Investment Universe, Process, Strategy and Benchmark – How does the Fund Manager invest? (ISIN: LU0271656133)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."
Performance 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: "Pioneer Funds – Global Ecology (Class A, non-distributing, EUR units) ended the fourth quarter of 2010 up 10.75% in absolute terms, slightly lagging its broad-market benchmark, the MSCI World Index, by -0.12%. The Portfolio (same unit class and currency as above) gained 2.8% over the month of December, while its benchmark returned 4.17% over the same period.
Equity markets ended 2010 higher after posting strong gains in the first three weeks of December. The Financials sector led the rally in the first week of December and drove US and European indices to two-year highs as economic reports reassured investors that the economic recovery is still underway. The US showed increased consumer sentiment and spending, and fewer applications for jobless-benefit claims, the Japanese economy grew more than estimations suggested, and employment numbers improved in Australia.
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 Review 2011
Christian Zimmermann: "Pioneer Funds – Global Ecology (Class A, non-distributing, EUR units) produced a return of -12.4% during 2011 underperforming its benchmark the MSCI World Index by 10% over the period as risk aversion in the market saw the themes in the Portfolio suffer more than the market as a whole.
Quarter 3 2011 proved to be one that investors would rather forget. The agreement on 21 July of a second Greek bailout and subsequent equity rally was short-lived as market concern shifted to the larger peripheral countries - Spain and Italy. This combined with concerns surrounding global growth, a potential "double-dip" and the downgrading of the US sovereign by S&P lead to an extreme sell-off of equity markets in the first two weeks of August. On the back of this market turmoil, a number of European countries introduced short-selling bans in a bid to prevent further falls in their respective markets.
Look at the Portfolio at a sector level, key contributors were overweight positions in Utilities (which benefited from a move by investors into more defensive areas of the market), Energy, and Financials with the Portfolio benefiting from being significantly underweight the Financial sector. Detractors at a sector level were Consumer Discretionary, Consumer Staples, Healthcare, Materials and Information Technology. Looking more to particular sectors - Solar and Agriculture hurt the performance of the Portfolio quite strongly during the third quarter due to negative newsflow and a move by investors out of smaller cap names.
Looking at 2011 as a whole, the US market has produced better returns than the European markets despite the fact that US equities are by all measures more expensive than their European peers. As we tend to be structurally overweight Europe (more suitable opportunities around) this allocation has also detracted from performance compared to a global benchmark. We still see valuation as the major driver for future performance and we believe it to be very likely that Europe can catch up some of this underperformance– provided there is no financial melt-down.
Risk aversion saw many themes in the portfolio fall out of favour during 2011. In addition, we remain overweight Europe as we believe that US equities are far more expensive than their European peers. While these two factors have impacted performance negatively in 2011, we are seeing some reversion of this trend in 2012."
Performance 2012 - Year-to-Date
Christian Zimmermann: "We have seen a good start to the year with the Fund up 6% on an absolute basis versus 4.1% for its board market benchmark , MSCI World Index. Equity markets have responded positively to the ECB Ltro[i.e backdoor quant easing] & the main beneficiaries of easy monetary policy in the Ecology universe will be the Agriculture sector.
We remain overweight “Agriculture” owning a basket of stocks: CF industries, Deere, Agrium, Potash & Yara. Other global reflation beneficiaries in the portfolio are: US rail stocks, BG Group, materials stocks: Johnson Matthey, Unicore & Voestalpine, UK Water Utilities.
The earnings season has seen good results from SAP, Union Pacific Corp & we have seen some disappointing reports from Kansas City Southern, Siemens & Google.
There are strong rumours of US action against Chinese dumping of solar modules on the US market, we are monitoring this situation carefully, as this could be the catalyst to accelerate the development of the Chinese domestic market, remember China exports 95% of their solar panels."
Performance since 2007
Christian Zimmermann: "Looking forward to 2012, there are many external factors and uncertainties as investors remain cautious of sovereign risk. Risk aversion saw many themes in the portfolio fall out of favour during 2011, wile this impacted performance negatively in 2011, we expect some reversion of this trend in 2012.
As part of our outlook, we have identified three themes that could be interesting over the next couple of months. This of course does not mean that the other themes are not in our focus any more! We have reduced some water and gas stocks in the portfolio, but overall it will always remain an important pillar for our portfolio construction due to the defensiveness of these companies. Furthermore, we are mentioning electric vehicles this year but we won’t focus only on this specific area within the mobility sector. We still like the railroad companies as well as the many car suppliers which are focusing on CO2 reduction.
Global Markets Strategy Report February 2012
• What did the Nuclear crisis at Fukushima in 2011 mean for future energy development?
• We think this is a significant turning point in the global development of nuclear power
• Natural gas may be the clear winner in the United States, combined cycle gas turbines is their only alternative base load option
• Natural gas & renewable focused companies may be the prime beneficiaries in Europe
• Natural gas & renewables could gain energy share in Emerging markets
• Sell-side research estimate that by 2016, advanced hybrids will account for 8% of the US market [up from 3% in 2009] & Electric Vehicles will account for 1% of the US market
• In China, attractive subsidy program to encourage the use of electric & hybrid cars.
• The US government has committed to individual tax credits for buying hybrid or electric vehicles.
• In Germany, the only initiative is the exemption of eco-friendly cars from the annual circulation tax for a period of 5 years.
• France pays €5,000 for electric vehicles & €2,000 for some hybrids.
• UK - the plug in vehicle grant scheme will provide a subsidy equal to 25% of the purchase price capped at £5,000.
• All big carmakers have this development on its agenda
• We are bullish on agriculture related stocks. We expect elevated crop prices in the medium term, driven by robust demand growth in a supply constrained world.
• Global grain inventories continue to decline to historic low levels.
• The key global grain inventory ratio ended at 19% in 2010, compared to 22.3% in 2009 and 20.9% in 2008.
• Agricultural super-cycle remains intact, since there is no evidence of an adequate supply response yet."