SUSTAIN Equity Fund Index Gains 3.21% and Outperforms S&P 500 by 1.17% in November

November Performance Summary

• Bond and equity markets continued on their volatile path into November, but end on positive notes: S&P 500 posts gain of 2.04% while Bloomberg Barclays US Aggregate Index adds 0.60%.

• The SUSTAIN Large Cap Equity Fund Index recorded a gain of 3.21% and outperformed the S&P500 by 1.17%.

• The SUSTAIN Bond Fund Indicator, up 0.426%, lagged behind the Bloomberg Barclays US Aggregate Index that posted a gain of 0.60%.

Bond and equity markets continued on their volatile path into November, but end on positive notes

Both bond and equity markets continued on their volatile path into November due to worries over economic growth, rising interest rates and trade tensions between the US and China, among other factors. The S&P 500 Index ended the month on a positive note, however, posting a gain of 2.04%. This, after moving higher early in the month then swinging to a negative -2.92% only to recover following remarks by Federal Reserve Chairman Jerome Powel that interest rates are “just below normal” and renewed hopes for a trade truce with China. Refer to Chart 1. During the 30-day interval ending November 30th, results ranged from a high of 10.37% recorded by the MSCI Index NR USD Index and a low of -22.21% achieved on a price only basis by Crude Oil as oil prices, measured by Brent Crude, continued to tumble. Within this range, mid-cap stocks posted better results than small-cap and mega cap stocks while value stocks produced slightly better returns than growth stocks. While not generating returns as high as India, emerging markets generally performed well. Developed markets, on the other hand, according to the MSCI EAFE NR Index, closed in negative territory, down -0.13%. Intermediate-term investment grade bonds moved in tandem with equity markets, adding 0.60% in November after recording negative results for two successive months in October and September. Bonds, too, reached an inflection point following the close of trading on November 8th. At the conclusion of the Federal Reserve’s two-day policymaking committee meeting, it was announced that the Fed’s benchmark rate will remain the same but is expected to increase by a quarter percentage point at the next meeting in December and that the economy remained in good health, citing strong growth and a continued decline in the employment rate. That pushed the yield on the 10-year Treasury from 3.24% to 3.19% the next day and 3.01% at the end of November.

The SUSTAIN Large Cap Equity Fund Index recorded a gain of 3.21% and outperformed the S&P500 by 1.17%

The SUSTAIN Large Cap Equity Fund Index recorded a gain of 3.21% and outperformed the S&P500 by 1.17%. While this was not the strongest gain so far this year, the increase scored a record for outperformance relative to the conventional S&P 500 since calculation of the SUSTAIN index started as of December 31, 2016. Contributing to outperformance is the fact that, for the first time this year, nine of the ten index constituents generated results in excess of the S&P 500 index. Further, three funds, all managed by Parnassus, including Parnassus Endeavor-Investor Shares, Parnassus Fund, up 4.39%, and Parnassus Core Equity Investor Shares, up 4.15%, each outperformed the index by over 2.0%. Refer to Table 1.

The best performing fund in the SUSTAIN Index was Parnassus Endeavor-Investor Shares, up 5.17% This $4.6 billion fund invests in a small number, approximately 30 holdings, of large-capitalization companies that represent Parnassus’ clearest expression of ESG investing. Such companies must offer outstanding workplaces, and must not be engaged in the extraction, exploration, production, manufacturing, or refining of fossil fuels. This workplace focus, according to Parnassus, can result in significant exposure to technology companies, many of which are leaders in offering positive and innovative workplaces. The fund’s performance, its best monthly result so far in an otherwise lackluster year, was bolstered by its value orientation but more importantly, its sector allocations and stock selections. On the one hand, the fund avoided the Energy sector’s November decline of -1.01% while on the other, it benefited from the almost 11% overexposure to the Healthcare sector which was the performing sector, up 7.26%. The fund also scored some double-digit returns with its top holdings, such as CVS Healthcare (CVS), Applied Materials, Inc. (AMAT) and Lam Research Corp. (LRCX), which accounted for 5.78%, 4.89% and 4.72% of portfolio assets, respectively. On a year-to-date and trailing 12-month-basis, the performance of the Parnassus Endeavor Fund-Investor Shares doesn’t shine as bright. In fact, the fund ranks 10th out of ten funds with a total return of -0.84%. Its results over the same time periods are eclipsed by the best performing Calvert Equity Fund Class A that posted strong conventional index beating results of 12.89% and 13.43%. The fund normally invests in quality, steady-growth companies. At the other end of the performance range, only one fund, the Dreyfus Sustainable US Equity Fund-Z Shares, underperformed the conventional S&P 500. It, along with eight index members, have fallen behind the S&P 500 since the start of the year and it is one of four funds to lag the S&P 500 over the 12-month interval. Since December 31, 2016, the SUSTAIN Index trails behind the S&P 500 by 3.6%, reduced from last month’s 4.9%. Refer to Chart 2. One index member, the Domini Impact Equity Fund, started the month of December with a new sub-adviser, SSGA Funds Management, Inc. which replaced long-time sub-adviser Wellington Management.

