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Pax Balanced Fund Commentary Q4 2018

By Nathan Moser, CFA®, Andrew Braun, Anthony Trzcinka, CFA® and Peter Schwab, CFA® | January 22, 2019
Categories
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  • Commentary
  • Pax Balanced Fund Commentary
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  • Balanced Fund Commentary
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Performance and Portfolio Update

  • The Pax Balanced Fund underperformed its benchmark (60% S&P500/40% Bloomberg Barclays US Aggregate Bond Index) in the fourth quarter but outperformed its Morningstar Allocation 50%-70% Equity peer group index which is representative of multi-asset funds with similar risk and asset allocation objectives.
  • Equity markets sold off significantly in the fourth quarter, with the S&P 500 Index† down -13.52%, as investors reacted to concerns about the onset of the next recession, rising interest rates, disruptions from trade/tariffs and the prospect of slowing earnings growth in 2019. Non-U.S. developed market stocks also were off significantly, with the MSCI EAFE Index‡ down -12.54%, but in a reversal of recent results, they modestly outperformed U.S. equities primarily due to a stronger December. Bonds delivered a positive return as the Bloomberg Barclays US Aggregate rose 1.64%.
  • The allocation to the Pax Large Cap Fund was the largest detractor to performance. After delivering strong performance through the third quarter, the Large Cap Fund’s cyclical holdings were particularly hard hit during the market downturn as fears of higher interest rates and recession weighed on multiples. The Pax MSCI EAFE ESG Leaders Index Fund and Pax ESG Beta Dividend Fund were positive contributors, as was the modest allocation to cash.
  • The Fund’s equity allocation was reduced early in the quarter and remains modestly below its 60% neutral target. The fixed income allocation remains in line with its 40% target, with the Fund maintaining a modest, transitional allocation to cash. The fourth quarter decline in the market brought equity prices to more attractive valuation levels, both relative to its own history and investment grade bonds, particularly with the 10-year Treasury closing the year at a yield of 2.69%. Amid this volatility, we are continually assessing whether current valuations across asset classes fully reflect a myriad of risks or if recent volatility has overly discounted these risks.
  • The Pax Balanced Fund Institutional Class ranked in the 22nd percentile in the Morningstar 50%-70% Equity peer group for the one-year period ended 12/31/18. We believe the Fund’s 28th percentile ranking for the five-year period ended 12/31/2018 is reflective of both its strong performance and risk management.*
  • *Rankings in other time periods may be lower. Comparison based on the Morningstar 50%-70% Equity peer group for the period ending 12/31/18. The Pax Balanced Fund’s Institutional Class performance for the 1-year period ranked 157 out of 775 (22nd percentile), for the 3-year period ranked 283 out of 697 (42nd percentile), for the 5-year period ranked 163 out of 610 (28th percentile), and for the 10-year period 240 out of 440 (55th percentile). The Pax Balanced Fund’s Investor Class performance for the 1-year period ranked 186 out of 775 (25th percentile), for the 3-year period ranked 364 out of 697 (52nd percentile), for the 5-year period ranked 210 out of 610 (34th percentile), and for the 10-year period 276 out of 440 (63rd percentile).

Performance

(as of 12/31/18)
1-MonthQuarterYTD1 Year3 Year5 Year10 YearSince Inception1
Balanced Fund - Investor Class-4.45-8.15-4.08-4.084.724.297.858.08
Balanced Fund - Institutional Class-4.42-8.14-3.85-3.854.984.548.128.15
S&P 500 Index-9.03-13.52-4.38-4.389.268.4913.12
60% S&P 500 Index / 40% Bloomberg Barclays U.S. Aggregate Bond Index-4.68-7.56-2.35-2.356.506.249.42
Morningstar Allocation--50% to 70% Equity-4.94-8.64-5.76-5.764.713.678.33

Performance data quoted represent past performance, which does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. To obtain performance for the most recent month-end, call 800.767.1729 or visit paxworld.com

Figures include reinvested dividends, capital gains distributions and changes in principal value.

1The inception date for the Pax Balanced Fund Institutional Class is April 2, 2007, and the Investor Class inception date is August 10, 1971. The performance information shown for Institutional Class shares includes the performance of Investor Class shares for the period prior to Institutional Class inception. Expenses have not been adjusted to reflect the expenses allocable to Institutional Class shares. If such expenses were reflected, the returns would be higher than those shown.

