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 Global High Dividend ADR Strategy Q2 2018 Commentary Market and Economic Review The second quarter of 2018 marked a divergence in equity markets globally, set in motion by the prospect of escalating trade tensions between the United States and its major trading partners. President Trump announced a series of tariffs against China, Canada, Mexico and the European Union, with each vowing to respond with retaliatory trade measures of their own. In the United States, economic growth and corporate profitability remained on an uptrend, partly due to the U.S. tax and offshore cash repatriation reforms. Given the positive economic backdrop, the Federal Reserve increased interest rates for the second time in 2018, to roughly 2%, and gave indications there will likely be two more hikes in the year. Against a more muted economic growth background and rising uncertainties around global trade, other major central banks, namely the European Central Bank (ECB), the Bank of England (BOE) and the Bank of Japan (BOJ), left rates unchanged. This divergence in monetary policy will likely culminate next year, once the ECB gradually winds down its bondbuying program by December 2018. Against this backdrop, fixed income outperformed equities in most developed countries, long-term interest rates fell and the U.S. Dollar reversed its losses from last year to appreciate against most currencies. Meanwhile, commodity markets were mixed, with Brent crude oil prices rising to over $79 a barrel as supply constraints from Venezuela and Iran were balanced by a modest lift in OPEC production, and most base and precious metals underperforming. By region, U.S. markets outperformed Developed Markets, which, in turn, outperformed Emerging Markets. Within Developed Markets, outperformance in Australia, Netherlands and Norway were offset by market declines in Singapore, Italy and Denmark. Gains in Emerging Markets, led by Qatar, India and Greece were offset by declines in Brazil, Turkey and Thailand. By sector, a mix of mostly cyclical sectors dominated the performance landscape, as gains in Energy, Information Technology and Consumer Discretionary were offset by declines in Financials, Telecommunication Services and Industrials. Energy outperformed on the back of higher commodity prices, Information Technology rallied as major technology firms announced large scale share repurchases from tax savings and repatriated overseas cash and Consumer Discretionary was driven by a resurgence in retailing, including brick and mortar retailers. On the flip side, Financials and Telecommunication Services were roiled by geopolitical uncertainty in Europe and Industrials declined on potential trade disruptions. By style class, growth outperformed value and small caps outperformed large caps. The investment discipline core to our strategy focuses on the long-term factors that drive superior risk-adjusted returns investments in high quality companies with attractive relative valuations, sustainable and growing dividends and catalysts to drive earnings growth and improving sentiment. Committing to this process over a full market cycle has rewarded clients with solid long-term gains and down market protection. Page 1 of 9
Portfolio Performance The strategy underperformed its benchmarks during the quarter as value investments remained out of favor, with MSCI World Value underperforming MSCI World Growth by over 300 basis points. Furthermore, Emerging Markets gave up a portion of their strong gains from last year, which impacted some of our direct Emerging Market investments. 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. Q2 YTD 1 Year 3 Year 5 Year 7 Year Since Incept* SCCM Global ADR -3.4-2.9 4.7 7.3 8.6 9.2 6.0 SCCM Global ADR (net) -3.6-3.2 4.2 6.5 7.6 8.3 4.9 S&P Global 1200 Index 1.3 0.4 11.6 9.3 10.5 9.3 5.9 MSCI World Index 1.7 0.4 11.1 8.5 9.9 8.8 5.2 *March 2007. Performance for periods greater than 1 year is annualized. Page 2 of 9 20180807.51532
Sector Attribution The largest contributor to relative performance during the quarter was our underweight allocation to Industrials, which underperformed during the period, as well as our overweight allocation to Energy and Health Care, which outperformed during the quarter. Stock selection in the Industrials sector was a significant contributor to relative performance, with BAE Systems and Siemens outpacing the rest of the sector, fueled by the prospect of increased defense spending globally and restructuring initiatives, respectively. Within the Energy sector, our higher beta Exploration & Production exposure via Vermilion Energy led the way higher, in tandem with our more defensive Integrated Oil & Gas exposure via Royal Dutch Shell and Total. Cash aided performance during the quarter. The largest detractor from relative performance was our underweight allocation to and stock selection in the Consumer Discretionary and Information Technology sectors, largely due to escalating trade tensions between the United States and its major international trading partners. Further detracting from relative performance was our overweight allocation to and stock selection in the Telecommunication Services and Financials sectors, which sold off amid broad market selloff in Emerging Markets and rising geopolitical risks in Europe. We retain confidence in these allocation decisions based on valuations and the long-term outlook for our portfolio companies. Source: SCCM/Bloomberg, 06/30/2018 Page 3 of 9 20180807.51532
