Portfolio Manager's Commentary
First Quarter 2013
Many of the world’s stock markets produced strong absolute returns during the first three months of 2013, as did the Portfolio 21 Global Equity Fund. However, there were significant differences in the returns from one country to the other. The following illustrates the magnitude of these differences: one of the strongest markets was the U.S., which saw the S&P 500 Index rise by 10.03%; China’s Hang Sang Index decreased by 1.58%, and Germany’s DAX Index gained a modest 2.40%. The Portfolio 21 Global Equity Fund slightly lagged its global benchmark during the quarter, largely because the Fund was underweighted in U.S. holdings.
Performance as of 3/31/13
| Retail (PORTX) | Institutional (PORIX) | MSCI World Index (Gross) | MSCI World Index (Net) | ||
|---|---|---|---|---|---|
| Quarter | Return (%) | 7.36 | 7.44 | 7.88 | 7.74 |
| 1 Year | Return (%) | 12.45 | 12.76 | 12.54 | 11.86 |
| Std Dev | 12.77 | 12.80 | 12.42 | 12.47 | |
| Alpha | -0.20 | 0.71 | 0.00 | 0.00 | |
| Information Ratio | -0.03 | 0.39 | N/A | N/A | |
| 3 Year Average Annual | Return (%) | 6.99 | 7.31 | 9.08 | 8.47 |
| Std Dev | 15.97 | 16.00 | 16.62 | 16.65 | |
| Alpha | -0.68 | -0.68 | 0.00 | 0.00 | |
| Information Ratio | -0.69 | -0.38 | N/A | N/A | |
| 5 Year Average Annual | Return (%) | 2.39 | 2.69 | 2.83 | 2.23 |
| Std Dev | 19.66 | 19.67 | 20.72 | 20.72 | |
| Alpha | -0.35 | 0.50 | 0.00 | 0.00 | |
| Information Ratio | -0.12 | 0.12 | N/A | N/A | |
| 10 Year Average Annual | Return (%) | 9.58 | 9.68 | 9.46 | 8.88 |
| Std Dev | 15.93 | 15.94 | 16.22 | 16.22 | |
| Alpha | 0.46 | 1.06 | 0.00 | 0.00 | |
| Information Ratio | 0.03 | 0.19 | N/A | N/A | |
| Since Inception Average Annual | Return (%) | 4.82 | 4.89 | 3.57 | 3.06 |
| Std Dev | 17.51 | 17.52 | 16.59 | 16.58 | |
| Alpha | 1.39 | 1.94 | 0.00 | 0.00 | |
| Information Ratio | 0.20 | 0.29 | N/A | N/A | |
| Gross Expense Ratio (%) | 1.47 | 1.17 |
PORIX performance reflects a blend of retail class shares (PORTX) and institutional class shares (PORIX) adjusted to reflect institutional class (PORIX) fees. PORTX performance is used from fund inception date, 9/30/99, until the launch of PORIX on 3/30/07. PORIX performance is used from 3/30/07 to date.
Portfolio 21’s Investment Team conducted on-site research at a number of companies during the quarter. We find that visiting companies’ operations and meeting face to face with management is valuable in the process of understanding the company’s results and especially valuable when assessing their environmental, social, and governance practices.
During one of our trips to the Seattle area we visited the headquarters of both Microsoft and Amazon. Although we do not own stock in these companies, we do have significant investments in other large technology companies and we wanted to compare Microsoft and Amazon against sector peers to see if either company had made improvements in their key environmental initiatives. We believe that certain technology companies, such as IBM, Google, and other Fund holdings, have done a good job of addressing energy efficiency, both in their products and in their operations, but Microsoft and Amazon are lagging in this area. For instance, one of Amazon’s largest direct impacts is the energy use of its data centers; yet the company is not a member of The Green Grid, an industry group committed to improving resource efficiency in information technology and data centers. Amazon also said it had no plans to build new data centers powered by renewable energy. Microsoft, a Green Grid member, has moderately strong initiatives in place to increase data center efficiency; however, our site visit with Microsoft revealed that the company has no plans to improve the energy efficiency of its products or seek opportunities in the clean technology space. For these and other reasons, neither Microsoft nor Amazon were approved for the Fund.
