Performance Review 2006Performance Review 2007
Christian Zimmermann: "Our portfolio solidly outperformed its benchmark, the MSCI World Index, during the first quarter mainly driven by successful stock selection among capital goods companies and utilities. Among utilities, our exposure to Repower Systems, a German wind power company, enhanced returns significantly, as it became the subject of a takeover battle.
Strong stock selection and beneficial sector positioning drove our portfolio to outperform its benchmark in the second quarter also. At the stock level, the strongest sector for portfolio performance was capital goods where holdings in Organo Corp, Orkla, Vossloh and SGL Group each contributed well amid solid share price gains.
The third quarter of the period saw our portfolio slightly underperform its benchmark as negative stock selection in the industrials sector offset the benefits of the portfolio’s underweight in financial stocks.
However, a lack of exposure to financial companies proved advantageous for relative returns during the fourth quarter. In addition, our large allocation to utilities compared to the benchmark also benefited but stock selection had mixed results. Holdings in larger European utility groups such as E.ON and Suez strengthened as the outlook for energy pricing hardened on rising oil prices. On the negative side, a position in Conergy, a German solar power company, fell sharply. We subsequently sold our position in the stock as it breached our stop loss limit."
Performance Review 2008
Christian Zimmermann: "Against a backdrop of virtually unprecedented volatility, Pioneer Funds – Global Ecology delivered performance comparable to the MSCI World index, its broad-market benchmark over 2008. It actually outperformed its benchmark during the fourth quarter, thanks to a relative underweighting of some of the worst affected sectors, and a year-end rally in industrials – a sector dominated by ecological stocks.
As an ecologically focused portfolio, we consistently hold an underweight position in financials. This contributed positively to our performance during 2008, especially during the fourth quarter, as financial institutions continued to suffer from the ongoing effects of the credit crisis.
Select holdings in the Consumer Discretionary sector also benefited performance. Investments in Volkswagen of Germany and Sanyo of Japan – partners in a joint venture to develop a battery-powered vehicle –positively contributed, despite an overall collapse in performance in Consumer Discretionary stocks.
Since most stocks involved in ecological activities are classified as Capital Goods (most projects in this area involve large amounts of capital expenditure), our largest consistent overweight position throughout the year was found in that sector. This overweighting negatively contributed to performance as the credit crisis intensified, as investors feared that capital availability would be constrained, affecting demand for expensive items such as wind turbines. Overall, our holdings in Capital Goods represented the largest single negative contribution to performance over 2008."
Performance Review 2009
Christian Zimmermann: "Looking at 2009 overall, the Portfolio has lagged its benchmark but posted positive gains in absolute terms. The Industrials sector (within which many of the names in our investible universe are categorised) suffered, particularly in the first three quarters of the year, and as our largest sectoral overweight, this significantly negatively impacted returns. The lack of capital availability was affecting companies within our universe, in particular solar stocks as government subsidy schemes for solar installation were affected.
The Portfolio improved performance over the fourth quarter of 2009 and outperformed its broad-market benchmark, the MSCI World, as the Industrials sector bounced back with solar companies like Trina Solar and Yingli Green Energy generating impressive returns. We also gained considerably from stock selection within the Financials sector. Avoiding laggard names held in the benchmark, in addition to underweighting our exposure to the sector as a whole, accounted for over 60 basis points of outperformance over the quarter.
Short-term periods of underperformance in the Portfolio does not shake our commitment to attempting to capture alpha through the early identification of winners in the ecological universe. Ours is a future orientated portfolio, designed to benefit over the medium term from an increased usage of technologies such as solar and wind, from a decreased reliance on depleting fossil fuels, and from a need to incorporate sustainability into our everyday lives. These trends are likely to play-out over longer periods than one month or one quarter, so our relative performance, given the strength of the financials rally that occurred outside of our investible universe over the year, is a return we consider acceptable, if not optimal."
Performance Review 2010
Christian Zimmermann: "Ecological-related stocks suffered during the year as many of the companies within our investible universe are closely linked to expenditures originating from governments. Government taxation revenue suffered globally as the recession of the past two years has yielded lower tax receipts, and as bond market investors continue to exert pressure, demanding more sovereign fiscal restraint; governments had been forced to scale-back planned spending. This has a direct implication on capital expenditure, and infrastructure-type projects, which usually benefit names within the ecological universe. Reduced sovereign capital expenditure was therefore impacting the order books, and short-term profitability prospects of several firms in our universe (including wind turbine manufacturers, solar technology producers, etc.). We do not anticipate capital spending will remain permanently impaired, but while bond market activists remain focused on deleveraging sovereign balance sheets, some reduction in spending previously identified for infrastructure-type projects seems inevitable.
Performance improved in the fourth quarter of the year thanks to a combination of rewarding sector allocation and successful stock selection decisions, particularly within the Capital Goods space."
Performance since 2006
Christian Zimmermann: "Ours is a future orientated portfolio, designed to benefit over the medium term from an increased usage of technologies such as solar and wind, from a decreased reliance on depleting fossil fuels, and from a need to incorporate sustainability into our everyday lives. These trends are likely to play-out over longer periods than one month or one quarter, as is shown by our long-term track record."
Investment Process and Strategy – How does the Fund Manager Invest?
Christian Zimmermann: "Our approach to investment in the ecological universe is quite unique, as we seek to mitigate risks by diversifying our investments across a number of ecological investment areas, at all times monitoring valuations to check we are not unnecessarily exposed to overvalued sectors.
