Q&A with Portfolio Manager Andrew Braun and Co-Portfolio Manager Barbara Browning
Andrew Braun and Barbara Browning joined the Pax World team as Portfolio Manager and Co-Portfolio Manager respectively of the Pax Large Cap Fund in September 2017. In this interview, Mr. Braun and Ms. Browning discuss their investment strategy, sustainable investing and their views on the market.
Q: What are the attributes that make the Pax Large Cap Fund distinctive?
Andrew Braun (AB): We feel there are three core aspects of our strategy which help set the Fund apart from peers. First, we construct the portfolio to maximize alpha from stock selection, as opposed to relying on sector bets. Second, the portfolio is highly curated into 40 to 60 stocks that we believe are some of the best-managed companies in the U.S. This portfolio concentration enables us to know our companies well and emphasize our best ideas. Third, our proprietary Pax Sustainability Score is fully integrated into our stock selection and portfolio construction, adding true environmental, social and governance (ESG) intentionality to the portfolio, which we believe helps enhance alpha and reduce long-term risk.
Q: What are some of the specific things you are looking for in a company?
Barbara Browning (BB): We generally look for companies with one or more catalysts that we believe will lead to either an increase in profitability or revaluation over a 12- to 18-month time frame. A catalyst can come in the form of an improvement in the company’s operating environment, a change in management, a new product cycle, or enhanced capital allocation.
Over a longer time horizon, we want to be invested in companies that are positioned to benefit from the transition to a more sustainable global economy. Companies with strong sustainability attributes are not only better equipped to reduce risks but are also often focused on fast growing products and services that are transforming their respective sectors and industries.
Q: Can you provide details on how you incorporate ESG issues into the investment strategy?
BB: We prioritize research towards companies with proprietary Pax ESG scores in the top half of the Russell 1000 Index and seek to maintain an average portfolio score of 7 or above on a 1 to 10 scale. From a thematic standpoint, we also look favorably on companies that focus on such issues as energy efficiency, water quality solutions, and gender equality.
On an ongoing basis, we monitor the ESG scores of the companies in the portfolio, and we want to see stable to improving scores for the majority of the portfolio. Companies with deteriorating ESG scores are placed on a watch list and monitored closely, while companies that score in the bottom quartile are sold from the portfolio.
Q: Can you provide examples of the way sustainability risks can translate into compelling investment opportunities?
AB: We think heating, ventilation, and air conditioning (HVAC) system providers are a compelling investment opportunity over the next few years. Half of all greenhouse gases are emitted by buildings, so advances in HVAC systems are critical to effectively managing global warming. In addition, 80-90% of the cost of an HVAC system is from its energy use. Manufacturers producing more energy-efficient systems have an opportunity to gain market share and drive cost benefits for customers.
Another notable example is the electrification of vehicles and movement toward autonomous driving. The electrification of vehicles reduces emissions and reliance on oil, while growth of autonomous vehicles has the potential to reduce the number of vehicles on the road through ride sharing and fleet sales. As the auto industry transitions over the next decade, the suppliers of specialized auto components should grow both revenue and operating margin from increased components per vehicle.
A third example arises from the need to replace our aging transportation and water infrastructure. More public and private dollars will need to flow to companies that provide the goods and services needed to strengthen and repair crumbling roads, bridges and pipes.
Q: A narrow band of Technology companies has been driving performance in the S&P 500 Index recently. What is your approach to managing exposure to this important segment of the benchmark?
BB: The so-called FANG (Facebook, Amazon, Netflix, and Google/Alphabet) stocks are some of the fastest-growing companies in the marketplace today and now comprise a significant weight in the S&P 500 Index. The technology leaders now are very different from many of the companies during the technology bubble of 1998-99, because today many have durable business models and are generating large amounts of cash. We continue to like the growth and profitability characteristics of several of these companies.
Q: How has the Pax Large Cap Fund performed during your tenure as portfolio managers?
AB: Performance of the Fund is up 20.21% from September 30, 2017 through September 30, 2018, which has handily outpaced the S&P 500 Index return of 17.91%.1 While we recognize these are just short-term results and we are long-term investors, we are very pleased with the portfolio’s performance thus far.
Q: In the age of passive funds and ETFs, how can an actively-managed, fundamental-driven process benefit a client’s portfolio?
BB: First, we feel the shift from a declining interest rate environment to a rising rate environment will offer a more attractive backdrop for active managers. Compared to capitalization-weighted passive funds, our active approach can better align with powerful fundamental and sustainability trends that are expected to unfold over the next 5 to 10 years.
Secondly, and just as importantly, the integration of ESG research into our process will highlight risks and opportunities that can enhance stock selection and the Fund’s performance. Passive strategies cannot easily replicate a responsive and proactive focus on ESG issues, or on the growing universe of companies well positioned to benefit from the transition to a more sustainable global economy. We believe that over time these companies should deliver better returns and lower risk than the broader index.
To learn more about the Pax Large Cap Fund, please visit here.
1 The annualized returns for the Pax Large Cap Fund – Institutional class as of 09/30/2018 were, 1 year: 20.21%, Since Inception (12/16/2016): 18.09%. The returns for the S&P 500 Index as of 09/30/2018 were, 1 year: 17.91%, Since Inception (12/16/2016): 17.66%.
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 the most current month end performance, please click here.
Alpha is a coefficient measuring risk-adjusted performance, considering the risk due to the specific security, rather than the overall market.
The S&P 500 Index is an unmanaged index of large capitalization common stocks. One cannot invest directly in an index.
The Russell 1000 Index measures the performance of the 1,000 largest U.S. companies, as measured by market capitalization. It is a subset of the Russell 3000 Index, which measures the largest 3,000 companies. The Russell 1000 Index is comprised of over 90% of the total market capitalization of all listed U.S stocks. One cannot invest directly in an index.
Risks: 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.