Quarterly Commentary

First Quarter 2020

Please join the Cornerstone team on May 19 at 4 pm for a deep dive into the Water strategy embedded within CCIIX. We will be joined by William Boardman and Matt Sheldon of KBI Global Investors, who will discuss details of the strategy, current market headwinds, and longer-term opportunities in this important sector. Register here.

CCIIX in Context

The Cornerstone Capital Access Impact Fund (CCIIX) maintains our regional positioning of 59% U.S., 20% Western Europe, 17% Asia Pacific, and the remainder in the rest of the world. We continue to believe that, despite the COVID-19 pandemic, the U.S. markets will outperform other developed international and emerging markets in 2020. Relative to the benchmark MSCI ACWI Index, CCIIX is in line with its U.S. weighting, overweight Western Europe by 1.3%, and underweight Asia Pacific by 1.7%.

We also maintain our overweight allocations to the IT and Industrial sectors. In our view, IT companies are permanently changing how businesses operate and are making them more efficient. Industrials are critical components for companies looking to improve access to clean air, water, and energy, among other areas.

1Q20: Financial Markets Dislike Uncertainty

The emergence of the coronavirus in 1Q20 quickly became a significant headwind for markets around the world. The MSCI ACWI declined by 21.3% during the quarter, while the S&P 500 fell 19.6%. The peak-to-trough decline during the quarter was 34%.

Financial markets dislike uncertainty, and there is great uncertainty about the spread of the virus so far and what might happen next. Moreover, most economic data are survey-based: Industrial production, some unemployment numbers, inflation numbers, GDP and the various sentiment opinion polls are based on surveys being completed. However, in the current environment, it’s likely that many of the those being surveyed will be too distracted to complete them, which will contribute to the uncertainty about the economic situation. Volatility increased precipitously during the quarter, with the VIX reaching 83 on March 16th. It is currently at 38 but well above 4Q19 levels, which were below 20.

The Federal Reserve has taken a significant number of steps including slashing interest rates and widening their bond purchase programs, which should support fixed income markets. However, the impact of the Fed’s moves may be muted in an environment where many stores are closed and consumers are postponing spending on big-ticket items in an environment of surging unemployment.

In terms of fiscal actions, the $2.2 trillion stimulus bill called the CARES (Coronavirus Aid, Relief, and Economic Security) Act is almost three times the size of the 2009 stimulus to address the 2007–08 crisis; that package cost roughly $800 billion.

Oil markets also declined strongly during the quarter on the back of demand cuts related to the virus and an oil price war between Saudi Arabia and Russia. WTI oil futures traded down to -$37.63 just before the May contracts expired vs. $61.18 at the start of the year. This is having negative ramifications for traditional and alternative energy markets in the U.S.

Our view is that financial markets will remain volatile until the virus is contained on a global basis or a medical solution (e.g., a vaccine) is developed. We think COVID-19 is a short-term shock to the system, not a structural issue. This is not 2008, when the entire global financial system was on the verge of collapse. This virus will eventually be contained and normal economic activity will resume. We recommend investors take a long-term view of the markets, and not focus on day-to-day volatility.

Fund Performance Update, First Quarter 2020

The Cornerstone Capital Access Impact Fund returned -17.22% during the first quarter of 2020, beating its benchmark by 414 bps. Three of the four managers in the fund outperformed the MSCI ACWI by at least 500 bps.

 

PERFORMANCE SUMMARY

AS OF 03.31.20

 


Performance data quoted represents past performance. Past performance does not guarantee future results. The 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. Cornerstone Capital Group maintains a contractual agreement effective through 12.31.2022 to cap the gross expense ratio of 2.47% at a net 1.35%.


Performance was driven by the following factors:

  • Next Economy strategy (Green Alpha Advisors): This strategy returned -14.79% for the quarter, which was 657 bps above the benchmark. Performance was driven by exposure to the Healthcare sector and lack of exposure to the energy sector, and by limited declines in the Basic Materials, Utilities and Consumer Non-Cyclicals names. Stocks driving the quarter include Teledoc, Moderna, and Gilead, which are all net beneficiaries of the pandemic. Tesla was also strong. Detractors included Infineon and Bluebird Bio.
  • Fintech strategy (Ark Invest): The Fintech strategy returned -14.12% in 1Q20, exceeding the benchmark by 724 bps. Shopify and Amazon led the portfolio as consumers shifted to online purchasing during the pandemic. The weakest performers were Lending Tree, which declined on fear that lending activity will trough due to economic recession, and Square, which reflected the pressure that COVID-19 is putting on small businesses.
  • Water strategy (KBI Global Investors): The Water strategy returned -23.00% for 1Q20, underperforming the benchmark by 164 bps. The Infrastructure and Technology segments of the portfolio were the worst performing due to a challenging environment for the Industrials sector. Utilities performed better. Half of the MSCI ACWI is in IT, Healthcare, and Consumer Staples, where the strategy has minimal exposure, and these three sectors performed well in 1Q20. Pennon had good performance due to the sale of its non-water business to KKR, while Orbia, Pentair, and Fortune were the largest detractors. The fund is also 24% Small Cap and 25% Emerging Markets (by underlying revenue exposure), both of which had a rough quarter.
  • Global Sustainable Growth strategy (Schroders): This strategy returned -15.99%, which was 537 bps above the benchmark. Stock selection and sector orientation were both return drivers, with the most robust performance coming from Continental Europe and North America. Healthcare and Industrials were supportive, with some weakness in Consumer Staples and Materials. Top performers include Roche and TenCent, both of which were net beneficiaries of the pandemic. Detractors included hospitality companies Booking Holdings and Whitbread, both of which were negatively impacted by COVID-19.