Although Portfolio 21 focuses on individual companies and their fundamentals, as opposed to macroeconomic trends, we do closely monitor key economic data for context in understanding company results, the investment outlook, and to watch for developing risks. We are mindful of the fact that many equity markets are approaching all-time highs, and are being driven, at least partially, by the actions of central banks.
As illustrated in the chart below, the Federal Reserve’s massive and ongoing program of bond buying has driven interest rates and bond yields to very low levels. With bond yields so low, equities are becoming more attractive to many investors, another point evident in the chart.
Source: dshort.com
PDCF, or Primary Dealer Credit Facility, was established in order to encourage financial markets to function more effectively. Primary dealers borrow overnight loans from the PDCF through their clearing banks at the primary credit rate offered by the Federal Reserve Bank of New York.
TALF, or Term Asset-Backed Securities Loan Facility, was a program created by the U.S. Federal Reserve in November, 2008 to boost consumer spending to help jumpstart the economy. This was accomplished through the issuance of asset-backed securities.
TARP, or Troubled Asset Relief Program, was a government program created for the establishment and management of a Treasury fund, in an attempt to curb the ongoing financial crisis of 2007-2008. TARP gave the U.S. Treasury purchasing power of $700 billion to buy up mortgage backed securities from institutions across the country, in an attempt to create liquidity and un-seize the money markets.
The Fed’s goals, of course, are not simply to cause investors to prefer stocks over bonds, but to help stimulate economic activity and job creation. The strategy is working, albeit slowly and with some risks. Japan has long faced a stagnant economy and deflationary pressure and has finally decided to employ similar tools to stimulate their economy. The Bank of Japan implemented a plan that will double the country’s money supply by 2014. Predictably, equity investors approved and the Nikkei Index shot up 19% (in local currency) for the quarter.
It is paramount to remember that this global printing of money, while so far successful in its stated goal to raise equity prices, has brought the world economy to a place without precedent in terms of the massive size of central bank balance sheets. Even if the “wealth effect” created by increased stock prices effectively jump starts the world economies back into growth mode, the specifics of how central banks will get rid of all the bonds they have accumulated are unknown, and the consequences are also unknown in scope and intensity.
While we are constructive on many individual companies, we are seeking to be conservatively positioned. Operating fundamentals for the companies in the Fund continue to compare well to the benchmark, but everything is a bit more expensive than it was just three or six months ago. The current P/E of the fund has ticked up a bit, which reflects the fact that the cost of quality growth has gone up as the market hits new highs. That being said, we continue to be mindful of the risks inherent in reaching for growth in a rising market. We remain committed to buying quality companies that are under or fairly valued.
| As of 3/31/13 | Portfolio 21 Global Equity Fund | MSCI World Equity Index |
|---|---|---|
| Growth measures: | ||
| EPS – 5 Year Geometric Growth (Latest Filing) | 6.19 | 4.18 |
| EPS – Estimated Long Term Growth | 10.93 | 11.14 |
| Last 12 months Sales Growth | 5.73 | 3.43 |
| Profitability measures: | ||
| 5 Year Average Return On Equity (Latest Filing) | 25.23 | 18.88 |
| Estimated ROE (Forward 12 mos) | 24.29 | 19.48 |
| Profit margin (Trailing 12 mos) | 12.16 | 6.00 |
| Valuation measures: | ||
| 5 Year Average P/E Ratio | 18.11 | 18.82 |
| Current P/E Ratio (Trailing 12 mos) | 19.59 | 16.98 |
| Estimated P/E Ratio (Forward 12 mos) | 11.92 | 13.41 |
Fund Companies: select leaders and laggards
The fortunes of two tech titans continued to diverge in the first quarter; Google was a leading contributor to performance, while Apple was the largest detractor. In September of 2012 both companies’ stock prices were around $700. Now Google is flirting with $800 while Apple is shy of $450. We believe that the difference in stock performance has more to do with perception than fundamentals.
Google had been seen as a one trick pony, with Internet search being its only money maker. But investors are finally realizing that while search is still the cash cow, Google has made impressive strategic moves to position itself for future growth. Through its Android platform, Google Maps product, and continual investment in mobile search, Google has staked out an impressive position in mobile computing. Meanwhile, products such as YouTube and Google Chrome enhance the brand, and concepts like Google Glass create buzz around the company’s innovative culture.
