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 2017 Commentary Market and Economic Review International equity markets outperformed in the quarter 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. In the quarter, cyclical sectors which benefited from positive short-term earnings revisions, outperformed, including Energy, Materials and Information Technology. By region, Western European countries such as Norway, Italy and Netherlands outperformed, whereas Developed Asian countries such as Singapore, Australia and Japan underperformed. Emerging Markets outperformed Developed Markets, led by strong gains in Brazil and China. By style class, value outperformed growth and small caps outperformed large caps. With volatility near record lows and asset markets being driven higher by ETF flows, 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. 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 Q3 YTD 1 Year 3 Year 5 Year 10 Year Incept* SCCM Intl High Div (net) 3.1 17.1 14.0 3.2 5.6 0.6 6.4 MSCI EAFE 5.4 20.0 19.1 5.0 8.4 1.3 6.2 MSCI ACWI ex US 6.2 21.1 19.6 4.7 7.0 1.3 6.7 *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 Financials, Telecommunication Services and Utilities, where our well positioned companies with unique catalysts driving higher earnings growth and shareholder value creation outperformed, including Allianz, BNP Paribas, NN Group, Telefonica Brasil and Engie. Our overweight allocation to Energy and our underweight allocation to Real Estate aided performance. The largest detractor from relative performance was our underweight allocation to cyclical sectors which outperformed, such as Materials, Information Technology, Consumer Discretionary and Industrials and our overweight allocation to non-cyclical sectors which underperformed, such as Consumer Staples, Healthcare and Telecommunication Services. We remain comfortable with these allocation decisions based on valuations and the long-term outlook for our portfolio companies and continue to find new, attractively valued investment opportunities across a number of sectors. Stock selection hurt us in Consumer Discretionary, Industrials, Healthcare and Consumer Staples, where near-term factors held back some of our investments though we see no meaningful impact to the long-term earnings power of these companies. Cash hurt performance during the quarter. Source: Bloomberg, 09/30/2017. Page 2 of 8
Country Attribution The largest contributor to relative performance was our overweight allocation to Canada, Brazil, Norway, Netherlands and Germany and our underweight allocation to Japan, Australia and Hong Kong. In commodity-exporting countries such as Brazil and Norway we are overweight quality non-cyclical companies whereas in Australia and Japan we are underweight financials. Our stock selection aided performance in France where our well-positioned domestically-focused companies, such as Engie and BNP Paribas, outperformed. The largest detractor from relative performance was our stock selection in Germany, the United Kingdom, Switzerland, Australia 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, United Kingdom and Singapore and our underweight allocation to Italy and Belgium hurt performance. Cash hurt performance during the quarter. Source: Bloomberg, 09/30/2017. Page 3 of 8
Portfolio Strategy and Changes Purchases: NN Group N.V. Netherlands Financials NN Group (NN) is a leading life and non-life insurance company, with a strong presence in the Netherlands and a diversified footprint across Europe and Japan. Formerly part of ING Groep, NN was spun out in 2014, as part of a restructuring plan, and has since considerably de-risked its portfolios while simultaneously growing its capital position to one of the strongest levels among European insurers. In 2017, NN completed the acquisition of Delta Lloyd, an insurance and asset management company with operations in the Netherlands, Germany and Belgium. The decision to merge with Delta Lloyd illustrated NN s opportunistic and disciplined approach to consolidating its position in an industry that remains competitive and continues to be challenged by low interest rates. The combined entity will be the largest Dutch insurance company, with a clear lead over its competitors, and should benefit from considerable economies of scale, substantial cost and capital synergies and significant earnings accretion and dividend growth. With significant business overlap in the Netherlands and Belgium, there is substantial room to reduce duplicative costs like real estate, IT and back-office operations, and headcount. Furthermore, the capital position of the combined entity will be well-served by NN s very strong standalone capital levels, capital synergies and the strong organic capital generation of the merged entity. While NN s management team has had a relatively short track record managing the company as a standalone entity, it remains committed to improving shareholder returns via dividend growth, while simultaneously maintaining the disciplined underwriting standards and focused capital management that facilitated this deal in the first place. Valuation levels are very attractive, with shares of the company trading at half of book value, which should re-rate significantly