Portfolio Manager's Commentary

Fourth Quarter 2013

Performance Review

We are pleased that 2013 was a strong year for global equity market returns and disappointed that the Portfolio 21 Global Equity Fund did not keep pace with the benchmark returns. During 2013 the world’s richest countries, led by high returns from the United States, made a full recovery from the declines of the 2007 and 2008 credit crisis, while the world’s emerging markets declined. Portfolio 21 held a lower percentage of the Fund in U.S. stocks (45.01%) and considerably more (9.38%) in companies of emerging markets, relative to the benchmark. This is what held back our 2013 results to “only” 22.52%.

The driving forces behind the global market returns for 2013 were 1) the strengthening economic recovery in the U.S. and 2) investor perceptions of when the U.S. Federal Reserve (“the Fed”) would begin to reduce the amount of liquidity it has been providing to the global economy. While a strengthening economy in the U.S. is certainly good news and provided a boost to many equity markets in 2013, it also means that the Fed is more likely to reduce the amount of easy money that it has been providing to the global financial system since the 2008 credit crisis.

Business Insider Chart

Source:  Business Insider

The above chart references returns of the following indices:  TOPIX (Japan), S&P 500 (U.S.), MSCI Europe (Europe), MSCI Asia Pacific ex Japan (Asia ex Japan), and MSCI Emerging Markets (Emerging Markets).

The massive liquidity that the Fed has provided has been extremely helpful to healing the damage done by the credit crisis and has been a key component to economic recovery. However, investors are concerned that some parts of the global economy may struggle when this excess liquidity is removed. As one would expect, concerns are greatest for the smaller emerging market economies than they are for the large developed economies.

As the U.S. economy has strengthened, bringing the Fed closer to reducing liquidity, investors have withdrawn funds from emerging markets, causing stocks to stagnate or decline. Portfolio 21 does not invest in emerging markets broadly; we have selected eight companies that we believe are exceptional compared to any company in the world. The emerging market companies we own have produced strong earnings and profits throughout 2013 and are now trading at a substantially lower valuation than the rest of the portfolio. We realize that investors may continue to turn away from emerging markets, as investors tend to move as a herd and the herd is concerned about the impact of the Fed’s liquidity taper.

We do believe that there are some very attractive long-term values among the emerging market companies, including and beyond the stocks we already own. We intend to continue to evaluate these companies and to take advantage of long-term opportunity within the limits of prudent portfolio management.

Although the Fund did underperform, Portfolio 21’s security selection was a positive for results; we just did not have enough exposure to the countries that did so well and we had too much exposure to emerging markets. Fund holdings of U.S. stocks performed better than their benchmark counterparts by nearly 2% for 2013 and 1% for the fourth quarter. Similarly, Japanese stocks in the Fund as a group outperformed their benchmark peers as the Nikkei 225 Index rose to a six-year high, driven by its currency market. Other countries where Fund stocks outperformed over the past three- and twelve-month periods include Canada and the United Kingdom, whereas Fund stocks underperformed in Sweden, France, and Belgium.

MSCI Index
Q4 2013
3 Year
5 Year
10 Year
Developed market indices
Pacific ex Japan1,346.28-0.43%1.46%0.48%13.65%7.32%
Emerging market indices
South Africa529.321.66%-8.85%-4.70%11.65%9.35%
South East Asia805.306-1.60%-7.50%0.01%16.73%9.62%


Stocks from Brazil, the world’s seventh-largest economy, were especially hard hit in 2013. Brazil is struggling with social unrest and rising inflation, a global decline in commodity prices, and a potential rise in U.S. interest rates. These factors have driven Brazil’s growth down from over 7% to the 2-3% range and caused investors to look elsewhere. For the Fund, exposure to Brazil was the biggest performance detractor for 2013 and the fourth quarter, accounting for over two-thirds of Fund underperformance, as both Brazilian equities and the currency (the real) depreciated in the mid-to-high teen percentages for the year and around 6% for the quarter. Brazilian stocks held in the Fund outperformed the Brazilian stock market overall and we continue to find high quality companies with compelling fundamentals during these down times. (Fund allocation to South Korean, Chinese, and Taiwanese equities and currencies also weighed on performance, but to lesser extent.)

We believe the longer-term story for Brazil is a good one as major economic and demographic fundamentals are a positive for Brazil. Its middle class is young and growing while poverty and unemployment are shrinking. The country is awash in natural capital at a time when the world is starting to realize its value. Subpar infrastructure is being upgraded. A U.S.-led global recovery would reignite demand for Brazilian exports. Other possible catalysts include the 2014 World Cup in São Paulo and a Presidential election later in the year.

