Q&A with Pax Chief Investment Officer Steve Falci, CFA® on the Pax Balanced Fund
Launched in 1971, the Pax Balanced Fund was the first socially responsible mutual fund in the U.S. Today, the Fund is a multi-asset ESG strategy that utilizes a dynamic, risk-focused asset allocation approach and diversifies across a broad range of Pax funds. In this Q&A, CIO Steve Falci, CFA®, shares his views on the Fund’s innovation, impact and its distinctive characteristics.
Q: With a 45+ year history, how has the Pax Balanced Fund adapted as sustainable investing and financial markets have evolved?
Steve Falci (SF): The Fund’s longevity is really a testament to the idea that investors can seek attractive long-term investment outcomes through a diversified portfolio while also contributing to positive societal outcomes. We have held true to that philosophical tenet and it still resonates today.
Pax’s history of innovation and deep ESG expertise has helped the Fund remain at the forefront of sustainable investing. Over the years, the Fund’s strategy has been refined to keep pace with financial market developments and sustainable investor preferences. More recently, over the last five years, we have taken steps to bolster the asset allocation process, inject more portfolio diversification through new investment strategies and asset class exposures, and deepen the impact that the Fund can offer across a range of sustainability issues.
Q: Can you explain how the Fund creates positive impact? And, are there any notable areas of emphasis?
SF: There are variety of ways in which the Fund seeks to create positive impact for shareholders.
For example, the fixed income portion of the portfolio provides exposure to direct high-impact investments such as green bonds and community investment notes that address issues such as climate change and affordable housing. We engage with companies to improve their ESG performance and to make a positive difference on specific issues, such as climate change, board diversity and gender pay equity. The Fund includes thematic strategies that invest in solution-oriented companies that are confronting environmental challenges. Lastly, full ESG integration within each underlying fund results in a bias toward companies with better sustainability profiles. Ultimately, we believe this approach helps drive improved corporate sustainability, which we think is ultimately better for investors and will deliver broader benefits to society as a whole.
Q: Market volatility has spiked recently, how does the Fund navigate various economic climates to meet long-term performance objectives?
SF: We believe asset class and investment strategy diversification allows the Fund to balance risk with reward and seek to deliver steady, long-term returns for investors, particularly in volatile markets. Over nearly a half century the Fund has endured numerous market cycles, economic booms and busts, political upheaval and other trials and tribulations. Since its inception in 1971 (investor share class PAXWX), the Fund has achieved 98% positive performance across five-year periods, as Figure 1 below illustrates.
Asset allocation is a discipline that can have both strategic and tactical elements. While strategic allocations are essential for establishing a strong foundation based on investor risk tolerance, at any point in time in the market or economic cycle, they may not accurately reflect nearer-term risks and opportunities.
To manage these risks, the Fund’s portfolio management team establishes a range of allocations for U.S. Equity, Non- U.S. Equity and Fixed Income asset classes each year that are tied to base, best and worst-case market scenarios. These ranges, anchored around long-term strategic targets, serve as a guidepost as the team evaluates near-term relative valuation, economic data and earnings data and makes adjustments throughout the year to the Balanced Fund’s asset allocation.
Figure 1: The Pax Balanced Fund has achieved consistent positive results over the long-term.
Source: Factset. Past performance does not guarantee future results.
Q: What about the Fund’s more recent results?
SF: We are very pleased with results over the last five years as the Fund has evolved into a multi asset approach with enhanced diversification and focused investment management in the underlying strategies.
Throughout this period, the Fund has outperformed the Morningstar Allocation 50%-70% Equity benchmark over the trailing 1-, 3- and 5-year time periods ending September 30, 2018.1 The Fund has also received a 4-Star Morningstar Rating for the 5-Year period ended November 30, 2018, based on risk-adjusted returns in the Morningstar Allocation 50%-70% Equity category (610 peers).2
Figure 2: For the 5-year period ending 9/30/18, the Pax Balanced Fund’s (PAXIX) risk-focused investment approach has produced better risk-adjusted performance than the peer group average.
Source: Factset. Past performance does not guarantee future results. Please see footnote 1 for standardized returns as of 9/30/2018.
Q: How does the Fund differ from other sustainable investing multi-asset funds?
