During the third quarter, we completed our annual review of the environmental practices of each of the companies owned in the Portfolio 21 Fund, a process that we have adhered to and built upon since the Fund’s inception in 1999. Also, the Fund had a fine quarter for investment returns, essentially keeping pace with the strong rise in global equity markets. As the Advisor to the Fund, we are pleased to provide this update on our investment management activity and on our recent and longer-term investment results.
|Performance Period||Retail (PORTX)||Institutional (PORIX)||MSCI World Equity Index||S&P 500 Index|
The Fund matched strides with its benchmark, the MSCI World Equity Index, during what turned out to be a strong run for stock prices during the quarter. Even though not much has changed for the better in terms of global economic growth, the market rose when the U.S Federal Reserve and other major Central Banks initiated yet another round of strategies to inject cash into the financial system in their ongoing effort to “stimulate” economic activity.
As you can see from the table above, the Fund’s long-term results are quite favorable relative to the benchmark, but prior to this quarter the Fund had not been keeping up during the strong market rallies in the shorter term. Simply stated, we have been too conservatively positioned to keep pace during some of the strongest rallies. Our conservative positioning has not changed; the market just (finally!) came around to the kind of stocks we like and that our disciplined approach leads to.
Portfolio 21 Investments focuses on finding companies with excellent environmental practices, attractive business fundamentals, and that may be purchased at what we consider to be attractive prices. The conservative nature of this equity investment approach and the conservative track record flow from the type of companies we invest in.
As Advisor to the Fund we are continuously researching the environmental and social practices of companies that look promising for inclusion in our universe of approved stocks, some of which are ultimately included in the Fund. We seek companies with industry leading strategies in dealing with environmental risks and we attempt to avoid those taking undue chances in these areas.
In addition to building our proprietary universe (and the related but much longer list of rejected companies), current holdings are regularly monitored to ensure environmental compliance and leadership. Over and above our ongoing monitoring, we conduct a formal, in-depth review of every one of the stocks in the Fund each year. The review process uses tools that are proprietary to Portfolio 21 Investments and involves desk research as well as direct company engagement. This year’s review was completed at the end of the third quarter and we are pleased to report no adverse findings of Fund holdings. In fact, we are very pleased with the leadership and innovation occurring among the companies in the Fund.
During the quarter, we reviewed a company with one of the world’s best known brands. We thought that you would be interested in our findings on why Starbucks, the world’s largest coffeehouse company with over 17,000 retail locations, did not make our cut. Coffee, after oil, is the world’s most traded commodity. Starbucks demonstrates environmental leadership across many of its impact areas. All of the company’s new stores are built to achieve LEED (Leadership in Energy and Environmental Design) certification. Starbucks also advocates for the use of renewable energy and purchases renewable energy credits to offset its power consumption. Despite these noteworthy efforts, we identified numerous shortcomings in Starbucks’s C.A.F.E. (Coffee and Farmer Equity) Practices. C.A.F.E. Practices include 249 indicators across four focus areas, which are designed to encourage Starbucks’s coffee farmers to adopt best practices. Unfortunately, these standards are not mandatory. Additionally, the number of applicants undergoing verification varies from year to year, which creates significant inconsistencies in compliance rates and complications in determining year-on-year progress. We believe Starbucks’s C.A.F.E. Practices are lagging, and because strong supply chain initiatives within the agricultural sector are so important in the management of a company’s ecological footprint, Starbucks was not recommended for inclusion in the Fund.
Two of the Fund’s current holdings demonstrated especially strong leadership during the third quarter: energy management company Itron and industrial manufacturer Eaton Corporation.
As the use of solar energy grows, there is increasing demand to monitor and manage the integration of solar and other renewable energy resources into the electric grid. Itron is an energy management company offering hardware and software solutions to optimize resource use across the electricity, natural gas, and water sectors, so the company’s recent entry into the solar energy market is a logical step. In the third quarter, Itron introduced a dedicated meter for the solar energy market. The company relied on its existing technology and expertise to develop a meter that can be used to monitor the energy production of both residential and commercial solar systems. The meter uses Itron’s cellular communication module that enables third-party solar providers the ability to collect, store, and upload a solar energy system’s production data over an existing cellular network. As proponents of the expansion of solar energy, we are pleased to see one of the fund’s holdings offer a new product to serve this growing market.