Currently, Brazilian stocks are cheap by historical and global standards, which should leverage any good news, or even absence of bad news, as a fair amount of pessimism seems priced in.

Cyclically Adjusted Price-Earnings (P/E) Ratios as of 10/1/13

P/E Ratio
South Korea15.21
Hong Kong16.61
South Africa19.04


Klabin is a Fund holding that exemplifies the type of opportunities available. The company is the largest producer, exporter, and recycler of paper in Brazil. It has 243,000 hectares (600,466 acres) of planted forests and 212,000 hectares (523,863 acres) of preserved native woodlands, all of which are certified by the Forest Stewardship Council (FSC). The company is a leader in responsible forest management, as it was the first company in the Southern Hemisphere to be granted FSC certification in 1998 and it is among very few in the industry to have chain-of-custody certification for its operations, product, and supply chain. The company’s vertical integration, responsible stewardship of natural capital, flexible business model, and good governance make Klabin a world class company that we believe possesses a competitive advantage.

Emerging market economies with strong current-account surpluses like South Korea, China, and Taiwan posted decent gross domestic product (GDP) growth in 2013, despite listless stock markets there. The South Korean won is one of the few emerging market currencies that did not depreciate against the U.S. dollar in 2013. South Korea resembles a developing market because of its heavy dependence on exports. The dominance of conglomerates in the economy is also more typical of developing economies. However, the high GDP per capita and low inflation rate is more characteristic of developed nations.

Low consumer savings, an aging population, and a low birth rate may restrain long-term growth, unless productivity growth spikes or a reunion with North Korea results in a development upsurge. Persistent government surpluses and low debt are advantages for South Korea, as are the huge foreign exchange reserves built up over years. Other boons include a highly educated workforce, a strong work ethic, and a robust banking system. As such, we believe innovative and forward-looking companies, such as DGB Financial, are well positioned for 2014 and beyond.

Portfolio 21 Fund companies outshined their MSCI World Index peers in terms of operating fundamentals over the last twelve months. Fund companies experienced higher rates of growth for sales and EBITDA over the past twelve-month period. Furthermore, long-term growth estimates for Fund companies remain above the index at around 12.80%, versus 11.81%. Still, Fund companies are currently trading at a discount to the MSCI World Index: The price-earnings (P/E) ratio, based on the latest quarterly earnings estimates for the Fund, is 17.86, compared with 18.07 for the index. On a historical basis the 5-year average P/E ratio for the Fund is nearly a full point lower at 19.69, compared with 20.91 for the index. Breaking down the data points by region illustrates our commitment to quality growth companies at attractive valuation multiples, irrespective of country headquarters:

P/E Ratio
5 Year Average
P/E Ratio
Based on 4th QTR 2013
Sales Growth
1 Year
1 Year
Portfolio 2119.6917.868.74%14.38%
MSCI World20.9118.076.66%5.54%
Portfolio 21 U.S.21.8219.589.57%15.47%
MSCI World U.S.22.7020.067.28%6.16%
Portfolio 21 Europe19.1617.4910.55%8.13%
MSCI World Europe19.1115.792.07%5.09%
Portfolio 21 Japan14.2115.5911.12%25.48%
MSCI World Japan19.0018.8718.24%13.02%
Portfolio 21 Emerging Markets (EME)11.7611.824.88%27.15%
MSCI EME17.9115.636.32%11.84%


Our research efforts continue to identify high quality companies across the globe with strong environmental, social, and governance characteristics and operating fundamentals that we believe will outperform the market and their respective peer set.

New Holdings:  Toyota and Hannon Armstrong Sustainable Infrastructure Capital

Toyota is the world's leading automaker with a full line of brands, including Toyota, Lexus, and Scion, and subsidiaries Daihatsu and Hino. It had an 11% global auto market share in 2012 and was 3rd in the U.S.  Toyota is a world leader in hybrid technologies and other strengths include productivity and quality, resulting from its industry leading production system. The founding family has a strong presence in management, President Akio Toyoda is third generation.