As of the 5/1/2018 prospectus, the Pax Balanced Fund All-In Gross expense ratio includes indirect expenses (Acquired Fund Fees and Expenses “AFFE”) of 0.61%. AFFE are fees and expenses charged by their investment companies in which the Fund invests a portion of its assets and are not direct costs paid by Fund shareholders. The All-In Gross expense ratio for Institutional Class and the Individual Investor Class shares are 0.66% and 0.91%, respectively. Pax Balanced Fund expense ratios, excluding indirect AFFE, are 0.05% and 0.30% for Institutional Class and Individual Investor Class shares, respectively. The management fee is a unified fee that includes all of the operating costs and expenses of the Fund (other than taxes, charges of governmental agencies, interest, brokerage commissions incurred in connection with portfolio transactions, distribution and/or service fees payable under a plan pursuant to Rule 12b-1 under the Investment Company Act of 1940 and extraordinary expenses), including accounting expenses, administrator, transfer agent and custodian fees, Fund legal fees and other expenses. (For this purpose, Impax Asset Management LLC does not consider acquired fund fees and expenses to be operating costs and expenses of the Fund.)

Asset Allocation

Relative Contribution (%)
 

Past performance is no guarantee of future results.
XThe Inception date of the Pax Large Cap Fund, Pax ESG Beta Dividend Fund and Pax Core Bond Fund is December 16, 2016. The Inception date of the Pax Global Opportunities Fund is June 27, 2018.

Asset Allocation (%)

(as of 12/31/18)
Fund
Equity57.5
Pax Large Cap Fund34.8
Pax ESG Beta® Dividend Fund6.8
Pax Mid Cap Fund6.1
Pax Global Opportunities Fund1.4
Pax Global Environmental Markets Fund0.9
Pax MSCI EAFE ESG Leaders Index Fund7.5
Fixed Income40.2
Pax Core Bond Fund40.2
Cash & Other2.3
Total100.0


Top 10 Equity Holdings

(as of 12/31/18)
Microsoft Corp. 2.1%, Amazon.com, Inc. 1.9%, Apple, Inc. 1.5%, Ingersoll-Rand PLC 1.2%, JPMorgan Chase & Co. 1.2%, Waste Management, Inc. 1.2%, IBM 1.1%, Eli Lilly & Co. 1.1%, Merck & Co., Inc. 1.1% and Alphabet, Inc., Class A 1.1%. Holdings are subject to change.

Definitions

†Standard & Poor’s 500 Stock Index is an unmanaged index of large capitalization common stocks.
‡The MSCI EAFE (Europe, Australasia, Far East) Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of the following 21 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom. Performance for the MSCI EAFE Index is shown “net,” which includes dividend reinvestments after deduction of foreign withholding tax. One cannot invest directly in an index.

©2019 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Morningstar, Inc. is an independent investment research firm that compiles and analyzes fund, stock and general market data.

The statements and opinions expressed are those of the authors as of the date of this report. All information is historical and not indicative of future results and subject to change. This information is not a recommendation to buy or sell any security. Past performance does not guarantee future results.

PAX008406 (4/19)

Nathan Moser, CFA®
Nathan Moser, CFA®
Nathan Moser is Senior Vice President and Portfolio Manager of the Pax Small Cap Fund and the Pax Mid Cap Fund. Nathan is also a member of the portfolio management team for the Pax Balanced Fund. CFA® is a trademark owned by the CFA Institute.
Andrew Braun
Andrew Braun
Andrew Braun is a Portfolio Manager of the Pax Large Cap Fund and a member of the Pax Balanced Fund portfolio management team. Andy joined the firm in 2017.
Anthony Trzcinka, CFA®
Anthony Trzcinka, CFA®
Anthony Trzcinka, CFA® is Senior Vice President and Portfolio Manager of the Pax Core Bond Fund. He is also a member of the portfolio management team of the Pax Balanced Fund. CFA® is a trademark owned by the CFA Institute.
Peter Schwab, CFA®
Peter Schwab, CFA®
Peter Schwab, CFA® is Senior Vice President and Portfolio Manager of the Pax High Yield Bond Fund. Peter is also a member of the portfolio management team of the Pax Balanced Fund. Prior to joining the firm in 2015, he was a Managing Director on the High Yield Bond and Loan Team at Goldman Sachs Asset Management. Peter joined Goldman Sachs Asset Management as a Senior Sector Analyst in 2000 and was promoted to Director of High Yield Research in 2010. CFA® is a trademark owned by the CFA Institute. Peter Schwab is a registered representative of ALPS Distributors, Inc.

