Total time: 12:48
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Bob Smith: Good day. This is Bob Smith, Chief Investment Officer at Sage Advisory Services in Austin, Texas. Today, I am joined by two members of our ESG investment management team, Emma Smith and Andy Poreda, to talk about recent market events and the value of sustainable investing through our environmental, social, and governance factor-focused, fixed income ETF listed on the New York Stock Exchange under the ticker symbol G-U-D-B. In our view, the first quarter of the year will long be remembered for the COVID-19 global health crisis, and how the many societal and economic fears that could have emerged from this pandemic became a stunning reality. It brought business closures, large and small, supply chain and production interruptions, border closings, and awkward requirements for social distancing –
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all which served to effectively shut down a large portion of the global economy. This resulted in interest rates falling sharply as investors and markets rapidly priced in a recession. In addition to this, the energy markets became embroiled in a global production fight between Russia and Saudi Arabia, the two largest producers after the United States, and this served to bring a sharp decline in oil prices, all the way to historical lows.
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The bond markets were also extremely volatile, and became highly illiquid by mid-March, as selling pressure came from investors and cash needs spiked. In response, the Federal Reserve and U.S. Treasury introduced several dramatic policy measures to bring the capital markets back into alignment and foster stabilization. Overnight interest rates were effectively cut to zero and a handful of fixed income
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income security purchase programs were introduced to bring a wave of fresh liquidity into the markets. During this time the 10-year U.S. Treasury yield declined from 1.9% to a closing low of just 0.5%. And investment grade corporate bond yields moved from a very tight 94/95 basis point spread above U.S. Treasuries to a high of 375 basis points above, comparable U.S. Treasuries and close the quarter near 275. So given this unprecedented environment of upheaval and market dislocations, let's examine how the Sage ESG Intermediate Fixed Income investment strategy did and how it is currently structured. Emma, can you please give us a quick review of the design and objectives of GUDB’s investment strategy and a general sense of how it performed compared to the broad fixed income markets in recent months?
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Emma Smith: So GUDB is an intermediate credit ETF that seeks to provide investors access to a diversified portfolio of investment grade corporate bonds issued by companies with best-in-class ESG characteristics, strong fundamentals, and a high degree of liquidity. Overall, GUDB performed well over the first quarter of 2020. We're very happy with the performance.
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Bob Smith: Thanks for that review and update Emma. That was very interesting, Andy, there are several factors that can affect risk and returns within investment portfolios over time. What do you think were the key portfolio factors that led to the recent market outcomes of GUDB’s passive investment strategy?
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Andy Poreda: Well, being a passive strategy, our ability to differ from key fundamental credit issues like duration are sometimes limited. But one of the things that we do have the ability to have control over is our credit quality. And so one of the things that we see in ESG is that there is a tendency to have a correlation of higher ESG, or highly rated ESG companies have higher credit quality, and that's true for the Sage Leaf Score as well as others. And so, in the volatile March period, we found that with spreads widening across the board, that high-quality characteristic of our portfolio did very well for us, as well as looking at individual ESG selection from a company. We found that that also gave us positive benefits as well.
Bob Smith: Thanks, Andy. That's very helpful to understand. Emma, given Andy's comments, would you add anything, and more specifically have any portfolio adjustments in terms of company or industry weightings been realized in recent weeks to kind of help improve the risk profile of the strategy in kind of preparation for what lies ahead?
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Emma Smith: Sure. So we really don't know what's lying ahead in terms of what the environment’s truly going to be like. So we predict it's going to stay in more of a cautionary territory, we want to remain that way. And so we are positioned in sectors that historically outperform in an unstable environment, and specifically an unstable health environment. So right now we're overweight in health care, overweight in information technology, and we want to stay in those kind of overweights now. And we want to stay away from overweight in any sort of consumer discretionary, travel, leisure, anything based on kind of the world running as normal. So we're currently underweight and we want to remain that way in those kind of areas. We want to stay prepared for uncertain times ahead while also maintaining our higher-quality ESG names within the sectors that we are positioned in. As we’re a passive index, we can't adjust our duration. We're tied to the broad market index in terms of fixed income characteristics, but we can change our sector allocation and our ESG security selection. So we definitely want to be on the lookout for higher-quality names and staying in the sectors that we want to be positioned in for this uncertain time.