After going through some hard times, we believe Toyota is in the midst of a comeback.  The financial crisis of 2008-09 was exacerbated by the company’s own recall crisis in 2009-10.  The resurgence of Detroit’s Big Three added to Toyota’s woes.  After these hits to its market share and reputation, the company has taken steps repair the damage and emerge a stronger company:

  • Created a Quality Committee in 2010 to collect and address customer concerns
  • Established the Toyota New Global Architecture to increase production efficiency by using more standard parts and using them across multiple vehicles
  • Continued to invest heavily in research and development through down times
  • Worked on managing fixed costs, including right sizing domestic vs. foreign production

Toyota also retains some competitive advantages over its peer set:

  • The Toyota Production System is still the industry standard
  • The quality of its vehicles allows it to sell with less incentives
  • Toyota still has lower legacy retirement and health costs than The Big Three
  • Continues to be the leader in electric hybrid vehicles

As Toyota rebounds, competition intensifies.  The quality gap that existed between Toyota and the American brands has narrowed considerably.  The rise of Hyundai has squeezed sales in Asia, while the emergence of Tesla has upped the bar for next-generation alternative vehicles.

Toyota’s stock currently trades in-line with the sector on a P/E and P/B basis, despite having well above median margins and return measures.  The company’s strong balance sheet continues to be a source of strength.

In the short term, continued weakening of the yen is a huge boon to Toyota’s earnings.  Its reputational comeback is also a positive.  There is also hope that the company will return some of its large cash pile to investors through dividends or buybacks.  Balancing the positives will be continuation of the restructuring, with capital investment in capacity, new models, and powertrains weighing on margins for the next couple of years.

Toyota is dedicated to developing next-generation vehicle technologies, such as plug-in hybrid, electric, and fuel cell.  Toyota is the world’s biggest hybrid vehicle company by sales.  On a cumulative basis, since Toyota’s first hybrid sale in Japan in 1997 through the end of March 2013, Toyota has sold five million hybrid vehicles.  In 2012, 14% of Toyota’s global vehicle sales were hybrids.  In Japan, hybrid vehicles accounted for 40% of the company’s country sales.  As of May 2013, Toyota had 20 commercialized hybrid vehicles and plans for the launch of 19 new and fully redesigned models between 2013 and 2015.  Despite Toyota’s market dominance in hybrids, the majority of the company’s fleet offerings continue to be combustion engine vehicles.  As a result, it is imperative that Toyota continue to improve the fuel economy of these vehicles.    From a 2005 baseline, Toyota intends to improve its global average by 25% by 2015.

Over the longer term, Toyota’s focus on efficiency and durability should provide an edge in emerging markets.  The company is working to localize production in emerging markets across the world, while developing new models tailored to these markets.  In developed markets, sales should be in line with the industry, while continued cost reductions, coupled with the superior quality and features of its products, should allow margins to expand.

Hannon Armstrong Sustainable Infrastructure Capital (HASI) is a growth and yield play on the U.S. sustainable infrastructure investment.  HASI operates as a Real Estate Investment Trust (REIT), making debt and equity investments in sustainable infrastructure projects.  The company focuses on profitable projects that increase energy efficiency, provide cleaner energy, positively affect the environment, or make more efficient use of natural resources.  Typical obligors include U.S. federal, state, and local governments, high credit quality institutions, and utilities.  The company has arranged about $4 billion in financing for more than 450 transactions since 2000 and currently has around $1.7 billion in assets under management.

HASI is well positioned for growth given the substantial infrastructure financing needs expected ahead.  Estimates call for $3.6 trillion of U.S. infrastructure investment needed by 2020.  The U.S. Department of Energy forecasts the market for energy services infrastructure to double or triple in size by the end of this decade.  HASI has an established network of loan sourcing and financing providers to grow its portfolio of high quality assets.

HASI’s business model is evolving to a fully integrated lending and advisory platform for sustainable projects from a securitization/syndication platform.  The April initial public offering proceeds have enabled HASI to move beyond the U.S. federal government, where HASI has 50% market share, and expand its distribution channel to states, municipals, and corporates.  A secondary offering is likely within the next year to fund continued growth.

HASI’s earnings are driven by a combination of net interest income on its portfolio, plus gains and fees associated with loan sales/syndication activities and loan servicing.  Noninterest expenses will be driven by direct compensation expenses and other direct costs related to origination and servicing activities.  We expect HASI to grow lending volumes over the next several years as it expands lending capacity and end-demand for clean energy finance develops further.  HASI can achieve further operating leverage as it expands its balance sheet, enhancing its return on equity potential over the next few years.

HASI’s portfolio is concentrated in high credit quality assets with contractually committed cash flows, which minimizes credit risk, although penetration into the corporate sector will increase it somewhat. Management is capable of managing risk in this regard, as well as managing interest rate risk.  In fact, management has indicated that it thrives in a volatile interest rate environment, so long as credit is priced appropriately.

