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 Q4 2017 Commentary Market and Economic Review International equity markets outperformed in 2017 as market participants remained optimistic that the outlook for global growth looks well supported by further fiscal policy and reform initiatives by governments. Against this backdrop, equities outperformed fixed income, long-term interest rates remained mostly range-bound and the US Dollar reversed gains from last year to depreciate against most major currencies. Given this robust near-term economic outlook, in the latest quarter, cyclical sectors outperformed, including Materials, Consumer Discretionary and Information Technology, whereas non-cyclical sectors underperformed, including Utilities, Healthcare and Telecommunication Services. Returns by sector were somewhat more narrowly distributed than usual for the full year as only three out of 11 sectors outperformed during the period. In the quarter, by region, Developed Asia outperformed Western Europe and Emerging Markets outperformed Developed Markets. By country, South Korea, China/Hong Kong and Japan outperformed whereas Sweden, Italy and Brazil, underperformed. By style class, we experienced headwinds as growth outperformed value and small caps outperformed large caps. With volatility near record lows and asset markets being driven higher by ETF flows and momentum-based strategies, adhering to the price disciplines of low price earnings and high dividend yield has become all the more important in providing satisfactory absolute and riskadjusted 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. Portfolio Performance We lagged our benchmarks during the cyclical-driven rally in the quarter, which is in keeping with our performance profile since inception, whereby we have generated annualized alpha by outperforming in flat and down markets and underperforming, while providing reasonable upside participation, in strong up markets. We continue to believe that our strategy is well positioned to outperform over a full market cycle while taking on less risk as measured by beta, standard deviation and/or down-market capture. Since Q4 YTD 1 Year 3 Year 5 Year 10 Year Incept* SCCM Intl High Div (gross) 2.0 19.8 19.8 6.8 6.0 1.5 7.2 SCCM Intl High Div (net) 1.8 19.2 19.2 6.2 5.2 0.7 6.5 MSCI EAFE 4.2 25.0 25.0 7.8 7.9 1.9 6.4 MSCI ACWI ex US 5.0 27.2 27.2 7.8 6.8 1.8 7.0 *August 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 strong stock selection in Telecommunication Services, Materials, and Utilities, where our well-positioned companies with unique catalysts driving higher earnings growth and shareholder value creation outperformed, including Vodafone, Nippon Telegraph & Telephone, Norilsk Nickel, Smurfit Kappa and Engie. Our overweight allocation to Energy and Consumer Staples and our underweight allocation to Utilities aided performance. The largest detractor from relative performance was our inferior stock in Industrials, Financials and Healthcare, where in many cases negative short-term factors held back some of our holdings though we see limited if any meaningful impact to the long-term earnings power of these companies. Our overweight allocation to non-cyclical sectors, such as Telecommunication Services and Healthcare and our underweight allocation to cyclical sectors such as Materials, Information Technology and Consumer Discretionary, hurt performance. Cash was a drag on performance during the quarter. Source: Bloomberg, 12/31/2017 Page 2 of 8
Country Attribution The largest contributor to relative performance was our overweight allocation to Singapore, Netherlands and Ireland and our underweight allocation to Sweden, Spain and Italy. We look to continue to maintain exposure to attractively valued companies in high quality countries while avoiding unattractively valued companies in low quality countries. Our superior stock selection aided performance in Ireland, Norway and Australia where our well-positioned companies, such as Smurfit Kappa, Orkla and Sonic Healthcare, outperformed. The largest detractor from relative performance was our inferior stock selection in the United Kingdom, France, Germany and Japan, as our conservative, blue-chip dividend paying companies underperformed companies with higher levels of financial and operating leverage. While conservative investing with a price discipline is currently out of favor, we continue to believe that this is the prudent approach to adopt over the long-term. Our overweight allocation to Switzerland, Germany and Norway and our underweight allocation to Japan, Australia and Hong Kong hurt performance. Cash was a drag on performance during the quarter. Source: Bloomberg, 12/31/2017 Page 3 of 8
