ESG Impact – Q3 2018 Commentary

The third quarter of 2018 was another period of strong performance for the U.S. Small & Mid Cap equity markets, with the Russell 2500™ returning 4.70%. The Health Care and Information Technology sectors were the key drivers of the Q3 benchmark performance, with each sector appreciating by over 10% during the quarter. The only sector in the Russell 2500™ that declined during the quarter was Consumer Staples (down 1.42%).

Our labor intensive, bottom-up process for identifying new investment ideas continues to yield a portfolio with attractive Environmental, Social, and Governance characteristics. We pay particular attention to businesses that leverage a competitive advantage that is tied to a social or environmental attribute at the company or industry level. The small-cap and mid-cap space is fertile ground for identifying such companies, and we believe our large analyst team positions Kennedy Capital to add value in this space over the long term.

Performance
The ESG Impact composite returned 6.33% in Q3 2018 (gross of fees) and 6.19% (net of fees) compared with a return of 4.70% in the Russell 2500™. Our best performing sectors for the quarter were Health Care and Industrials. This was offset by underperformance in the Information Technology and Financials sectors. None of our holdings detracted more than 25 basis points of relative portfolio performance during the quarter.

Regarding portfolio characteristics, at the end of Q3 2018, the ESG Impact portfolio had weighted average annual carbon emissions (reported and estimated) of 60,622 metric tons – this is a 90% reduction from the weighted average annual carbon emissions of the benchmark. The portfolio companies had zero carbon reserves, while the benchmark had reserves that equate to over 500 million metric tons of potential future emissions. The weighted average governance score of the portfolio (based on Institutional Shareholder Services’ Quality Score metric) was 3.88 compared with 4.58 for the Russell 2500™, or 15% more attractive (lower score is better).

We remain confident in our ability to construct a portfolio with attractive Environmental, Social, and Governance characteristics that delivers relative investment outperformance over the long term. As always, we appreciate the trust you place in our team. Please don’t hesitate to contact us with any questions regarding Kennedy Capital Management or our investment process.

Sincerely,

Chris McDonald, CFA®

Portfolio Manager

 

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