Commentary - March 2023Tran Sustainable Focus Fund

The following commentary provides insight into the potential for growth stock outperformance, portfolio changes and growth metrics, and the Fund’s high active ESG score from Portfolio Managers Quoc Tran and Michael Im.

Large growth companies outperformed smaller value stocks in the first quarter of 2023. Why do you believe this outperformance will continue?

There are a few macroeconomic factors that look encouraging for large growth stocks. Core consumer price index (CPI) in February increased 6% compared to the previous year and, shelter or owners’ equivalent rent, which is about one-third of the weighting in CPI, rose 8% year-over-year. As the economy cools and unemployment rises, wage growth and rental equivalent may cool as well, which should result in lower inflation. With this backdrop, the Federal Reserve could end its tightening cycle.

In addition, GDP growth is forecasted to be moderate this year and earnings per share of companies in the S&P 500 Index could decline 1% on average.

In an environment of tightening financial conditions with a scarcity of high-quality growth companies, we believe those companies that provide essential services, generate high margins and a high degree of recurring revenue, and participate in share buybacks could lead in performance.

Would you please discuss the growth metrics of the Fund compared to the overall market?

We’re pleased we are able to find many high-quality companies with an average price to earnings that are about the same as the overall market but anticipated to grow faster. As of March 31, 2023, the Fund’s holdings, on average, are expected to grow their earnings nearly 30% while the market’s earnings are projected to decline 1.7%. In 2024, the portfolios could grow their earnings nearly twice as fast as the overall market.

A few other notable areas include:

Fund - More Growth Potential than the Overall Market
  2023 Price to Earnings 2023 EPS Growth Rate 2024 EPS Growth Rate Weighted Avg. Market Capitalization
Fund 18.9x 29.7% 19.7% $262 billion
S&P 500 18.7x -1.7% 10.2% $510 billion

Source: Bloomberg, Earnings growth is not representative of the Fund’s future performance. Stated growth rates are estimates and may not be realized.

What companies have you added to the portfolio in the past quarter that fit your growth criteria?

The Fund purchased T-Mobile, a leading wireless provider. We believe low-cost cell phone service has become essential to its customers. In the event of a recession when consumers look to cut expenses, they are unlikely to cancel their cell service. Evidence of this “sticky” business can be seen in the company’s low churn rate of about 10% per year. T-Mobile produces high recurring revenue and has prioritized using its robust free cash flow to buy back shares.

In the first quarter, we also bought Aptiv, which benefits from the evolution of electric vehicles and autonomous driverless automobiles. Europe, which makes up one-third of Aptiv’s volume, averted an expected energy shortage, which increased our confidence to re-establish a position in this company.

We re-established a position in PayPal, which has shown improving governance, as well as Salesforce and Intuit. These are known franchise growth companies with essential technology services and products.

Conversely, given the financial issues within the banking industry, we exited Silicon Valley Bank and Wells Fargo. We also sold Halozyme Therapeutics, as the biotechnology company reached our price target.

The Fund scored highly on an active ESG share metric. Please describe this score and why it’s important for investors.

The active ESG share score is a new analysis focused on actively managed ESG funds and created by University of Notre Dame Professors Martijn Cremers and Rafael Zambrano, and University of Arkansas Professor Timothy Riley. The new research shows that funds holding stocks carrying significantly different scores from different ESG ratings providers tend to perform best.

Importantly, the higher the score, the more likely it is that portfolio selection relies less on ESG ratings and benchmarks and more on their own internal research. At Tran Capital, we augment the ESG data from a variety of sources with an internal ESG framework when constructing the portfolio.

As a result, while the average active ESG share score for a fund is about 15%, the Cromwell Tran Sustainable Focus Fund was among the funds with the highest scores, at 25%. We believe this score reinforces the value of viewing ESG investing through a different lens and, as such, the Fund holds positions that other ESG-oriented managers may not consider.

Active Share measures the percentage of stock holdings in a fund that differ from a benchmark. The Core Consumer Price Index (CPI) measures the changes in the price of goods and services, excluding food and energy. Earnings per Share (EPS) is the portion of a company’s profit for each outstanding share and is an indicator of a company’s profitability. Price to earnings (P/E) is the market price per share divided by earnings per share. Return on Equity measures a company’s profitability and represents the average return on equity on the securities in the portfolio.