Major position changes in 1Q20

New positions initiated in 1Q20 included Sea, an online gaming and e-commerce company that is building a fintech business in Southeast Asia; Idex, a metering technology company in the water space; Rexnord, a water management company; Ferguson, the largest distributor of plumbing supplies in the U.S.; Microsoft; B3, the Brazilian stock exchange; and First Republic Bank.

Exits from the portfolio included Pattern Energy and AquaVenture due to M&A activity. In fintech, positions were eliminated mostly in opportunistic trading. Sales included Baidu, Eventbrite, Shopify, and Zip. Franklin, Chemtrade, and Kubota were removed from the water strategy due partly to valuation concerns. Legrand, Umicore, and Terumo were sold due to a mix of concerns about valuation and vulnerability to COVID-19.

Top Ten Holdings by Portfolio Weight (3.31.2020)*

Company Portfolio Weight
Square, Inc. 3.27%
Amazon.com, Inc. 1.88%
Apple, Inc. 1.76%
Kurita Water Industries Ltd. 1.67%
United Utilities Group PLC 1.50%
Tencent Holdings Ltd. ADR 1.42%
MercadoLibre, Inc. 1.28%
Alibaba Group Holding Ltd. 1.26%
Danaher Corp. 1.25%
Zillow Group, Inc. 1.23%

*Holdings and weightings subject to change. Number of holdings: 224 as of 4.30.2020.


Manager Spotlight: KBI Global Investors

Established in 1980 in Ireland as the Investment Management division of Ulster Bank, KBI Global Investors has been managing assets for institutional clients for some 35 years. The Water strategy is global and was launched in 2000. The strategy seeks to solve the following problems: increasing water supply, decreasing water demand and waste, improving and testing water quality, and building and fixing water infrastructure.

KBI separates companies providing solutions to water scarcity into three buckets:

  • water infrastructure – companies providing pipes, pumps, and valves as well as design engineering and construction services;
  • water technology – companies providing filtration, disinfection test and measurement products and metering; and
  • water and wastewater utilities – companies managing infrastructure and delivery of water and/or treating water for reuse or safe remediation back into the environment.

The primary portfolio managers have been working on the strategy an average of 10 years.

In order to be eligible for the portfolio, companies must derive either 50% of their revenue from water or water treatment activities, or 10% but also be a market leader in their business segment (generally defined as being a top three player in a particular niche in the water space). The strategy does not invest in bottled water, hydro power, or dredging. The portfolio is relatively concentrated and currently consists of 38 names, with an average holding period of 3.5-4 years. Approximately 24% of the positions are small cap in nature, and roughly 25% of the portfolio revenues are based in emerging markets. The portfolio is currently split into 36.2% water infrastructure, 32.7% water technology and 29.5% in water utilities.

The KBI Water strategy touches on two themes that CCIIX aims to express in its portfolio: Climate and Clean Energy; and Health, Wellness, and Education, as access to clean water and water sanitation is key to good health. The strategy also aligns with several of the United Nations Sustainable Development Goals, including:

Goal 3: Good Health and Well-Being
Goal 6: Clean Water and Sanitation
Goal 7: Affordable and Clean Energy
Goal 11: Sustainable Cities and Communities

Please join the Cornerstone team for our quarterly outlook call on May 19, 4 pm ET. We'll be speaking with William Boardman, Senior Vice President, and Matt Sheldon, Senior Portfolio Manager, for KBI Global Investors. KBI's Water strategy is a core holding of CCIIX. We'll discuss both the near-term market challenges and longer-term investment opportunities in this key sector. Register here.

Thematic Spotlight: Climate and Clean Energy

The theme of Climate and Clean Energy is not a new concept – indeed, it has been an investable option for some time – but it is an enduring focus area that continues to experience significant levels of innovation aimed at reducing the global carbon footprint and improving the quality of the air we breathe and the water we drink. Alternative energy providers are now able to price their products more competitively, and technological development in areas like battery storage are making it possible to extend the benefits of clean energy over a sustained period. Private sector companies such as Apple are transitioning to become 100% powered by renewable energy, and demand for electric vehicles is rising. We are excited to be incorporating this theme into our portfolio.

