Commentary - September 2023Tran Sustainable Focus Fund

Portfolio Managers Quoc Tran and Michael Im, CFA discuss this year’s top heavy market performance, how the Fund’s holdings are positioned to grow in the face of higher interest rates, and their thoughts about the market and economy.

Would you please discuss the “top-heavy” market performance that we have seen this year?

This year, the “Magnificent Seven” stocks—Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla—have led the market, but the group’s performance has been diminishing. In the first quarter, these seven stocks contributed over 80% of the S&P 500 Index returns. In the second quarter, they contributed 65% of returns, and in the third quarter, they contributed only about 45%. This pattern suggests that overall Index performance is broadening out, which should be healthy for the overall market and the Fund.

Following this period, we believe companies with an attractive valuation and healthy earnings growth look particularly compelling. As of September 30, 2023, the Cromwell Tran Sustainable Growth Fund was selling at a slight premium to the market yet the holdings, on average, were anticipated to grow nearly twice as fast as the market.

Fund - More Growth Potential than the Overall Market
  2024 Price to Earnings 2024 EPS Growth Rate Weighted Avg. Market Capitalization
Fund 19.6x 19.5% $407B
S&P 500 17.5x 10.2x $633B

Source: Bloomberg, Earnings growth is not representative of the Fund’s future performance. Stated growth rates are estimates and may not be realized. Data as of 9/30/23.

Past performance does not guarantee future results.

How are the Fund’s holdings positioned to grow in the face of “higher for longer” interest rates?

Many of the holdings in the Fund have historically been leaders in their industries and have generated significant free cash flow. Given this position of strength, a number of holdings are gaining market share in this environment by taking proactive actions to strengthen their businesses or expand into new markets.

For example, with its strong balance sheet, Microsoft took advantage of the market environment to acquire Activision Blizzard. The video gaming company expands Microsoft’s addressable market and with multi-player gaming, it is expected that the IT and server support will be placed on Azure, the cloud computing platform run by Microsoft.

Would you please provide an example of a new holding and how it exemplifies your investment process?

Multi-national financial services company Charles Schwab is a new holding in the Fund. Over the past several months, some high-quality businesses have faced short-term pressures because of higher interest rates, providing an opportunity to invest at attractive prices.

After many stocks in the Financial Services sector declined in the first half of the year, we purchased Schwab, a company we have admired for years.

Schwab has historically traded at a premium to the market; however, as of the third quarter, the stock was selling at about 14x 2024 earnings compared to the S&P 500’s 17.5x. Although higher interest rates have weighed on its deposits, we believe this is a short-term issue that will dissipate over the next four to six quarters.

In the meantime, Schwab is levered to the asset growth of Registered Investment Advisors, who have been gaining market share with retail investors, growing about 8% a year compared to broker-dealers and securities firms that have increased about 2% a year.

From an ESG perspective, Schwab has a strong track record in promoting women to the board and senior management level.

What are your thoughts about the market and rate hikes as we close out the year?

From a performance standpoint, August and September have historically been among the weakest months of the year. This year was no different. Alternatively, October, November and December are among the months that have historically provided the best returns of the year. We believe the recent pullback in stocks provides an attractive setup for the rest of the year and going into 2024.

Additionally, the Federal Reserve appears to be ending its rate tightening cycle with potentially one more rate hike in November. This period has generally been positive for investors. In the past following the final tightening, the S&P 500 has generally rallied about 15-30% over the next 12 months.

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.

Holdings can be found here.