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Bob Smith: Thank you for that Emma. Understanding those small adjustments and how meaningful they can be, you know, in terms of keeping GUDB on a competitive path is very helpful. Thank you. Andy. Let me ask another question. While financial performance of GUDB, its underlying basic financial outcomes are really important, it's also no less important that the maintenance of a high-quality ESG risk profile is maintained across the portfolio. So could you speak to how the ESG profile of this ETF stands today, and how it has evolved over the last year? And then secondly, would you also give us an understanding of what do you attribute this to in terms of its relative ESG performance compared to say, the broad market or more conventional, non-ESG optimized investment alternatives?
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Andy Poreda: Well, great question, Bob. And I think in looking at our ESG scores over the past year, we really made a concerted effort to increase the ESG profile of our GUDB ETF because we felt very strongly that in the long-term outcomes, sustainable companies will do better financially. And so if you look at our scores from well-known names, such as MSCI or Sustainalytics, you'll see that Morningstar, which uses Sustainalytics, rates us as a five-globe company and a historical sustainability score in the 6% of funds in the US Fixed Income category out of 671 total funds, as of 2/29/2020, and MSCI has us in the top 20%.
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Bob Smith: So let's kind of bottom line this and let's kind of leave it with an outlook for the markets and what we're thinking here. And what I can tell you is that we believe the current economic setting will become progressively better and stronger. As the COVID-19 health crisis subsides and government economic policy initiatives actually kicked into high gear we are in and will remain in an economic recession. Throughout the balance of this year, we will begin to see some positive economic trends emerge in the last quarter of this year. This outlook is based on two assumptions. First, that government policy will remain aggressive and vigilant enough to prevent this downturn from snowballing,
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extending into a longer-term kind of credit and business confidence crisis. Second, the continuation of social distancing, the introduction of rapid response infection testing, and the eventual approval of a high-efficacy vaccine will lead to a containment of the pandemic and its eventual elimination from the economic landscape. Throughout this period, we expect interest rates to remain low and corporate bond yield differentials versus U.S. Treasuries to revert to their historical averages. This should provide a favorable environment for investors seeking corporate credit investment opportunities created by the recent short-run market dislocations. Thank you for listening today.
Important Risk Information
Investors should carefully consider the investment objectives, risks, charges and expenses of the Sage ESG Intermediate Credit ETF. This and other important information about the Fund is contained in the prospectus, which can be obtained by calling 888-724-3911. The prospectus should be read carefully before investing. The Fund is distributed by Northern Lights Distributors, LLC, Member FINRA/SIPC.
Sage Advisory Services LTD Co. and Northern Lights Distributors, LLC are not affiliated.
The Fund generally will invest at least 80% of its total assets in the component securities of the SAGE ESG Credit Index (the “Index”). The Index consists of corporate bonds selected from the Barclays Capital U.S. Intermediate Credit Bond Index that meet Environmental, Social and Governance (ESG) criteria. The ESG investment strategy limits the types and number of investment opportunities available and, as a result, the strategy may underperform other strategies that do not have an ESG focus.
Investing involves risk including possible loss of principal. No level of liquidity or diversification can ensure profits or guarantee against loss. There is no guarantee that the Fund will achieve its objectives.
Rankings are only one form of performance and should not be used as the sole factor in making an investment decision. For more information about the Fund, please call 888-724-3911 or visit www.sageetfs.com
* The MSCI ESG Fund Quality Score measures the ability of underlying holdings to manage key medium-to long-term risks and opportunities arising from environmental, social, and governance factors. The Fund Percentile Rank measures how a fund's overall ESG Quality Score ranks relative to other funds in the same peer group.
© 2020 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.
Based on Morningstar U.S. Fixed Income Category. The Morningstar Sustainability Rating is a measure of how well the holdings in a portfolio are managing their environmental, social, and governance, or ESG, risks and opportunities relative to their Morningstar Category peers. The rating is a holdings-based calculation using company-level ESG analytics from Sustainalytics, a leading provider of ESG research. The rating ranges from “Low” to “High” on a 1-5 scale, represented by the number of “globes” the fund receives. The Morningstar Portfolio Sustainability Score is an asset-weighted average of Sustainalytics' company-level ESG Risk Score. The Sustainalytics' company-level ESG Risk Score measures the degree to which a company's economic value may be at risk driven by ESG factors. Like the ESG Risk Scores, the Portfolio Sustainability Score is rendered on a 0-100 scale, where lower scores are better, using an asset-weighted average of all covered securities. To receive a Portfolio Sustainability Score, at least 67% of a portfolio's assets under management (long positions only) must have a company ESG Risk Rating. The percentage of assets under management of the covered securities is rescaled to 100% before calculating the Portfolio Sustainability Score.