Whereas many competitors seek investment opportunities in restricted universes (both limiting their geographic and sector scope), we seek to benefit from investment opportunities across a global universe, and only limit our investment opportunities to those firms which behave in a sustainable manner. We believe this diversified approach affords us a better opportunity to uncover attractive opportunities, irrespective of geographic location or sector.
We focus on companies developing environmentally friendly products and technologies, and companies contributing to the development of a cleaner and healthier environment. We believe these are the firms that will benefit the most from the changes required to sustain our modern lifestyle. We seek sustainable business practices that meet the needs of the present without compromising future generations’ abilities to meet their own needs. For us, this requires the integration of ecological (environmentally friendly production operations), social (no child labour) and governance (entrepreneurial responsibility) criteria into investment decisions (ESG Investing), although the focus is on ecologically sound companies.
In terms of investment process, a sustainability screen is conducted externally on the basis of predefined exclusion criteria. We conduct an in-house quant screen to gain a more in-depth analysis of a stock’s investment potential. The aim of this stage in the process is to generate a list of potential portfolio candidates. We employ a multi-factor quant screening approach. Under this approach, factors related to fundamental valuation and price momentum are considered. The valuation and momentum calculations within the screening model are updated weekly to provide us with a comprehensive and dynamic view of the qualifying stocks. Price momentum is the first element to the idea generation/stock selection process. I employ a proprietary relative strength calculation to identify companies, which appear attractive relative to the broader market. This calculation approach focuses on price momentum over three, six and twelve month periods and aggregates them on a weighted basis to determine the broad relative strength measure. The resulting price momentum measure is one factor considered by us alongside the valuation metrics as part of a fundamental overlay applied to each stock. Key valuation metrics considered are price to sales (P/S), price to earnings (P/E), dividend yield and price to book (P/B), as well as earnings growth and earnings momentum.
In the next stage, I aim to gain a more in-depth analysis of a stock’s investment potential by conducting Fundamental Research on the list of potential investments. Fundamental analysis is applied to the selection of stocks generated from the quant screening, and the potential intrinsic value of each company is assessed.
Combined with the output from the multi-factor screening process, we look for those companies that can offer a combination of good operating dynamics and good momentum but are relatively undervalued by market analysts. The combined analysis enables us to decide on final stock selection and create the Portfolio."
Christian Zimmermann: "Our strategy, as always, remains to source and invest in ecologically sustainable opportunities, particularly those that we believe are under-priced relative to the market at any given time.
Our top conviction themes of 2011 include:
→ sustainable mobility
→ green building/energy efficiency.
While we will only invest in a company if we believe in the fundamental investment case of the company and its ecological merits, we are aiming to keep a relatively balanced portfolio with regards to the above-mentioned themes. We are also cognisant of the environment and take that into consideration while investigating potential investment candidates. We believe there are a number of visible catalysts providing a positive backdrop for ecological themed equities in 2011. In the United States, one of Obama’s top priorities for 2011 will be to pass a bipartisan energy and climate change bill. Additionally, Europe remains committed to ecology friendly policies. For example, a new EU sustainable water framework will be published in 2011. China´s 12th five-year plan (2011-15) with more specific economic and social targets will be approved by the National People’s Congress in March 2011, and the country is set to get tougher on its climate change initiatives. In terms of our top-down high conviction themes for the year ahead, we continue to favour water-related companies as European capital expenditure will increase as the requirements of the 2011 EU Water Framework Directive (WFD) are implemented. In Emerging Markets, there is a significant infrastructure gap which is a large potential market for water utility companies. GlobalWater Intelligence (GWI) forecasts capex investment of $247bn 2010-16, an increase of 54% over the period. There are also signs that tariffs are beginning to rise – GWI’s survey of global water tariffs showed an average increase of 8.5% between June 2009-10, and a similar increase is anticipated next year. Limited water infrastructure is a prominent problem. Consequently, there is much opportunity for water companies. These companies have better knowledge of managing water resources in a sustainable way than local Government authorities. We are bullish on agriculture related stocks as the agricultural super-cycle remains intact, with no evidence of an adequate supply response yet. Another investment theme which we will be playing in the coming year is sustainable mobility. The Chinese Auto sector remains committed to low carbon transport and has recently announced an incentive programme for the purchase of new fuel efficient cars. Sustainable mobility extends to US railroads - railroads can be as much as three to five times as fuel-efficient as trucks, and American railway companies set to introduce hypoid locomotives, which decrease the carbon footprint by 90%. The depth of the recent volume downturn has created significant slack in the network in the United States.We believe operating leverage of returning volumes, combined with solid, positive pricing, creates an opportunity for markedly improving earnings. We also have high conviction on companies related to Chinese rail infrastructure. Finally, we believe in green building and energy efficiency as a key investment theme within the Portfolio in 2011. The key driver for this is that regulation & policy frameworks are increasingly supportive. We remain confident that a normalisation of market conditions will soon again generate interesting investable opportunities, and that sustainable investing will become more important as more and more industrial enterprises acquire a “green” stance. Green technologies will create more jobs, and the consumer will have increasing ethical, ecological or social claims for the use of their money. We believe that the names that we invest in will reward over the medium term as a result of:
→ Cost benefits: companies, which consume less resources, will have advantages if commodity and energy costs increase;
→ Sales opportunities: increase in demand for environmentally and socially acceptable goods;
→ Image: society is getting more and more sensitive. An environmentally sustainable image is a very important competitive factor;
→ Reduction in risk: the tendency towards a clean environment is irreversible."