Portfolio Strategy and Changes Purchases: Daimler AG Germany Consumer Discretionary Daimler is the world s largest manufacturer of premium automotive vehicles, developing passenger cars under the Mercedes-Benz brand, and a leading supplier of vans, buses, as well as light-, medium- and heavy-duty trucks globally. The Mercedes-Benz brand is one of the most recognizable luxury automotive brands globally, well known for its long track record of superior quality and performance, and remains an aspirational brand for a large and rapidly-evolving group of affluent consumers globally. Over the medium term, the company stands to benefit from continued momentum behind its higher-margin SUV models, a category that has experienced better global demand than traditional sedans, new model launches, including a new E-class and S-class portfolio, as well as a turnaround in its European business on the back of an ongoing economic recovery. Over the long term, the company should benefit from continued growth in emerging markets, which already account for over a fifth of total sales, as vehicle ownership rates begin to converge to developed market rates from very low underpenetrated levels. Moreover, Daimler is at the forefront of several long-term industry trends, including vehicle electrification, autonomous driving and mobility services, having already committed significant capital into research and development in order to develop, test and integrate these features in a timely, safe and cost-effective manner. The company is also examining the possibility of restructuring as a holding company, organizing its divisions into legally independent entities which, we believe, would allow for a higher degree of flexibility to address the requirements of each division, while simultaneously allowing for more clarity on the proper valuation for each of its businesses. Over the long term, shares of the company have considerable upside potential from new product launches, early-mover advantages in new industry trends, restructuring initiatives and the benefit of a strong balance sheet with a robust free cash flow generation profile, which should translate into a sustainable and growing dividend. Shares of Daimler are valued at 7.8 times forward earnings and offer a 5.1% dividend yield. Sales: None. Page 4 of 8
Outlook We continue to believe that our strategy is well positioned from a long-term perspective given the strong outperformance potential from a reversal of the historically extreme multi-year underperformance of 1) international versus US equities and 2) value versus growth equities. In this regard, while international equities have outperformed for the last 13 months, we may still be early in this recovery as five similar periods of outperformance since 1970 have lasted 43 months, on average. Further, value as a style remains the most out of favor since the Tech Bubble, following which MSCI World Value was up 75% over the next 7 years (March 2000 Feb 2007) while MSCI World Growth was actually down. Thus, in a world of increasingly full asset prices, our strategy offers the patient long-term investor with the unique and valuable ability to benefit from the normalization of two major discounts of meaningful proportion, all the while collecting an attractive 4.4% dividend payment. The recovery that we have had since 2009 is one of the longest-running recoveries in history, which tend to favor growth. For a number of growth indices and the ETFs which track them, valuations are currently at the highest levels in over 15 years, thus offering limited, if any, downside protection. The current mood in asset markets is one of higher-than-average risk and valuation tolerance in the pursuit of return maximization, as seen by the recent outperformance of leveraged cyclicals, small caps, non-investment grade credits, highly-valued internet companies and cryptocurrencies, at a time when volatility is low and credit conditions are benign. Given this backdrop, for an investor sensitive to risk, the chart below shows how our strategy compared to MSCI EAFE and MSCI EAFE Value has generated greater alpha (excess return) with a lower standard deviation during the current recovery. Therefore, looking at the market on a risk adjusted performance basis gives investors a completely different perspective than looking at performance only on an absolute basis. Source: Morningstar, 12/31/2017 Page 5 of 8
