Products

ESG Equity

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Inception Date: January  1, 2018

Investment Philosophy

The Fairpointe ESG Equity Strategy integrates structured ESG analysis with our bottom-up, fundamental valuation-based approach to investing.

We seek companies that adhere to principled corporate governance practices, are environmentally accountable and socially responsible. In our fundamental valuation-based analysis, we look for a compelling business model, effective management, financial strength, and attractive valuation. We prefer businesses with products or services that make their customers more efficient or profitable and are critical to their success. Our goal is to select companies with favorable ESG characteristics that are inefficiently priced relative to their earnings growth outlook over the next three to five years.

Investment Process

The ESG equity strategy incorporates a comprehensive evaluation of two key components: (1) ESG analysis, and (2) fundamental valuation-based analysis.

Ideas are generated from a variety of sources including: the investment team’s broad knowledge base, quantitative screens, discreet events such as short-term disruptions or spin-offs, conferences, and industry research and publications. The strategy’s investable universe includes primarily U.S. securities with market capitalizations greater than $1 billion.

Our ESG analysis begins with an assessment of a company’s corporate governance practices. We believe that when good governance leads, responsible social and environmental actions follow. We have established an aspirational list of corporate governance best practices to guide our evaluation, examples include board composition, compensation of management and risk management.  While some companies may not meet all tenants, we look for those that exhibit good practices, are working to improve and place shareholders’ interests first.

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We also look for companies with keen awareness of environmental issues, such as climate change, scarcity of natural resources, waste disposition, utilization of clean technology, and that are committed to minimizing negative impacts on our natural environment. External research, such as MSCI’s ESG database, industry reports, SEC filings, and government websites are leveraged to gain perspective on critical risk factors that are unique to an industry.

For the social pillar, we seek companies that value their employees and treat them with respect by paying fair wages and providing appropriate benefits and training. We evaluate policies and records for employee health and safety as well as product safety. To assess risk and corporate behavior, we utilize a variety of resources including: MSCI reports, litigation filings, SASB reports, and industry data.

We engage with management teams to aid our evaluation and determination of each ESG factor.  Ratings for each pillar are determined, with consideration to a company’s performance on an absolute basis and compared to peers, and the trend in behavior.  Next, an overall ESG rating is established, with the governance pillar weighed more heavily.

Our fundamental valuation-based analysis is the other key component of our investment process.  We use a combination of quantitative screens and qualitative research.  We are looking for companies with the following characteristics:

  • focused business with topline growth and competitive advantages
  • effective management
  • financial strength
  • attractive valuation

We evaluate the following quantitative valuation criteria:

  • P/E to growth rate
  • price to revenue
  • price to cash flow
  • relative P/E

An integral part of our investment analysis for both ESG factors and fundamentals is engagement with management, and in some cases the board of directors.  Meetings and conference calls typically focus on issues related to the business outlook, market share/competitive positioning, and company strategy.

A recommendation for inclusion in the ESG portfolio can be made only after a company has received a favorable ESG rating and met our fundamental investment criteria.

Our ESG Commitment

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as of September 30, 2020

Top Ten Holdings*

  1. Agilent Technologies
  2. Commercial Metals
  3. Mattel
  4. Pentair PLC
  5. Corning
  6. Bristol Myers Squibb
  7. Waters Corporation
  8. Quest Diagnostics
  9. LKQ Corporation
  10. New York Times

Portfolio Construction

Additional portfolio characteristics include:

  • Concentrated portfolio of 35-40 stocks
  • 30% maximum sector weight
  • 6% maximum position per holding

Managers

Frances E. Tuite, CFA
Portfolio Manager

  • Miami University, MBA
  • University of Cincinnati, BBA
  • Certified Public Accountant

38 years industry experience

Brian M. Washkowiak, CFA
Portfolio Manager

  • Illinois State University, BA

26 years industry experience

Performance

Returns (%) as of  9/30/2020 Q3 2020 1YR SI
Fairpointe ESG* 3.48 19.13 -15.72
S&P 400 Index 4.77 26.20 -11.08
S&P 500 Index 8.93 31.49 -4.38

*Net of Fees

Commentary

ESG Equity – 3Q 2020 Review

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Portfolio

as of September 30, 2020

Holdings By Sector*

Sectors % of Equity
Portfolio
% of
S&P 400 Index ETF
Communication Services 10.2 1.7
Consumer Discretionary 12.1 16.0
Consumer Staples 2.8 4.0
Energy 0.0 1.2
Financials 4.2 13.7
Health Care 24.6 11.2
Industrials 21.1 17.5
Information Technology 19.3 15.8
Materials 5.6 5.9
Real Estate 0.0 9.3
Utilities 0.0 3.8

Characteristics*

  • P/E 2021 Calendar Year 16.5
  • P/Revenue (forward 1-year) 1.5
  • Long Term Debt/Capitalization 39.6%
  • Return on Equity – 5-year Average  13.8%
  • Long-Term Earnings Growth Rate (5-years) 8.9%
  • P/E to Long-Term Earnings Growth Rate  1.8
  • Average Mkt Cap ($mil) $63,370
  • Dividend Yield  1.4%

 * This information is based on a representative account.