Country Attribution The largest contributor to relative performance during the quarter was our stock selection in China, where our Sinopec (China Petroleum and Chemical Corporation) position outperformed against the backdrop of higher oil and gas prices, strong delivery on operational targets as well as continued progress on government energy pricing reforms. The company also released some of its excess capital in the form of higher dividend payments, which more than doubled in the quarter. Further contributing to our relative performance was our overweight allocation to the Netherlands and Ireland, which outperformed during the quarter, as well as our underweight allocation to Japan, which underperformed in the period. Cash aided performance during the quarter. The largest detractor from relative performance was our underweight allocation to and stock selection in the United States, with JP Morgan Chase impacted by the flattening yield curve, which reduces banks net interest margins, and Altria declining partly on concerns that newer vapor/e-cigarette competitors, such as JUUL, are gaining domestic market share. Further detracting from relative performance was our overweight allocation to Germany, Switzerland and France, where our holdings in cyclical sectors, including Financials, Consumer Discretionary and Industrials, underperformed as market participants reacted to negative headlines regarding European politics and the prospect of a prolonged global trade war. Our allocation to Taiwan and Brazil, which declined amid the Emerging Market selloff, also hurt relative performance. Source: SCCM/Bloomberg, 06/30/2018 Page 4 of 9 20180807.51532
Portfolio Strategy and Changes Purchases: None Sales: Kimberly-Clark United States Consumer Staples We liquidated our position in Kimberly-Clark, one of the leading manufacturers of personal care and healthcare products. While the company has taken steps to address increased competition in certain product categories, we decided to reallocate this capital across more attractively-valued alternatives in the sector. The stock trades at 15.3x forward earnings with a 3.8% dividend yield. 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, as seen below, international equities currently have the lowest weight in the MSCI World Index in 40 years, at 39.1% versus their long-term average weight of 51.7%, as the performance of world equities is being dominated by a narrow group of U.S.- domiciled large capitalization growth stocks. Thus, many investors who look to simply match the exposure of broad global indices are currently underweight international equities despite their meaningfully more attractive valuations at a time when the profitability of international companies has room to rise and international currencies, which are oversold and cheap on a purchasing power parity basis, have room to normalize. Further, value as a style remains the most out of favor since the Tech Bubble, following which MSCI World Value returned 75% over the next 7 years (March 2000 Feb 2007) while MSCI World Growth posted negative returns. Thus, in a world of increasingly full asset prices, our global value 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. Page 5 of 9 20180807.51532
Global Ex-US Equities are Meaningfully ut of Favor Source: BCA Research; As Of 6/30/2018 Over the short term, relative performance has been impacted by narrow equity market leadership, with only ten stocks accounting for over 200% of the MSCI World return for the first two quarters of this year, and by the returns of higher dividend-paying equities globally, which have underperformed against the backdrop of rising interest rates in the United States. This latter phenomenon, however, has been short-lived historically and typically reverses as fundamentals begin to re-exert themselves. As the study below shows, higher-yielding quintiles of the MSCI World index have meaningfully underperformed lower- and non-yielding sectors of the market on both a trailing 12-month and year-to-date basis. Going forward, we would expect that fundamentals, in the form of well-managed companies with high-quality earnings and a disciplined approach to dividends and dividend growth, will come back into favor, driven by upward trends in corporate profitability and inflation. Yield Sectors Weight in MSCI 12 Month YTD Performance World Index Performance (USD) (USD) 0.00-0.94 18.04 19.87 5.76 1.00-1.81 16.65 14.16 0.03 1.82-2.62 23.29 11.92-1.33 2.63-3.77 22.96 6.26-2.51 3.78-12.95 19.06 3.52-3.01 Source: SCCM Research; As of 6/30/2018 Over the last five years, certain areas of the international equity landscape, such as Japanese equities (+60%), international small caps (+74%) and international Information Technology companies (+105%) have all meaningfully outperformed MSCI EAFE (+41%) and MSCI ACWI ex US (+37%). While having limited exposure to these segments of the market, despite being overweight international equities in our global allocation, has hurt our relative performance, we believe that these areas of the market offer less compelling investment opportunities going forward. Japanese equities offer the lowest dividend yields globally and have Page 6 of 9 20180807.51532