Funds

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  • Pax ESG Beta Quality Fund
  • Pax ESG Beta Dividend Fund
  • Pax Global Opportunities Fund
  • Pax Global Environmental Markets Fund
  • Pax Ellevate Global Women’s Leadership Fund
  • Pax MSCI EAFE ESG Leaders Index Fund
  • Pax Core Bond Fund
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Impax Asset Management LLC, formerly Pax World Management LLC, is investment adviser to Pax World Funds.

You should always consider Pax World Funds' investment objectives, risks, and charges and expenses carefully before investing. For this and other important information, please download a fund prospectus. Please read it carefully before investing.

Investments involve risk, including potential loss of principal.

Balanced Fund Footnotes and Disclosures

Holdings are subject to change.

Risks

The Pax Balanced Fund is a fund-of-funds. The funds’ allocations may change due to market fluctuations and other factors. Equity investments are subject to market fluctuations, the fund’s share price can fall because of weakness in the broad market, a particular industry, or specific holdings. Yield and share price will vary with changes in interest rates and market conditions. Investors should note that if interest rates rise significantly from current levels, bond fund total returns will decline and may even turn negative in the short term. Mortgage related securities tend to become more sensitive to interest rate changes as interest rates rise, increasing their volatility. There is also a chance that some of the fund’s holdings may have their credit rating downgraded or may default. Investments in smaller companies generally will experience greater price volatility. Emerging market and international investments involve risk of capital loss from unfavorable fluctuations in currency values, differences in generally accepted accounting principles, economic or political instability in other nations or increased volatility and lower trading volume.

1About Inception Date

Inception of Institutional Class shares is April 2, 2007. The performance information shown for Institutional Class shares includes the performance of Individual Investor Class shares for the period prior to Institutional Class inception. Expenses have not been adjusted to reflect the expenses allocable to Institutional Class shares. If such expenses were reflected, the returns would be higher than those shown.

About Expenses

As of the 5/1/2018 prospectus, the Pax Balanced Fund All-In Gross expense ratio includes indirect expenses (Acquired Fund Fees and Expenses "AFFE") of 0.61%. AFFE are fees and expenses charged by their investment companies in which the Fund invests a portion of its assets and are not direct costs paid by Fund shareholders. The All-In Gross expense ratio for Institutional Class and the Individual Investor Class shares are 0.66% and 0.91%, respectively. Pax Balanced Fund expense ratios, excluding indirect AFFE, are 0.05% and 0.30% for Institutional Class and Individual Investor Class shares, respectively. The management fee is a unified fee that includes all of the operating costs and expenses of the Fund (other than taxes, charges of governmental agencies, interest, brokerage commissions incurred in connection with portfolio transactions, distribution and/or service fees payable under a plan pursuant to Rule 12b-1 under the Investment Company Act of 1940 and extraordinary expenses), including accounting expenses, administrator, transfer agent and custodian fees, Fund legal fees and other expenses. (For this purpose, Impax Asset Management LLC does not consider acquired fund fees and expenses to be operating costs and expenses of the Fund.)

About the Indexes

The Blended Index is comprised of 60% S&P 500 Index and 40% Bloomberg Barclays U.S. Aggregate Bond Index. The S&P 500 Index is an unmanaged index of large capitalization common stocks. The Bloomberg Barclays U.S. Aggregate Bond Index represents securities that are U.S. domestic, taxable and dollar denominated. The index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities and asset-backed securities.

Morningstar Allocation 50% to 70% Equity portfolios seek to provide both capital appreciation and income by investing in three major areas: stocks, bonds and cash. These portfolios tend to hold larger positions in stocks than conservative-allocation portfolios. These portfolios typically have 50% to 70% of assets in equities and the remainder in fixed income and cash.

One cannot invest directly in an index.

Fund Changes

On February 23, 2017, the Board of Trustees of Pax World Funds Series Trust I voted to close the Class R shares of the Pax World Funds as of May 1, 2017. On May 1, 2017 all Class R shares were automatically converted into Individual Investor Class shares of the same Fund.

On December 12, 2016, the Pax Balanced Fund converted to a fund of funds asset allocation structure. The Fund continues to have the same investment objective, portfolio management team, strategic asset allocation and expenses; however, now the Fund’s asset allocation components are fully invested in Pax World Funds rather than a combination of individual securities and mutual funds.

CFA® is a trademark owned by the CFA Institute.

© 2019 Impax Asset Management LLC. All rights reserved.
Pax World Funds are distributed by ALPS Distributors, Inc. ALPS Distributors is not affiliated with Impax Asset Management LLC.