarter we were able to keep pace with our benchmark despite having lower exposure to many of the regions in Europe which rebounded most sharply. This is as on a sector level the move upward was not merely driven by cyclical sectors. Healthcare and Consumer Staples which we are overweight were among the best performing sectors whereas Information Technology and Consumer Discretionary which we are underweight were among the worst. While the recovery in international markets was relatively broad based in the quarter, international small cap stocks continued to outpace large cap stocks in the quarter and year to date. Portfolio Performance The SCCM International High Dividend Composite was 8.2% (net) in the 3rd Quarter versus 7.0% for MSCI EAFE. Since Q3 YTD 1 Year 3 Year 5 Year Incept* SCCM Intl High Div (net) 8.2 12.3 18.3 4.8-4.1 6.5 MSCI EAFE 7.0 10.6 14.3 2.6-4.8 4.8 S&P 500 6.4 16.4 30.2 13.2 1.1 5.1 *March 31, 2004. Performance for periods greater than 1 year is annualized. 645 Fifth Avenue New York, NY 10022 Tel 212.644.1800 Fax 212.593.4275 www.schafer-cullen.com
Sector Attribution The largest contributor to relative performance was our stock selection across a number of sectors including Industrials, Information Technology, Energy, Consumer Staples and Healthcare. Outperformance here was led by a diverse group of companies including 1) Fraser and Neave, and Sakari Resources (deeply undervalued companies with attractive assets which received buy-out bids during the quarter), 2) Siemens, ABB and BAE Systems (leading late cycle industrials), 3) Taiwan Semiconductor (dominant global leader in semiconductor foundries which is benefitting from the growth in wireless devices such as smartphones and tablets), 4) Treasury Wines and Diageo (global beverage companies which are benefitting from improved pricing based on both industry consolidation and increasing demand from the emerging markets) and 5) Bayer and Sanofi (pharmaceutical companies which have among the best long-term growth prospects based on limited patent expirations and exposure to emerging markets). Our underweight allocation to Consumer Discretionary and Information Technology and our overweight allocation to Consumer Staples and Healthcare aided performance.iiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiii The largest detractor from relative performance was our stock selection in Utilities where we were hurt by our position in CEMIG, a Brazilian electrical utility whose long-term growth outlook was tempered by prospects for lower concession renewal rates across the industry. While market participants have decided to shoot first and ask questions later, we remain comfortable with our position in the company which since our initial investment has paid us back over 100% of our original cost basis in the form of dividends alone. Our underweight allocation to Financials and our overweight allocation to Telecommunication Services and Energy hurt performance. Cash was a drag on performance during the quarter.jjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjj International High Dividend Value Equity ORD vs. ishares MSCI EAFE Index Fund GICS Sector Allocation Effect Selection + Interaction Total Eff ect 6/29/2012-9/28/2012 Industrials Health Care Inf ormation Technology Consumer Discretionary Consumer Staples Energy Materials Telecommunication Services [Cash] Financials Utilities -1-0.5 0 0.5 1 Source: FactSet FactSet Research Systems Page 2 of 6
Country Attribution The largest contributor to relative performance was our underweight allocation to Japan and our overweight allocation to Singapore, Switzerland, Canada and Germany. Our allocation decisions were driven by our mandate to construct a portfolio of attractively priced, high quality companies with high dividend yields which we believe can sustainably be grown over the long-term. Stock selection aided performance in Singapore as two of our companies received take-out bids. Selection also aided performance in our three core European markets of the United Kingdom, Germany and Switzerland, which together account for 79% of our total European exposure. Performance here was aided by leading blue chip global multinationals which are performing strongly despite a mixed picture for global economic activity and include Diageo, BAE Systems, Siemens, Bayer, ABB and Zurich Insurance. The largest detractor from relative performance was our overweight allocation to Brazil and China and our underweight allocation to Spain and Australia. We remain comfortable with these allocation decisions based on valuations and the long-term prospects of our portfolio companies. Stock selection hurt us in Hong Kong as companies which had outperformed by a wide margin year to date, lagged during the quarter. Our currency exposure was a headwind as currencies we were underweight such as the Swedish Krona and Japanese Yen, outperformed and currencies that we were overweight such as the Brazilian Real and Hong Kong Dollar, underperformed. Cash was a drag on performance during the quarter. International High Dividend Value Equity ORD v s. ishares MSCI EAFE Index Fund Country Allocation Effect Selection + Interaction Total Effect 6/29/2012-9/28/2012 Japan Singapore Germany Taiwan South Africa Switzerland Australia Me xico Indonesi a Norway Canada France Netherlands [Cash] United Kingdom Hong Kong -1-0.5 0 0.5 1 1.5 2 Fac tset Research Systems Source: FactSet China Brazil Portfolio Strategy and Changes There were no purchases or sales in the quarter. Page 3 of 6