Eaton Corporation, a holding in the Fund since December 2007, made the 2012 Carbon Disclosure Leadership Index and the 2012 Carbon Performance Leadership Index. Eaton was one of only 11 S&P 500 companies to earn this leadership status on both indices. These are coveted positions, as the Carbon Disclosure Project awards only 15 companies entrance to the Leadership Index. Companies receive a score based on their disclosure; high scores indicate strong internal data monitoring and robust understanding of how climate change will impact business operations. Eaton’s leadership in both indices demonstrates the company’s commitment to emissions management and transparency, which are qualities we seek in the Fund’s holdings.
Throughout global equity markets and within the Fund, technology, healthcare, and industrial stocks led the charge. In the technology sector, Fund holdings Google, Samsung, and Apple all rose strongly as the battle for market share in the lucrative smartphone market intensified with these three Fund holdings in the lead. Fund industrials, including ABB, Eaton, and Philips Electronics also rose double-digit percentages on solid second-quarter results or increased order volume.
We continue to overweight the technology and industrial sectors. These sectors are in the forefront of the “doing more with less” theme that we feel will only get stronger as natural resources get scarcer. In a world where growth is becoming more and more selective, companies that sell products producing efficiency for customers will likely find demand. Companies that make use of efficient products will potentially produce stronger fundamentals even in times of slower sales. Companies that do both have a chance to be standouts in an age of resource constraints.
Looking forward, we are pleased with the operating fundamentals of the current Fund holdings on average compared with the global equity market. We are able to find companies with above-average profit and growth characteristics. We find that the price we have to pay for what we consider to be excellent companies is reasonable compared with the market and by historic standards.
|As of 9/30/12||Portfolio 21 Global Equity Fund||MSCI World Equity Index|
|EPS – 5 Year Geometric Growth (Latest Filing)||5.52||4.30|
|EPS – Estimated Long Term Growth||11.24||11.09|
|Last 12 months Sales Growth||10.66||7.10|
|5 Year Average Return On Equity (Latest Filing)||26.79||20.04|
|Estimated ROE (Forward 12 mos)||24.18||20.22|
|5 Year Average Net Profit margin||14.80||14.13|
|5 Year Average P/E Ratio||17.05||18.24|
|Current P/E Ratio (Trailing 12 mos)||16.34||15.65|
|Estimated P/E Ratio (Forward 12 mos)||13.17||12.30|
We believe that Fund positions Samsung, Svenska Cellulosa, Ecolab, and Ormat all have strong fundamentals and attractive environmental strategies. Nonetheless, Samsung and Svenska Cellulosa contributed positively to Fund performance while Ecolab and Ormat were detractors during the quarter.
Shares of Korean electronics company Samsung rose 12% in the third quarter. The stock has risen a total of 75% since we initiated a position two years ago. Samsung is a technology leader in every sense of the word. Smartphones and flat screen displays continued to drive profits as consumer demand for the newest gadgets showed no sign of abatement. The company has stable, growing fundamentals and strong cash flow. Its scale across products and components is unmatched and we see this as a large competitive advantage. Coupled with a strong balance sheet and well-earned brand recognition, we believe the company is well positioned to continue its strong growth record.
Svenska Cellulosa, a global leader in paper goods based in Sweden, helped Fund performance for the quarter as the market continued to recognize the company’s transformation from a paper and packaging company to a consumer products company focused on personal hygiene. Shares rose nearly 25% in U.S. dollar terms over the past three months. Undervalued to new peers like Kimberly Clark and with emerging markets at 20% of sales and growing, Svenska Cellulosa has potential for continued outperformance.