poor corporate governance; international small caps trade at a +20% valuation premium to large caps and tend to outperform earlier in an economic cycle; and Information Technology companies, after outperforming for six straight years in a row, appear fully valued. Given our focus on investing with a price discipline and a long-term outlook, we will continue to avoid overvalued parts of the market, even at the expense of some short-term underperformance and we ask that our clients do the same. In the United States, the current bull market, which is the second longest, at 112 months, and third strongest, at +305%, since 1930, has remained range-bound this year, as it consolidates the significant gains over the past few years. U.S. equities remain bifurcated with a narrowing group of Information Technology and Consumer Discretionary stocks, in addition to the resurgence of Energy leading performance, while a sell-off initially concentrated in high dividend sectors has now spread to Industrials and Financials. As a result of its strong multi-year performance but increasingly in-line earnings growth, Information Technology P/E multiples have risen dramatically; the sector now trades at 1.18x the market s forward earnings multiple, making it the most expensive sector in the market. The sector is also the most crowded in the market, residing in the 90 th percentile relative to history and comprising 26% of the S&P 500 s market capitalization; yet, the sector accounts for only 18% of S&P 500 earnings. A key consequence of these dynamics continues to be a widening performance disparity between Growth and Value stocks and an increasing spread between the style P/E multiples. Globally, markets dislike uncertainty and thus the recent sell-off on the back of negative news headlines regarding tariffs and trade wars is understandable. Across our portfolio holdings, we remain underweight investments which would be most adversely impacted in such a scenario, including the manufacturers and retailers of industrial and consumer goods which need to travel across borders. For now, the initial steps from politicians on trade in various countries has been limited in nature and thus the hope remains that these moves mostly represent short-term posturing. Further, the global order in its current form, with some countries running continued large trade surpluses and others running continued large trade deficits, is likely unsustainable. Thus, an attempt at some form of successful restructuring of the current trade paradigm, if done in a rational and rulesbased approach, appears reasonable and, if successful, would be a major positive for future sustainable economic growth. The opportunity for cooler heads to prevail and for a positive surprise here, in much the same way that political developments surprised positively last year across most major regions of the world, should not be ruled out. While low interest-rates and general investor complacency have driven up overall valuations, our commitment to our value, dividend yield and dividend growth disciplines remains resolute. Thus far in 2018, 90% of our portfolio companies which have declared dividends have raised their dividend payments by an average of 9.1% YoY. These strong dividend actions come despite near-term equity market volatility, which indicates the confidence our companies have in their long-term earnings outlook. In this regard, strong dividend increasers include Sinopec, British American Tobacco, Telefonica Brasil, United Overseas Bank, JP Morgan Chase, Daimler, Cisco Systems, BNP Paribas, Altria, Unilever and Smurfit Kappa. With strong balance sheets and continued earnings growth, we anticipate that this trend will continue in 2018 and beyond. Thank you for your continued support and please do not hesitate to contact us with any questions. Best Regards, Schafer Cullen Capital Management, Inc. Page 7 of 9 20180807.51532
Appendix: Portfolio Exposure and Characteristics as of 06/30/2018 Portfolio Exposure Sectors % Assets Regions % Assets Consumer Discretionary 6.2 Developed Asia Pacific 8.2 Consumer Staples 11.2 Europe 47.8 Energy 8.7 North America 30.7 Financials 22.1 Asia Pacific Emerging 3.8 Healthcare 13.6 Latin America 1.9 Industrials 6.1 EMEA 1.8 Information Technology 13.2 Materials 4.4 Real Estate 0.0 Developed Markets 86.2 Telecommunications 7.7 Emerging Markets 8.2 Utilities 0.9 Cash 5.6 Cash 5.9 Total 100.0 Total 100.0 Top Country Exposure United States United Kingdom Switzerland Germany Netherlands France Canada Japan Hong Kong Ireland Top Ten Holdings Cisco Systems JP Morgan Chase Intel Microsoft Diageo Royal Dutch Shell HSBC Holdings Novartis Johnson & Johnson Unilever Portfolio Characteristics Forward Price / Earnings Forward Dividend Yield Est. LT EPS Growth Ave. Market Cap ($B) SCCM Global High Dividend ADR 12.9 4.4 9.2 151.4 MSCI World Index 16.0 2.6 9.4 149.1 Page 8 of 9 20180807.51532
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 World 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 9 of 9 20180807.51532