Investors are concerned about Apple’s ability to maintain its historic pace of product innovation and extraordinary sales growth. Perhaps being spoiled by the company’s incredible run from iPod through iPad, the lack of another industry disruptive device in the last year has sowed doubt about Apple’s growth potential. This may be especially the case due to the change at the top; everyone was worried that when Steve Jobs passed the company would lose a step in terms of its ability to bring out new products that sold well worldwide. We note that Apple continues to have strong fundamentals and is still the world’s leading money maker in the mobile computing segment. Despite current market perceptions and the decline in stock price, we have stayed with Apple, showing patience as new leadership establishes itself at the company.
Something that Portfolio 21 likes about both Google and Apple may be lost on investors less concerned about environmental issues: both companies are industry leaders in how they deal with matters of energy efficiency and use of renewables in energy production and sourcing. Google continues to be a champion for energy efficient data centers throughout the industry, even opening the doors to its own once top secret data center. Apple, also a leader in this area, announced that its largest U.S. data center now generates 60% of its electricity requirements onsite from solar panels and fuel cells and purchases the remainder of its electricity needs from offsite renewable sources.
New Holding: Darling International
Darling International is on the verge of seeing a biodiesel fuel, made from its feedstocks of recycled restaurant grease and animal byproducts, marketed broadly at the pump by one of the largest refiners of vehicle fuel in the U.S. The company, based in the U.S., is a leader in the rendering business; it collects and recycles animal processing by-products and used restaurant cooking oil.
Darling’s business model is based on producing value-added fuel, food, and fertilizer from waste streams. We believe this will serve the company well as demographic trends play out and environmental pressures escalate. The company’s joint venture with Valero, Diamond Green Diesel, will result in fuel made from Darling’s feedstocks becoming available at fuel stations. We expect global biofuel mandates to drive market demand. Moreover, Darling’s green diesel has a different molecular structure from typically produced biodiesel, which allows it to be distributed using current petroleum pipelines. It also has no cold flow issues, which means it will not thicken and clog engines in cold weather.
Forward, with caution
In our December 31, 2012 communication we expressed that we were pleased with the strong market results of 2012 and were enthusiastic about the portfolio fundamentals. Now, three months later, we can say that we are pleased with the strong results of the last three months and continue to be pleased with the portfolio fundamentals. However, we note that the results of these first three months of 2013 are 50% or more than the results from the entire year of 2012. We are attempting to position the portfolio conservatively in this market and would caution shareowners that if the market continues to rise rapidly, our conservative position may result in the Fund lagging the market. Conversely, the overall market may be due for a correction, which could result in a short-term reversal of results. While the market may create some near-term uncertainty, our commitment to the environmental excellence of the Fund’s holdings will remain a constant.
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 free float-adjusted market capitalization index that is designed to measure global developed market equity performance. An investment cannot be made directly in an index. Gross total return indices reinvest as much as possible of a company’s dividend distributions. The reinvested amount is equal to the total dividend amount distributed to persons residing in the country of the dividend-paying company. Gross total return indices do not, however, include any tax credits. Net total return indices reinvest dividends after the deduction of withholding taxes, using a tax rate applicable to non-resident institutional investors who do not benefit from double taxation treaties.
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. The Hang Seng Index is a freefloat-adjusted market capitalization-weighted stock market index that is the main indicator of the Hong Kong Stock Exchange. The DAX Index is a blue chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. The Nikkei 225 Index is the leading and most-respected index of Japanese stocks. It is a price-weighted index comprised of Japan's top 225 blue-chip companies on the Tokyo Stock Exchange. It is not possible to invest directly in an index.
Index performance is not indicative of fund performance.
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.
Standard deviation is applied to the annual rate of return of an investment to measure the investment's volatility. Standard deviation is also known as historical volatility and is used by investors as a gauge for the amount of expected volatility.
Alpha is a measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk) of a mutual fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index is a fund's alpha.
Information Ratio is a ratio of portfolio returns above the returns of a benchmark (usually an index) to the volatility of those returns. The information ratio (IR) measures a portfolio manager's ability to generate excess returns relative to a benchmark
The Fund is distributed by Quasar Distributors, LLC.
