Strategy Commentary | Fossil Fuel Free Core Q1 | March 2021
Fossil Fuel Core
The Fossil Fuel Free Core strategy generated a return of 5.4% net of quality-centered, long term investment style and we view the fees, for the quarter ended March 31, 2021, compared to the quarterly performance as in-line with those expectations. benchmark S&P 1500 index, which returned 6.9% during the same Trading in the first quarter sought to align the portfolio with period. At quarter-end, the portfolio contained 70 stocks, changing expectations. Overall, the trades marginally lowered the representing 10 of the 11 economic sectors comprising the market cap by investing in a few companies with solid long term benchmark S&P 1500 index, all except traditional Energy. While we secular growth drivers, which are also slightly more levered to an slightly shifted our positioning during the quarter, as described economy reopening for business after Covid closures. This was below, the portfolio remained, on average during the quarter, most funded in part by slightly reducing the portfolio’s large overweight underweight in Communication Services (-1.9% on average) and exposure to Information Technology. In particular, we reduced Energy (-2.6%, as the strategy does not own Energy) and most exposure to semiconductors and semiconductor capital equipment, overweight in Technology (4.7% on average, which includes some which have performed particularly strongly in recent months, by renewable energy exposure) and Consumer Staples (0.7%).] selling chip manufacturer Analog Devices and by trimming The first quarter continued on the fourth quarter’s reversal of the semiconductor capital equipment manufacturer ASML Holding; and Covid-19 inflicted damage in the stock market. While “reopening” by taking profits from payments processor PayPal. Within was the general theme in both quarters, in the first quarter much of Technology, we introduced a new positon in outsourced human the activity seemed to indiscriminately reward companies that had resources and payroll software company Paycom Software, which suffered earlier. Small caps greatly outperformed mid caps, which we believe is particularly attractive to growing small and medium were stronger than large caps. Value outperformed growth, as sized businesses. In Industrials, we initiated a position in investors sought companies showing steep near term growth, environmental consulting firm Tetra Tech Inc., which has leading rather than steadier long term growth. The Energy sector was practices in water management and cleanup, and a growing practice nearly 10% stronger than the second place finisher Financials, as in renewable energy development. In Financials, we closed our investors favored the economically sensitive sectors. While the size positon in investment services provider Bank of New York Mellon, divergence was present all quarter, the growth/value dichotomy was and reinvested in LPL Financial Holdings, which provides brokerage particularly strong for several weeks mid-quarter. This type of and advisory services to independent financial advisors. extremely volatile, hyper cyclical market typically does not favor our >> Continued
Top 5 Contributors (%) Average Portfolio Relative Weight Return Contribution 0.40%0.40% SVB Financial Group 2.14 27.29 0.37 0.35% 0.30%0.30% ASML Holding NV ADR 1.86 26.58 0.34 0.25% Apple Inc. 3.47 -7.81 0.34 0.20%0.20% 0.15% Alphabet Inc. Class A 5.09 17.68 0.32 0.10%0.10% 0.05% NXP Semiconductors NV 1.75 27.01 0.32 0.00%0.00%
Top 5 Detractors (%) Average Portfolio Relative Weight Return Contribution 0.00%0.00% First Solar, Inc. 1.36 -11.75 -0.26 -0.05%-0.05% Lululemon Athletica Inc 1.18 -11.87 -0.22 -0.10%-0.10% -0.15%-0.15% LHC Group, Inc. 1.22 -10.36 -0.21 -0.20%-0.20% Palo Alto Networks, Inc. 1.32 -9.38 -0.21 -0.25%-0.25% ANSYS, Inc. 1.35 -6.66 -0.17 -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 12/31/2020 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 | Fossil Fuel Free Core Q1 | March 2021
Sector allocation was the driver of underperformance for the quarter. products and services. Energy was the strongest performing sector in the benchmark, while On the upside, several of the top contributors benefitted from shifting this portfolio has no exposure to traditional fossil fuel energy. In investor preference in the market rotation. High quality, California- addition, Information Technology, after leading the market for much based SVB Financial Group (+27.3%) benefitted from investor of the last decade, was the second-worst performing sector in the preference for interest rate sensitive financial companies. benchmark, losing ground as the market rotated to value. While Semiconductors were in favor, as evidenced by the group’s reduced during the