The SUSTAIN Bond Fund Indicator, up 0.426%, lagged behind the Bloomberg Barclays US Aggregate Index that posted a gain of 0.60%

Only for the third time this year, the SUSTAIN Bond Fund Indicator, up 0.43%, lagged behind the Bloomberg Barclays US Aggregate Index that posted a gain of 0.60%. The Pax Core Bond Fund-Institutional Shares managed to outperform its conventional benchmark, posting a gain of 0.64%. This $672.9 million fund, which also leads the benchmark since the start of the year and last 12-months, benefited from its slightly longer duration of 5.79 as of October 31 relative to its benchmark and peer index members while the fund’s 83.6% investments in securities rated A or better also appears to have contributed to the fund’s performance in November. Refer to Table 2.

The SUSTAIN Bond Fund Indicator continues to exceed the performance of the conventional index since December 31, 2017. An exception is the PIMCO Total Return ESG Institutional shares that, given November’s 0.14% decline, now also has fallen behind for the longer time interval. This marks the fourth time this year that the fund has lagged the monthly return of the Bloomberg Barclays US Aggregate Index.  Refer to Chart 3.

Index/Indicator Explanations  

Sustainable (SUSTAIN) Large Cap Equity Fund Index. The index, which was initiated as of June 30, 2017 with data back to December 31, 2016, tracks the total return performance of the ten largest actively managed large cap domestic equity mutual funds that employ a sustainable investing strategy beyond absolute reliance on exclusionary practices for religious, ethical or social reasons. While methodologies vary, to qualify for inclusion in the index, funds in excess of $50 million in net assets must actively apply environmental, social and governance (ESG) criteria to their investment processes and decision making. In tandem with their ESG integration strategy, funds may also employ exclusionary strategies along with impact oriented investment approaches as well as shareholder advocacy.Multiple funds managed by the same management firm may be included in the index, however, a fund with multiple share classes is only included in the index once, based on the largest share class in terms of assets. The index is equally weighted, it is calculated monthly and rebalanced once a year as of December 31. The combined assets associated with the ten funds stood at $21.2 billion and represent about 13.7% of the entire sustainable US equity sector that is comprised of 220 funds/share classes, including actively managed funds and index funds, with $154.4 billion in assets under management.

Sustainable (SUSTAIN) Bond Fund Indicator.  This benchmark, which was initiated as of December 31, 2017, tracks the total return performance of the five largest actively managed investment-grade intermediate term bond mutual funds that employ a sustainable investing strategy beyond absolute reliance on exclusionary practices for religious, ethical or social reasons. While methodologies vary, to qualify for inclusion in the benchmark, funds in excess of $50 million in net assets must actively apply environmental, social and governance (ESG) criteria to their investment processes and decision making. In tandem with their ESG integration strategy, funds may also employ exclusionary strategies, impact oriented investment approaches as well as issuer-oriented advocacy.Multiple funds managed by the same management firm may be included in the benchmark, however, a fund with multiple share classes is only included once, based on the largest share class in terms of assets. The indicator is equally weighted, it is calculated monthly and rebalanced once a year as of December 31. At the time it was constructed as of December 31, 2017 less than 10 funds qualified under the criteria set forth above and for this reason to distinguish this measure from a more robust one in terms of number of constituent funds, the benchmark is referred to as an indicator rather than an index. The combined assets associated with the five funds stood at $2.7 billion and these funds account for 15.3% of the entire sustainable US taxable fixed income sector that is comprised of 109 funds/share classes, including actively managed funds and index funds for a total of $17.8 billion in assets under management.