While renewable energy infrastructure companies are a core component of this thesis, there are many other investable areas, including companies delivering products and services that reduce environmental waste and increase efficiencies; carbon credit traders; and investment strategies seeking to improve the health of our oceans and forests. Within the public equity universe, these companies map to GICS1 sectors that include Industrials, Utilities, and Healthcare.

Three out of our four managers express Climate and Clean Energy in their investment strategies, including Green Alpha, KBI, and Schroders. Our portfolio holdings include positions in United Utilities, a British water and wastewater utility, and Xylem, a global water technology provider based in North America.

In terms of the UN SDGs, the Climate and Clean Energy theme touches on the following:

Goal 6: Clean Water and Sanitation
Goal 7: Affordable and Clean Energy
Goal 13: Climate Action
Goal 14: Life Below Water
Goal 15: Life on Land

1 Global Industrial Classification Standard.

Learn More: Media & Resources

ESG Fund Performance in Volatile Markets

There has been tremendous volatility in the price of most asset classes since the onset of the coronavirus-related financial crisis. That includes the price of sustainable equity funds. Given that much of the growth of sustainable investing has taken place in the past five years, many environmental, social, and governance (ESG) strategies have experienced relatively few periods of market volatility. What can we expect in terms of the performance of ESG funds in this period of extreme volatility?

The Benefits of ESG Discipline in Times of Market Volatility

In theory, the performance of ESG funds should hold up well in times of market volatility. At the company level, the managers of a sustainable business will likely have given plenty of thought to contingencies. They will focus on risk issues and make business continuity plans. While even the best-governed companies likely wouldn’t have prepared sufficiently for a pandemic of this scale, they are still in a relatively strong position to act decisively given their strong leadership.

Risk management is an important factor at the portfolio level, and here too ESG provides an edge. When the CFA Institute conducted a 2017 survey of portfolio managers and asked, “why do you take ESG issues into consideration in your investment analysis/decisions?” the vast majority replied, “to help manage investment risks.”

In addition, many ESG funds completely avoid or limit their exposure to fossil fuels and other industries heavily reliant on oil and gas (e.g., airlines and cruise ships), which has insulated them from the recent volatility associated with the collapse in the price of oil. Read more...

Forever Changed: COVID-19 and Impact Investing

On March 19, 2020, Cornerstone Capital Group held a conference call addressing concerns about the current coronavirus pandemic and its impact on the markets, the economy, and importantly, the changes in how we think about the infrastructure of our society over the longer term. Read more…

Water – Adapting to the Impact of Climate Change Will Both Protect and Save Lives

KBI Global Investors recently published a piece in honor of World Water Day, highlighting seven water investing trends for the ‘20s. Read their insights here.

10 Facts About the World Water Crisis

In honor of World Water Day, on March 22, the nonprofit organization Lifewater.org published these top ten water facts. Access their full article here.

  1. 748 million people around the world are without basic water access. That’s more than twice the population of the United States.
  2. More people die from unsafe water than from all forms of violence, including war.
  3. Two billion people, or about 1 in 4, lack access to a toilet or latrine.
  4. Diarrheal diseases, caused primarily by unsafe water and poor sanitation, kill more children under 5 years old than malaria, AIDS, and measles combined.
  5. Diarrheal disease kills one child every 60 seconds.
  6. About a quarter (22%) of health facilities in Least Developed Countries have no safe water.
  7. In sub-Saharan Africa, women and girls spend an estimated 40 billions hours a year collecting water.
  8. An estimated 400 million school days are lost each year due to water-related diseases, with 272 million lost to diarrhea alone.
  9. Lost time gathering water significantly reduces productive farming time for women in parts of the developing world. With safe water nearby, it’s estimated that women could feed 150 million of the world’s hungry.
  10. For every $1 invested in safe water and sanitation, a yield of $5 to $28 USD is returned in increased economic activity and reduced health care costs. Access to safe water stimulates the economy for the long-term.

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Investing involves risk, including loss of principal. There is no guarantee that this, or any, investing strategy will be successful. Applying ESG and sustainability criteria to the investment process may exclude securities of certain issuers for both investment and non-investment reasons and therefore the Fund may forgo some market opportunities available to funds that do not use ESG or sustainability criteria. Securities of companies with certain focused ESG practices may shift into and out of favor depending on market and economic conditions, and the Fund’s performance may at times be better or worse than the performance of funds that do not use ESG or sustainability criteria. Investments in foreign securities involve risks that may be different from those of U.S. securities. Foreign securities are subject to individual country risk, less favorable reporting and disclosure risks, currency exchange risk, greater volatility, and potential for higher liquidity risk than U.S. - registered securities. Diversification does not ensure a profit or guarantee against loss. You should carefully consider the Fund’s investment objectives, risks and charges and expenses before investing. This and other important information is contained in the Fund’s prospectus and summary prospectus, which should be read carefully before investing. To obtain a Fund prospectus or summary prospectus, call 1-800-986-6187. The Fund is distributed by Ultimus Fund Distributors, LLC. There is no affiliation between Ultimus Fund Distributors, LLC and the other firm referenced in this material. 10166991-UFD-5/4/2020

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