quarter, this portfolio has a large overweight to particularly strong performance early in the quarter; this move Technology, which was detractive. triggered our trim of exposure to the group, including ASML Holding Stock selection was also detractive during the quarter. Selection was (+26.6% during the quarter). Strong earnings and increased capital weakest in Consumer Staples, where companies such as spice and spending announcements by major semiconductor companies added flavoring producer McCormick & Company and retailer Costco, which to the positive sentiment for the company and its peers. Apple (- had outperformed during the lockdowns, underperformed during the 7.8% during the quarter), is an underweight position in the portfolio, opening. This was somewhat offset by positive selection in so was a relative top contributor as concerns over consumer spending Communications Services and Financials. created uncertainty over pricing and gross margins at the company. Alphabet (+17.7%) had solid quarterly earnings, driven by a rebound in During the quarter, many underperforming stocks were the victims of digital advertising revenues. the market rotation, as investors moved away from high growth stocks, rather than specific events or disappointing operating or financial For many, 2020 was a year we will never forget, no matter how hard we performance. This was generally true of the portfolio's biggest try. 2021 is presenting new opportunities, as economies and societies detractor during the quarter, solar PV manufacturer First Solar (-11.8% reopen. As we noted above, investors are quickly modifying outlooks during the quarter). The company itself reported a somewhat and positioning, as prospects for growth are increasing. We believe that underwhelming quarter, with slippage of a large project, as is common; with the expectations for growth now baked in to valuations, the initial, an announcement of the sale of the project division; and in-line to volatile phase of the market rotation may be over. At the same time, modestly disappointing guidance. However, after very strong there are real changes afoot in the governance of this country, as the performance in the second half of 2020, the stock prices of many federal government begins the process of tackling the intersectional renewable energy companies globally retreated during the first quarter, crises of climate change, structural racism, and wealth inequality. In as fears of a bubble took hold. Althleisure apparel retailer Lululemon addition to adding unprecedented amounts of stimulus to the Athletica (-11.9%) also underperformed in the quarter due to shifting economy, the approved Recovery Act and proposed Jobs Act point to a investor preference. Overall sales trends were quite strong, driven by future within reach, featuring a cleaner and more equitable American digital, but the company saw pressure on operating margins as they economy. We remain committed to our long-term focus and contended with lower store traffic due to capacity limitations, higher investment in high-quality and sustainability-centered companies Covid-related costs, and investment in recently acquired fitness product seeking to meet the challenges of this year of recovery and transition, Mirror. We believe Lululemon is still in the early innings of its growth and beyond. Our belief in the importance of ESG is unabated, as we are trajectory, particularly as it continues to expand internationally. Home convinced more than ever of the importance of integrating beyond- health care provider LHC Group (-10.4% during the quarter) has financial environmental, social and governance concerns into our declined post-election, after strong earlier performance, due to investment decisions. investors’ concerns that a shift in its Medicare patient payer profile could potentially lower its long term Operating Margin profile. We believe these concerns are overblown and remain optimistic about this Contact Information company’s long term strategy focused on serving the shift in patient provider healthcare from the most expensive settings to one’s home. [email protected] Cyber security company Palo Alto Networks (-9.4% during the quarter) 800-548-5684 also underperformed during the quarter despite stellar earnings results. Perpetual US Services Co, LLC and Trillium Asset We continue to view this name as a core holding, providing the portfolio Management are affiliates under Perpetual Ltd. Australia. with exposure to positive demand trends for data security related Please note this email address is for general inquiry Past performance is no guarantee of future results. Every investment carries the purposes and personal Information should not be provided. 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