Outlook Over a period when banks are deleveraging, when debt-burdened consumers are increasing savings and reducing borrowings, when companies are running historically high levels of excess liquidity and when fiscal policy is having a negative impact on GDP growth, it is difficult for monetary policy to be effective, except as a backstop. The IMF s annual meeting in Tokyo this week offered a sober forecast of global growth prospects that reminds policy makers in developed economies, that while financial markets in advanced economies have been relatively calm in recent weeks, that doesn t signal a fundamental global turnaround. While bottom-up consensus earnings estimates for MSCI EAFE for 2012 and 2013 have continued to be reigned in even since the latest quarterly reporting season, they nevertheless remain high at $124.0 for 2012 and $139.8 for 2013, an ambitious 13% growth rate. Sluggish global growth will make a lift in top lines challenging, while margins are already high from a historical perspective. While we believe that the general earnings consensus is too high, offsetting this, the market multiple is at a discount relative to real rates and inflation expectations. Since the recent increase in asset prices comes against the backdrop of slowing global growth and a moderation in corporate profitability, the challenge remains to select attractively valued investments, while at the same time being mindful of risks to the earnings outlook for these companies. Going forward, we will grapple with this issue with a clear focus on our objective of achieving a high absolute dividend yield and strong long-term dividend growth. A key differentiator for companies in this environment is their geographic revenue exposure, with those with greater exposure to faster growing emerging markets and lesser exposure to stagnating developed markets, offering the best potential for meaningful growth. In addition to optimal revenue exposure, we continue to believe that in a low growth, volatile world, leading blue-chip multinational companies which are gaining market share against smaller, distressed rivals, are improving profitability and are undertaking value enhancing mergers and acquisitions by taking advantage of record low interest rates, will continue to remain rewarding investments. We believe that we are in a period during which factors such as valuations, earnings reliability and dividend yield are key to strong outperformance. This bodes well for our strategy given our focus on high, sustainable and growing dividend yields. In this regard, our portfolio dividend yield of 5% continues to compare favorably to government bond yields which in major markets are at less than 2% while unlike our companies offering no prospects for long-term income growth. In our International High Dividend portfolio, all of our companies have paid dividends thus far in the year. 65% of these companies have raised their dividend with an average increase of 12.5%. With strong balance sheets and continued earnings growth, we anticipate that this trend will continue in 2012 and beyond. Best Regards, Schafer Cullen Capital Management, Inc. Page 4 of 6
Appendix: Portfolio Exposure And Characteristics As Of 09/30/2012 Portfolio Exposure Sectors % Asset Regions % Asset Consumer Discretionary 0.0 Developed Asia Pacific 20.4 Consumer Staples 18.4 Developed Europe 54.8 Energy 10.8 North America 4.3 Financials/ REIT 15.0 Asia Pacific Emerging 8.9 Health Care 14.5 Latin America 4.6 Industrials 12.4 EMEA 2.9 Information Technology 2.7 Materials 7.6 Developed Markets 79.5 Telecommunications 12.4 Emerging Markets 16.4 Utilities 2.1 Cash 4.1 Cash 4.1 Total 100.0 Total 100.0 Top 10 Countries United Kingdom Switzerland Germany Singapore Australia France Taiwan Indonesia Canada South Africa Top 10 Holdings Novartis AG Sanofi-Aventis Nestle S.A. MTN Group Ltd. Unilever N.V. British American Tobacco Roche Holding AG Treasury Wine Estates Singapore Telecom Ltd. Vodafone Group PLC Portfolio Characteristics Forward Forward Q3 12 Est. Est. Q3 12 Price / Dividend LT Debt / LT DPS LT EPS Market Earnings Yield Capital Growth Growth Cap SCCM Intl High Div 12.1 5.0 26.5 7.4 9.2 $68,135 MSCI EAFE Index 12.0 3.8 28.6 6.2 8.2 $55,866 Source: SCCM Research, Bloomberg, FactSet Page 5 of 6
Disclosure: Schafer Cullen Capital Management (SCCM or the Adviser ) is an independent investment advisor registered under the Investment Advisers Act of 1940. 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. All opinions expressed constitute Schafer Cullen Capital Management s judgment as of the date of this report and are subject to change without notice. Page 6 of 6