HASI has an experienced management team with 20 years of experience in the sustainable infrastructure business.  Management’s interests are aligned with shareholders; management holds a 10% stake in the company.

If HASI continues to post solid portfolio growth, strong securitization/syndication fee income, and expands its footprint into the private sector and developer market, we believe investors will take notice.

Fund Companies:  Select Leaders and Laggards

U.S. transportation and logistics company Ryder System gained 24% in the fourth quarter and 50% for the full-year 2013 on steadily improving lease demand, firm rental activity, and margin tailwinds from lower maintenance and depreciation. A new share repurchase program announced in December provided an additional boost. Looking forward, we believe Ryder is well positioned to benefit from an increase in lease writing activity based on aging fleet demographics, improved macro conditions, increased equipment costs and reduced availability of late model used equipment. Ryder’s environmental, social, and governance initiatives also continue to impress. The company has received accolades from the Women’s Forum of New York for its diversity efforts and was named a 2013 Green Supply Chain Award winner by Supply & Demand Chain Executive. The company was honored with a U.S. Environmental Protection Agency SmartWay® Excellence Award in the Logistics Management, Large Carrier category as a true industry leader in freight supply chain environmental performance and energy efficiency.

Japan’s second-largest wireless carrier, KDDI, appreciated 28% to a 13-year high during the fourth quarter after it announced expectations that operating earnings will rise more than 10% next fiscal year and that average revenue per user, a key measure of customer spending, would increase this fiscal year after a period of decline. The company, which continues to trade at a lower P/E multiple than competitor SoftBank, is tapping into demand for iPhones to drive sales as customers shift away from older handsets. KDDI is also working to reduce its environmental impact. In its energy consuming base stations the company has begun to employ tri-brid electric power control technology, which combines solar power generation, accumulator batteries, and grid power. The solar electricity generated during the day is used to power the base stations at night. This technology has cut annual carbon dioxide emissions by as much as 30% compared with conventional base stations. KDDI formulates a medium-term environmental plan for its operations every 5 years and establishes reduction targets for power consumption and goals to increase recycling and preserve biodiversity.

Shares of French food and beverage company Danone had a tough quarter and declined 7%. Results were hit hard by currency impacts and issues in the baby food division. Danone was forced to recall some baby food products and, even though the products in question turned out to be safe, the company’s sales and reputation took a hit. This comes on the heels of price-fixing allegations by Chinese officials that impacted pricing in the Chinese baby nutrition market. Despite these headwinds, Danone’s future prospects look bright. Its continued focus on healthy foods and reputation for fresh, quality products should allow the company to grow faster than its markets while its recent stock price decline makes its valuation very attractive versus larger peers such as Nestle.

Belgium’s Umicore, the world’s leading recycler of precious metals, saw shares decline 5% in the fourth quarter, leaving them down 20% for the year. Precious and specialty metal prices continued their downward trend, which made it hard for the company to get any earnings traction. The company’s heavy exposure to Europe has also been a drag on performance. However, despite the tough times, the company continues to invest heavily for the long term. Umicore is one of the world’s largest metal recyclers and retains a technological advantage in its ability to handle complex feedstocks. A recovery in metal prices, combined with exposure to clean tech growth areas like catalysis, electric vehicles, and fuel cells, should leverage Umicore’s future performance.



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 TOPIX, also known as the Tokyo Stock Price Index, is a capitalization weighted index of all companies listed on the First Section of the Tokyo Stock Exchange.

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.

MSCI Europe Index is an unmanaged index considered representative of stocks of developed European countries.

MSCI Asia Pacific ex Japan is an unmanaged index considered representative of Pacific region stock markets, excluding Japan.

MSCI Emerging Markets Index is an unmanaged index considered representative of stocks of developing countries.

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.

MSCI USA Index is designed to measure the performance of the large and mid cap segments of the US market.

MSCI Japan Index is an unmanaged index considered representative of stocks of Japan.

MSCI Europe Index is an unmanaged index considered representative of stocks of Europe.

MSCI EAFE Index is an unmanaged index considered representative of stocks of Europe, Australasia and the Far East.

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 (EPS) is calculated by taking the total earnings divided by the number of shares outstanding.  EPS Growth and Earnings Growth are not forecasts 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.

The Price to Book (P/B) ratio is a financial ratio used to compare a company's current market price to its book value.

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.

EBITDA is intended to indicate the current operational profitability of a business. It is created by considering a company's earnings before interest payments, tax, depreciation, and amortization are subtracted for any final accounting of its income and expenses.

The Fund is distributed by Quasar Distributors, LLC.


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