Strategy Commentary | All Cap Core Q1 | March 2021
All Cap Core
The All Cap Core strategy generated a return of 5.5% net of fees, for Trading in the first quarter sought to align the portfolio with the quarter ended March 31, 2021, compared to the benchmark S&P changing expectations. Overall, the trades marginally lowered the 1500 index, which returned 6.9% during the same period. At market cap by investing in a few companies with solid long term quarter-end, the portfolio contained 72 stocks, representing 10 of secular growth drivers, which are also slightly more levered to an the 11 economic sectors comprising the benchmark S&P 1500 index, economy reopening for business after Covid closures. This was all except traditional Energy. While we slightly shifted our funded in part by slightly reducing the portfolio’s large overweight positioning during the quarter, as described below, the portfolio exposure to Information Technology. In particular, we reduced remained, on average during the quarter, most underweight in exposure to semiconductors and semiconductor capital equipment, Communication Services (-2.6% on average) and Energy (-2.6%, as which have performed particularly strongly in recent months, by the strategy did not own Energy) and most overweight in selling chip manufacturer Analog Devices and by trimming Technology (4.7% on average) and Utilities (0.9%), both of which semiconductor capital equipment manufacturer ASML Holding; and included exposure to renewable energy. by taking profits from payments processor PayPal. Within Technology, we introduced a new positon in outsourced human The first quarter continued on the fourth quarter’s reversal of the resources and payroll software company Paycom Software, which Covid-19 inflicted damage in the stock market. While “reopening” we believe is particularly attractive to growing small and medium was the general theme in both quarters, in the first quarter much of sized businesses. In Industrials, we initiated a position in the activity seemed to indiscriminately reward companies that had environmental consulting firm Tetra Tech Inc., which has leading suffered earlier. Small caps greatly outperformed mid caps, which practices in water management and cleanup, and a growing practice were stronger than large caps. Value outperformed growth, as in renewable energy development. In Financials, we closed our investors sought companies showing steep near term growth, positon in investment services provider Bank of New York Mellon, rather than steadier long term growth. The Energy sector was and reinvested in LPL Financial Holdings, which provides brokerage nearly 10% stronger than the second place finisher Financials, as and advisory services to independent financial advisors. investors favored the economically sensitive sectors. While the size divergence was present all quarter, the growth/value dichotomy was Sector allocation was the driver of underperformance for the particularly strong for several weeks mid-quarter. This type of quarter. Energy was the strongest performing sector in the extremely volatile, hyper cyclical market typically does not favor our benchmark, while this portfolio has no exposure to traditional fossil quality-centered, long term investment style and we view the fuel energy. quarterly performance as in-line with those expectations. >> Continued
Top 5 Contributors (%) Average Portfolio Relative Weight Return Contribution 0.35%0.35% ASML Holding NV ADR 1.72 26.58 0.32 0.30%0.30% Alphabet Inc. Class A 4.92 17.68 0.31 0.25%0.25% 0.20%0.20% SVB Financial Group 2.04 27.29 0.31 0.15%0.15% NXP Semiconductors NV 1.43 27.01 0.26 0.10%0.10% 0.05%0.05% Apple Inc. 4.05 -7.81 0.26 0.00%0.00%
Top 5 Detractors (%) Average Portfolio Relative Weight Return Contribution 0.00%0.00% First Solar, Inc. 1.36 -11.75 -0.27 -0.05%-0.05% Palo Alto Networks, Inc. 1.50 -9.38 -0.24 -0.10%-0.10% -0.15%-0.15% LHC Group, Inc. 1.22 -10.36 -0.21 -0.20%-0.20% Lululemon Athletica Inc 1.10 -11.87 -0.21 -0.25%-0.25% ANSYS, Inc. 1.43 -6.66 -0.18 -0.30%-0.30%
This information is not intended as investment advice or a recommendation to purchase or sell specific securities. Sector and stock performance included in portfolio commentary reflects a representative account as of 03/31/2021 and excludes cash. Actual holdings will vary for each client and there is no guarantee that a particular client’s account will hold any or all of the securities/sectors listed. Additional information regarding the calculation methodology, as well as each holding’s contribution to the strategy’s performance is available on request.