SF: It can be challenging for other fund providers to construct a multi-asset portfolio with an ESG integration approach that is as cohesive and diverse as the Pax Balanced Fund. The Fund consists of a unique mix of underlying strategies employing the expertise across Impax’s Portsmouth, New Hampshire, and London-based investment teams. ESG is integrated in each strategy while accommodating the unique characteristics and challenges of the individual asset classes and investment processes.
I think this specialist approach is unique, and Impax’s commitment to shareholder engagement through proxy voting, shareholder resolutions and public policy advocacy is difficult to match. Many investors use the fund as a way to access an entire sustainable portfolio — fully diversified, professionally allocated and invested — with a single investment.
Figure 3: The Fund invests in underlying Pax World Funds, providing exposure to a broad range of asset classes, sectors, geographies and sustainable investment strategies.
Learn more about the Pax Balanced Fund.
You should consider a fund’s investment objectives, risks, and charges and expenses carefully before investing. For this and other information, call 800.767.1729 or visit www.paxworld.com for a fund prospectus and read it carefully before investing.
RISKS: Equity investments are subject to market fluctuations, a fund’s share price can fall because of weakness in the broad market, a particular industry, or specific holdings. 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. Investments in high yield bonds generally are subjected to greater price volatility based on fluctuations in issuer and credit quality. When investing in bonds, you are subject, but not limited to, the same interest rate, inflation and credit risks associated with the underlying bonds owned by the Fund. Mortgage-related securities tend to become more sensitive to interest rate changes as interest rates rise, increasing their volatility. Funds that emphasize investments in mid-size and smaller companies generally will experience greater price volatility. Investing in non-diversified funds generally will be more volatile and loss of principal could be greater than investing in more diversified funds. The Pax Global Opportunities Fund is new and has a limited operating history.
Performance shown above does not reflect the effects of any sales charges. Note that returns of 0.00% are counted as positive periods.
1As of 9/30/18 the returns for the Pax Balanced Fund Investor Class (PAXWX) were: 1 year: 8.40%, 3 year: 9.27, 5 year: 7.17%, 10 year: 6.80%, Since Inception (08/10/1971): 8.32%.
As of 9/30/18 the returns for the Pax Balanced Fund Institutional (PAXIX) were: 1 year: 8.73%, 3 year: 9.55, 5 year: 7.44%, 10 year: 7.06%, Since Inception (06/2/2007): 8.39%.
As of 9/30/18 the returns for the 60% S&P 500 Index / 40% Bloomberg Barclays U.S. Aggregate Bond Index were: 1 year: 8.40%, 3 year: 9.27%, 5 year: 7.17%, 10 year: 6.80%.
As of 9/30/18 the returns for the Morningstar Allocation–50% to 70% Equity were: 1 year: 6.75%, 3 year: 8.80%, 5 year: 6.67, 10 year: 7.58%.
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. For most recent month-end performance information visit www.paxworld.com.
Diversification does not eliminate the risk of experiencing investment losses.
Inception of Institutional Class shares is April 2, 2007. The performance information shown for Institutional Class shares represents the performance of the 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. Institutional Class Inception date return since April 2, 2007, is 4.88 (annualized).
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.)
2The Morningstar Ratings™ shown are as of 11/30/18. The Pax Balanced Fund – Institutional (PAXIX) Morningstar ratings were 3 stars out of 697 funds overall, 3 stars out of 697 funds for 3-years, 4 stars out of 610 funds for 5-years, 3 stars out of 443 funds for 10-years. The ratings for other Balanced Fund share classes may differ. The Morningstar Rating for funds, or ‘star rating’, is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product’s monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-and ten-year (if applicable) Morningstar Rating metrics. The weights are 100% three-year rating for 36-59 months of total returns, 60% five-year rating, 40% three-year rating for 60-119 months of total returns, and 50% ten-year rating, 30% five-year rating, 20% three-year rating for 120 or more months of total returns. While the ten-year overall rating formula seems to give the most weight to the ten-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods.
3Sharpe ratio determines a risk-adjusted return using standard deviation; a high Sharpe ratio indicates greater return per unit of risk and demonstrates if performance was based on smart investments or on excess risk.
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.