ESG SMID Cap – Q1 2022 Commentary

The Russell 2500™ index declined 5.82% in the first quarter of 2022, as the uncertainty caused by Russia’s invasion of Ukraine and heightened expectations of a more restrictive U.S. monetary policy weighed on investor sentiment.  Companies continue to grapple with supply chain challenges and labor availability constraints, though the latter appear to be improving as we progress into Spring.  This improvement is partially linked to the waning impact of COVID-19 after a difficult start to the year, driven by the Omicron variant.

During the first quarter, the portfolio was most overweight the Industrials, Information Technology, and Health Care sectors.  Largest underweights were Energy, Materials, and Communications Services.  Note that the Oil & Gas Exploration and Production industry – the largest component of the Energy sector – represented less than 3.5% of the Russell 2500™ index in Q1 2022.

Performance & Characteristics

The ESG SMID Cap portfolio returned (7.28%) in Q1 2022 (gross of fees) and (7.44%) (net of fees), underperforming the benchmark, which returned (5.82%).  On a trailing 12-month basis, the portfolio appreciated 6.55% (gross of fees) and 5.79% (net of fees) vs. the index return of 0.34%.  Our best performing sector this quarter was Health Care, as strong stock selection resulted in positive relative performance.  The worst performing sector vs. the benchmark was Energy, detracting from relative portfolio performance.  The portfolio remains underweight the Energy sector, which drove an unfavorable allocation effect this quarter.  Since the inception of the ESG SMID Cap strategy, the Energy underweight has had a largely neutral effect on relative portfolio performance.

Regarding portfolio characteristics, as of 12/31/21 the ESG SMID Cap portfolio had weighted average carbon emissions (Scope 1, reported and estimated) of 96,838 metric tons – this is an 88% reduction from the weighted average emissions of the benchmark.  The portfolio had zero carbon reserves, while the benchmark had reserves that equate to over 560 million metric tons of potential future emissions.  The weighted average governance score of the portfolio (based on Institutional Shareholder Services’ Quality Score metric) was 3.64 compared with 4.37 for the Russell 2500™, or 17% 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 confidence you place in our team.  Please don’t hesitate to contact us with any questions regarding Kennedy Capital Management or our investment process.


Chris McDonald, CFA®

Portfolio Manager

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