Boston | San Francisco | Portland www.trilliuminvest.com Strategy Commentary | All Cap Core Q1 | March 2021
In addition, Information Technology, after leading the market for move triggered our trim of exposure to the group, including top much of the last decade, was the second-worst performing sector in contributor ASML Holding (+26.6% during the quarter). Strong the benchmark, losing ground as the market rotated to value. While earnings and increased capital spending announcements by major reduced during the quarter, this portfolio has a large overweight to semiconductor companies added to the positive sentiment for the Technology, which was detractive. company and its peers. Alphabet (+17.7%) had solid quarterly earnings, driven by a rebound in digital advertising revenues. High Stock selection was also detractive during the quarter. Selection was quality, California-based SVB Financial Group (+27.3%) benefitted weakest in Consumer Staples, where companies such as spice and from investor preference for interest rate sensitive financial flavoring producer McCormick & Company and retailer Costco, which companies. NXP Semiconductors (+27.0%) benefitted from investor had outperformed during the lockdowns, underperformed during the demand for semiconductors, as well as strong fourth quarter opening. This was somewhat offset by positive selection in performance due to tight inventory supplies, coupled with strong Communications Services. demand for components necessary for electric vehicle (EV) During the quarter, many underperforming stocks were the victims of production. Apple (-7.8% during the quarter), is an underweight the market rotation, as investors moved away from high growth position in the portfolio, so was a relative top contributor as concerns stocks, rather than specific events or disappointing operating or over consumer spending created uncertainty over pricing and gross financial performance. This was generally true of the portfolio's margins at the company. biggest detractor during the quarter, solar PV manufacturer First For many, 2020 was a year we will never forget, no matter how hard Solar (-11.8% during the quarter). The company itself reported a we try. 2021 is presenting new opportunities, as economies and somewhat underwhelming quarter, with slippage of a large project, as societies reopen. As we noted above, investors are quickly modifying is common; an announcement of the sale of the project division; and outlooks and positioning, as prospects for growth are increasing. We in-line to modestly disappointing guidance. However, after very believe that with the expectations for growth now baked in to strong performance in the second half of 2020, the stock prices of valuations, the initial, volatile phase of the market rotation may be many renewable energy companies globally retreated during the first over. At the same time, there are real changes afoot in the quarter, as fears of a bubble took hold. A similar dynamic was in governance of this country, as the federal government begins the effect for cyber security company Palo Alto Networks (-9.4% during process of tackling the intersectional crises of climate change, structural the quarter), which underperformed during the quarter despite stellar racism, and wealth inequality. In addition to adding unprecedented earnings results. We continue to view this name as a core holding, amounts of stimulus to the economy, the approved Recovery Act and providing the portfolio with exposure to positive demand trends for proposed Jobs Act point to a future within reach, featuring a cleaner and data security related products and services. Home health care more equitable American economy. We remain committed to our long- provider LHC Group (-10.4% during the quarter) has declined post- term focus and investment in high-quality and sustainability-centered election, after strong earlier performance, due to investors’ concerns companies seeking to meet the challenges of this year of recovery and that a shift in its Medicare patient payer profile could potentially lower transition, and beyond. Our belief in the importance of ESG is its long term Operating Margin profile. We believe these concerns are unabated, as we are convinced more than ever of the importance of overblown and remain optimistic about this company’s long term integrating beyond-financial environmental, social and governance strategy focused on serving the shift in patient provider healthcare concerns into our investment decisions. from the most expensive settings to one’s home. Althleisure apparel retailer Lululemon Athletica (-11.9%) also underperformed in the quarter due to shifting investor preference. Overall sales trends were quite strong, driven by digital, but the company saw pressure on Contact Information operating margins as they contended with lower store traffic due to [email protected] capacity limitations, higher Covid-related costs, and investment in 800-548-5684 recently acquired fitness product Mirror. We believe Lululemon is still in the early innings of its growth trajectory, particularly as it continues Perpetual US Services Co, LLC and Trillium Asset to expand internationally. Management are affiliates under Perpetual Ltd. Australia. Please note this email address is for general inquiry On the upside, several of the top contributors were semiconductor purposes and personal Information should not be provided. related, as the group’s was particularly strong early in the quarter; this
Past performance is no guarantee of future results. Every investment carries the potential for both profit and loss. Returns are presented net of management fees and include the reinvestment of all income.
The S&P Indices are widely recognized, unmanaged indices of common stock. It is not possible to invest directly in an index. The S&P 1500 combines three indices, the S&P 500, the S&P MidCap 400, and the S&P SmallCap 600 to cover approximately 90% of the U.S. market capitalization. Investments in smaller companies generally carry greater risk than is customarily associated with larger companies for various reasons, such as narrower markets, limited financial resources and less liquid stock.
Boston | San Francisco | Portland www.trilliuminvest.com