ESG Large Cap Value

ESG Large Cap Value Strategy

Overview: Matrix ESG Large Cap Value is an equity strategy investing in Large Cap common stocks and ADRs.  It builds on our flagship Large Cap Value (LCV) investment process with an ESG (Environmental, Social and Governance) overlay.  A candidate stock is first assessed for its investment merits using our long-standing research and investment process for the LCV strategy.  It is only after a stock is approved for inclusion in the LCV strategy that we further explore whether it is also a suitable candidate for the related ESG-LCV strategy.  All stocks in the ESG portfolio are included in the related flagship portfolio, but not all stocks in the LCV portfolio must be included in the ESG version.

Investment Objective: Capital appreciation in quality companies trading at a significant discount to their intrinsic value, providing opportunity to deliver strong results over time as solid managements drive both growth in value and a reduction in the discount.  Seek to excel in Value-driven markets, and to outperform the benchmark on average over time.  Invest in companies with a demonstrated commitment to ESG principles.

Research Process: Fundamental research on individual companies (both quantitative and qualitative) by our analysts to identify high quality companies trading at a significant discount (30%) to their intrinsic value.  Additionally, we overlay a supplementary analysis to assess a company’s approach to complying with positive ESG principles.

ESG Overlay: The ESG overlay uses ESG scoring and analysis from Morningstar’s Sustainalytics, an acknowledged leader helping investors identify, understand, and manage ESG-driven risks and opportunities.  Sustainalytics provides descriptive risk analysis and numerical scoring of each of the environmental, social and governance “pillars.” Companies that score under 30 by Sustainalytics are judged to be “good”, with lower scores being better.  Also, Matrix uses a company’s ESG scores and analysis from Refinitiv, another well-respected provider of this data, as a secondary source.  Refinitiv uses letter grades to assess a company’s standing on ESG issues.  Companies generally must score under 30 on Sustainalytics to be included in Matrix ESG portfolios.  For companies that score at or slightly over 30, we use Refinitiv’s ratings to gain additional perspective on the company’s ESG characteristics.  In addition, the Matrix investment team reviews annual ESG/sustainability reports and disclosures provided by companies, noting especially areas of concern that need improvement and progress made to address previous deficiencies.  For companies that receive a borderline ranking from one or both rating services, we do a deep dive that examines the pertinent issues on a qualitative basis.  This review includes the current ESG status of a company as well as its plans to address any shortfalls.  In cases where we believe a company is focused and committed to addressing problem areas in upcoming periods, we will consider the stock for inclusion in an ESG portfolio.  If we are uncomfortable with their commitment to ESG principles, the company will not be included in ESG portfolios.

Buy Discipline: Identify mature, successful companies with strong financial characteristics, selling at attractive valuations relative to each company’s intrinsic value with an additional ESG overlay.

Sell Discipline: Stocks will be sold from the ESG portfolios based on the sell criteria used in the LCV portfolio or if the ESG performance of a company in a portfolio declines below acceptable levels, unless the company’s plan to remediate the issue is deemed reasonable and timely by Matrix.  Reasons that a stock may be a candidate for sale include: the share price reaches our target price, the company’s outlook deteriorates, or the balance sheet materially weakens.

Risk Management: Monitor and assess the contribution to total portfolio risk.  Risk is evaluated at five levels – security, industry, sector, portfolio, and ESG overlay.