One area of the international investment landscape which continues to have modest valuations and may have the potential to positively surprise is European financials. Currently, on a price/book basis, European financials trade at a steep 33% discount to US financials versus a 20-year average discount of 17%. While market sentiment may be impacted by memories of the large drawdowns in this space during 2008 and 2011, we believe that a select group of companies here has worked hard to right-size their balance sheets and simplify their business models and thus they are in a much stronger position today. Currently we even have some European financial portfolio holdings with a clear excess capital position which should, over time, translate into increased shareholder returns. Given our conservative approach, we have tended to focus on owning property and casualty insurers with scale and underwriting advantages and on banks in healthy banking markets with low balance sheet leverage. While normalizing long-term interest rates and/or greater fiscal integration within the Eurozone would both be helpful to the investment case for European financials, we have not incorporated these potential positive developments into our base case analysis. Across most major regions, the reform agenda of governments has also been a key driver of asset markets as seen in 2017, which turned out to be a major milestone year for the global economy with the election of President Macron in France, the passing of landmark tax reforms in the United States and the successful implementation of early stage supply side reforms in China. While some economic purists advocate for less intervention from governments in markets even when they support monetary policy intervention, we believe that many of these new initiatives are pragmatic and pro-growth and thus are likely to be beneficial to owners of capital over the long-run. We believe that pairing positive reform trends with the dividend discipline, as we have done with a number of our portfolio holdings, is a powerful combination, which should ensure long-term success across a number of different scenarios. With equity price multiples having recovered to historical norms, going forward we believe that the bulk of returns will be generated via the components of dividend yield and earnings/dividend growth, which is in line with the long-term norm of equity markets globally. On both these measures we consider our portfolio to be well positioned with a higher, 4.4% dividend yield and a faster and more sustainable dividend growth profile relative to the benchmark MSCI EAFE. Thus far this year, 75% of our portfolio companies that have declared dividends have raised their dividend payments by an average of 6.6% YoY. In this regard, strong dividend increasers include Telefonica Brasil, BNP Paribas, Smurfit Kappa, Michelin, Nippon Telegraph & Telephone, British American Tobacco, Manulife Financial, Unilever, Imperial Brands and Investor. With strong balance sheets and continued earnings growth, we anticipate that this trend will continue in 2018 and beyond. Best Regards, Jim Cullen Portfolio Manager Rahul Sharma Portfolio Manager Pravir Singh, CFA Director of International Research Page 6 of 8
Appendix: Portfolio Exposure and Characteristics as of 12/31/2017 Portfolio Exposure Sectors % Asset Regions % Asset Consumer Discretionary 7.2 Developed Asia Pacific 15.6 Consumer Staples 14.1 Continental Europe 52.4 Energy 6.8 United Kingdom 17.0 Financials 27.9 North America 5.4 Health Care 11.4 Asia Pacific Emerging 2.5 Industrials 9.2 Latin America 1.9 Information Technology 2.5 EMEA 2.0 Materials 5.3 Real Estate 0.0 Telecommunications 9.8 Developed Markets 90.4 Utilities 2.5 Emerging Markets 6.3 Cash 3.3 Cash 3.3 Total 100.0 Total 100.0 Top 10 Countries Top 10 Holdings United Kingdom 17.0 Smurfit Kappa 3.4 Switzerland 15.4 Investor AB 3.3 Germany 12.1 ING Groep 3.0 France 10.2 ABB Ltd. 3.0 Netherlands 7.3 British American Tobacco 2.9 Japan 5.6 Siemens 2.9 Canada 5.4 Novartis 2.9 Hong Kong 3.9 Nestle 2.8 Singapore 3.4 Allianz 2.8 Ireland 3.3 Sonic Healthcare 2.7 Portfolio Characteristics Forward Forward Q4 17 Est. Est. Q4 17 Price / Dividend LT Debt / LT DPS LT EPS Market Earnings Yield Capital Growth Growth Cap (B) SCCM Intl High Div 13.4 4.4 29.3 8.1 9.7 83.5 MSCI EAFE Index 15.1 3.1 29.2 7.5 10.1 65.5 Source: SCCM Research, BCA Research, Bloomberg Page 7 of 8
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. 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. Page 8 of 8