as the return-on-equity improves. Shares of NN Group are valued at 9.3 times forward earnings and offer a 5.0% 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 10 months, we may still be early in this recovery as five similar periods of outperformance since 1970 have lasted 43 months on average. Further, as seen below, within global equities, value as a style class has currently underperformed growth on a trailing ten-year basis by the second largest margin in nearly 30 years, translating into a negative two standard deviation event. Historically, such extreme underperformance of value equities relative to growth equities has been followed by strong outperformance of the former, as was the case in the nearly decade-long period following the dotcom crash in March 2000. Thus, in a world of increasingly full asset prices, international value equities offer 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 current dividend payment. Source: Strategas Research, As of 9/30/2017 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. Over the long-term however, risk and reward must be well balanced to deliver adequate absolute and risk-adjusted returns, which remains our objective. With Technology companies having outperformed the broad market for five consecutive years, there is much interest and excitement in this space, though in many cases the elevated valuations here preclude us from making meaningful investments. Many of our attractively valued portfolio companies, however, also benefit from technological innovations such as digitization, big data analytics and new technology-enabled channels of distribution and are thus well positioned to deliver strong long-term earnings growth. Page 5 of 8
Another important driver of strong asset markets is the current high degree of faith in governments and central bankers globally, as reflected by the still near-record low yields on government bonds in several major markets, most notably across Western Europe. We thus continue to believe that high dividend paying equities in such a scenario look favorable versus fixed income and in many cases our portfolio holdings offer dividend yields 50% above those available on their relevant local government bonds, while also offering for long-term growth in earnings and dividends. Whereas a near-term strengthening synchronized global economic upswing at a time when monetary policy still remains quite accommodative has created some pockets of froth and excess in asset markets, we believe that over the long-term, fundamentally-driven value investing could potentially deliver meaningful outperformance relative to passive, technically-driven momentum ETFs. Across most major regions, the reform agenda of governments has also been a key driver of asset markets though this is very much of a two steps forward and one step back process. In the United States, political acrimony has thus far precluded what many would consider an easy win in the form of tax reform whereas Europe, following the impressive victory of President Macron in France, is now dealing with the complexity of recent political developments out of Germany and Spain. Across major emerging markets, such as China, India, Brazil and South Korea, reforms carry on at a varied pace and we remain optimistic over the long-term. 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. History shows that the noise of short-term macroeconomic or geopolitical events often does not meaningfully alter the future earnings power of well positioned companies and instead provides patient long-term value investors with an excellent entry point to increase their ownership in quality companies. 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, 4.5% 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 7.3% YoY. In this regard, strong dividend increasers include Norilsk Nickel, Telefonica Brasil, BNP Paribas, Smurfit Kappa, Michelin, British American Tobacco, Manulife Financial, Imperial Brands, Unilever and Investor. With strong balance sheets and continued earnings growth, we anticipate that this trend will continue in 2017 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 09/30/2017 Portfolio Exposure Sectors % Asset Regions % Asset Consumer Discretionary 6.8 Developed Asia Pacific 12.5 Consumer Staples 14.2 Continental Europe 53.0 Energy 6.3 United Kingdom 20.3 Financials 27.6 North America 5.0 Health Care 13.2 Asia Pacific Emerging 1.8 Industrials 9.5 Latin America 1.8 Information Technology 1.8 EMEA 1.3 Materials 4.4 Real Estate 0.0 Telecommunications 8.9 Developed Markets 90.8 Utilities 3.0 Emerging Markets 5.0 Cash 4.2 Cash 4.2 Total 100.0 Total 100.0 Top 10 Countries Top 10 Holdings United Kingdom 20.3 Investor AB 3.5 Switzerland 15.2 Smurfit Kappa 3.1 Germany 11.9 ING Groep 3.0 France 10.9 Novartis 2.9 Netherlands 7.2 Siemens 2.9 Japan 5.4 Nestle 2.8 Canada 5.0 Allianz 2.7 Sweden 3.5 ABB Ltd. 2.7 Singapore 3.2 British American Tobacco 2.7 Ireland 3.1 HSBC Holdings 2.5 Portfolio Characteristics Forward Forward Q3 17 Est. Est. Q3 17 Price / Dividend LT Debt / LT DPS LT EPS Market Earnings Yield Capital Growth Growth Cap SCCM Intl High Div 14.0 4.5 30.9 7.9 9.4 82.9 MSCI EAFE Index 15.8 3.3 29.8 6.5 9.5 64.0 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