Cleaning and maintenance services company Ecolab suffered in the third quarter, declining 5%, after falling short of second quarter revenue estimates and bringing down third quarter earnings growth estimates due to a challenging macroeconomic environment. Still, the shares have nearly doubled in price since it was added to the Fund in 2009. Ecolab is well managed, generates strong cash flows, and is diversified across stable end-markets and geographies, with an enviable track record of operating success. Ecolab has the strongest global competitive position in the global industrial and institutional cleaning markets, where the company employs the largest sales force in the industry. Ecolab’s recent acquisition of Nalco added another favorable element to the mix. Nalco’s water systems and chemicals are essential in various capital-intensive industries, from the production and processing of carbon fuel and other commodities to power generation and manufacturing.
Ormat, the world leader in production of geothermal energy, saw its share price slide 12% during the quarter. However, we feel the weak performance masked some very important improvements at the company. Its North Brawley plant, which has been a more difficult challenge than the company expected, is scheduled to reach break-even (on an EBIDTA basis) this year. Fleet additions have cut overhead. Further, Ormat’s growing geothermal exploration and production experience, plus new technology, have trimmed up-front expenses for well exploration. These factors should translate into stronger fundamentals for one of the few baseload renewable energy companies in the world.
We sold the Fund’s shares of Royal Bank of Canada (RBC) and purchased shares of Toronto-Dominion Bank (TD). We have been interested in TD for some time, because the company has consistently generated a high return-on-capital, strong return-on-assets, and has generated better results than most banks. Furthermore, TD’s high-quality loan portfolio has enabled the bank to operate with few loan losses and lower capital ratios. However, the stock had been priced at a premium until recently, so when its valuation dipped we made the trade.
TD has a strong personal and commercial banking business in North America and low relative weighting toward capital markets’ revenues. In Canada, TD possesses a top tier franchise with scale and servicing advantages over peers. In the U.S., TD’s loan-light and deposit-rich balance sheet provides a promising growth story with the lending capacity and low-cost funding advantage to outgrow its U.S. peers. We expect growing benefits from MBNA and Chrysler Financial purchases and expense containment initiatives in 2013. TD has recently made strides in incorporating environmental risk factors into all facets of its operations, including its lending and asset management businesses and extending to environmental initiatives at its branches.
We are respectful of the fact that the global economy continues to face more than the normal headwinds. However, these problems are generally well known to the market and stock price valuations have been held in check. Further, many companies have already adjusted their cost structures and business plans in order to be able to move forward despite the world’s financial problems. We continue to find companies that have the combination of excellent environmental practices and world-class business management that we always seek. From our vantage point, it seems there are more companies worldwide working to develop and implement strategies to deal with environmental risks and opportunities. Of course, the majority of companies still are not, and we must dig well below the surface in order to get comfortable with the strength of any company’s programs. We continue to find that many of the companies that are true leaders environmentally are also leaders in overall business management.
The information provided herein represents the opinion of the Portfolio Manager of the Fund and is not intended to be a forecast of future events, a guarantee of future results, nor investment advice.
Past performance does not guarantee future results.
Holdings are subject to change and are not recommendations to buy or sell any security. See complete fund holdings information.
The MSCI World Equity Index is a capitalization weighted index that monitors the performance of stocks from around the world. MSCI World Energy Index is a component of the MSCI World Index and represents the energy securities defined by MSCI. The MSCI All Country World Index is a market capitalization weighted index designed to provide a broad measure of equity-market performance throughout the world and includes both Developed Markets and Emerging Markets. The S&P 500 Index is a broad-based unmanaged index of 500 stocks, which is widely recognized as representative of the U.S. equity market. It is not possible to invest directly in an index.
Earnings Growth is a measure of growth in a company's net income over a specific period, often one year. This is not a forecast of the Fund's future performance. Earnings growth for a Fund holding does not guarantee a corresponding increase in the market value of the holding or the Fund.
Earnings per share is calculated by taking the total earnings divided by the number of shares outstanding. EPS Growth is not a forecast of the Fund's future performance.
Return on Equity is the amount, expressed as a percentage, earned on a company’s common stock investment for a given period.
The Price to Earnings (P/E) Ratio reflects the multiple of earnings at which a stock sells.
Cash flow is revenue less operating expenses including interest expenses and maintenance capital spending. It is the discretionary cash that a company has after all expenses and is available for purposes such as dividend payments, investing back into the business or share repurchases.
The Fund is distributed by Quasar Distributors, LLC.