Investor Shares Performance Commentary
The Fund invests primarily in mid- to large-cap equities across Europe, the Asia-Pacific region, and throughout the rest of the world. It is managed through a two-step process designed to capitalize on the strengths of Domini Impact Investments and Wellington Management Company, the Fund’s subadvisor. Domini creates an approved list of companies based on its social, environmental and governance analysis, and Wellington seeks to add value using a diversified stock selection approach, while managing risk through a systematic and disciplined portfolio construction process. Download Commentary as a PDF.
Total Returns as of June 30, 2017
| |
Apr
2017 |
May
2017 |
June
2017 |
2nd Qtr
2017 |
YTD |
One
Year |
Three
Year1 |
Five
Year1 |
Ten
Year1 |
Since Inception
(12/27/06)1 |
|---|
| DOMIX |
3.61% |
2.88% |
-0.55% |
6.01% |
15.96% |
22.33% |
4.50% |
11.72% |
1.34% |
1.94% |
| MSCI EAFE (gross) |
2.62% |
3.81% |
-0.15% |
6.37% |
14.23% |
20.83% |
1.61% |
9.18% |
1.50% |
2.55% |
| MSCI EAFE (net) |
2.54% |
3.67% |
-0.18% |
6.12% |
13.81% |
20.27% |
1.15% |
8.69% |
1.03% |
2.26% |
Market Overview
For the second quarter of 2017, international equities remained in positive territory, with the MSCI EAFE Index returning 6.12%2. Despite heightened geopolitical risks and political uncertainty in Europe, equity markets were resilient, fueled by generally solid economic data and strong corporate earnings growth. European markets rallied around the results of France’s presidential election, which saw centrist Emmanuel Macron soundly defeat Marine Le Pen, providing needed reassurance around the stability of the European Union. Economic indicators out of the Eurozone suggested that regional growth momentum remains strong: the composite purchasing managers’ index held steady at a six-year high as manufacturing and services exceeded expectations, unemployment fell to its lowest level since the global financial crisis, and consumer confidence improved. However, volatility sparked in June after inflation dropped below the European Central Bank’s target, casting increased uncertainty over the pace on which the ECB should rein in its stimulus program.
Conversely, In the United Kingdom inflation accelerated to its fastest pace in nearly four years, prompting consumers to reduce discretionary spending and causing retail sales to tumble. Risk uncertainties escalated significantly after the snap election on June 8 backfired against Prime Minister Theresa May, who called the election in an attempt to strengthen her hand going into Brexit negotiations, but instead wound up losing her Conservative majority in Parliament. The resulting increase in uncertainty over the Brexit timetable further exacerbated concerns over the UK’s leadership and caused the British pound to fall.
Stocks in the Asia-Pacific region advanced for the fourth consecutive quarter. In Hong Kong, GDP growth accelerated, manufacturing data turned positive, and international visitors increased. In Japan, equities received continued support from the Bank of Japan’s ongoing accommodative monetary policy, as well as improving export growth and business sentiment. Although inflation is on an uptrend, it remains well below the central bank target of 2%. Australia underperformed the region, despite a falling unemployment rate, as manufacturing growth and consumer sentiment dipped.
Emerging markets had a very strong quarter, fueled by improving economic conditions, a weaker U.S. dollar, and upbeat corporate earnings. Asia drove the majority of gains, led by South Korea, which was boosted by receding political noise and strong corporate earnings, and China, which was supported by better-than-expected real estate sales in third-tier cities and MSCI’s decision to add China A-Shares to emerging market indexes.
Fund Performance
For the quarter, the Fund’s Investor shares returned 6.01%, modestly underperforming the MSCI EAFE Index net return of 6.12%2. Security selection was neutral, with strong selection in Consumer Discretionary and Financials offset by weaker selection in Consumer Staples, Energy and Information Technology. Sector allocation made a slight positive contribution to relative performance, thanks mainly to an underweight to Energy, which was the quarter’s worst performing sector.
Geographically, security selection was very strong in Europe, with strong selection in the Netherlands and United Kingdom slightly offset by weaker selection in Norway. Selection was also strong in Japan, but was more than offset by weaker selection in Hong Kong. Relative performance benefitted from the Fund’s out-of-benchmark emerging-market positions—with strong contributions from South Korea, China, and Turkey—but this benefit was mostly offset by weakness from its out-of-benchmark positions in Brazil.
Top Relative Contributors
Top Relative Detractors
*Represents return for period in the Fund's Portfolio or return for the entire period if not held.
**Not held in the Portfolio.
The top individual contributor to relative performance was French luxury goods company Kering, which gained more than 28% for the quarter after reporting first-quarter results that far surpassed expectations. Improving Chinese demand and European tourism are providing a boost for luxury brands, and Kering is outpacing peers. Comparable sales improved 28.6% from prior-year quarter, driven by 48% growth for Kering’s largest brand, Gucci—its strongest quarterly growth in more than 20 years. The Saint Laurent brand also saw strong sales growth at 33%, while Bottega Veneta unexpectedly reversed its decline.
Spain’s Aena, which is primarily engaged in the operation of airports, was the second largest contributor for the quarter, returning almost 25%. Aena reported above-consensus results for the first quarter, driven by better-than-expected cost control, lower interest costs, volume growth in Spain, and across-theboard higher revenue.
The other top contributors this quarter came from the Financials sector. UK-based private equity and venture capital company 3i Group returned almost 28% for the quarter, reporting a 93% increase in total return for the year ended March 31, driven by gains in its private equity and infrastructure investments. Banking and financial services groups Crédit Agricole, based in France, and ING Groep, based in the Netherlands, respectively returned over 23% and almost 17%. The European banking sector, and French banks in particular, were fueled by Macron’s victory. With the political risk diminished and less cause for uncertainty on Europe’s macroeconomic recovery, investors refocused their attention on banks’ solid fundamentals, including strong credit and deposit growth and improving margin dynamics thanks to the steepening yield curve.
The largest individual detractor to relative performance this quarter was a benchmark holding that the Fund did not own: Swiss food and beverage company Nestlé, which gained almost 17% this quarter. Nestlé is not approved for investment by the Domini Funds primarily due to its leading role in the infant formula and bottled water industries, and related concerns.
The largest relative detractor that the Fund did hold was Australia’s Fortescue Metals, which declined almost 16%, as an oversupply of iron ore caused worse-than-expected pricing and shipments, leading to lower production and higher costs. Fortescue lowered full-year guidance as the price for iron ore hit a disappointing low.
Among the other largest detractors were two non-benchmark holdings: Südzucker, a German company engaged in the processing of sugar and other agricultural raw materials, and Banco do Brasil, a Brazilian financial services group. Südzucker fell more than 17% during the quarter, as progress for fiscal year 2018 is threatened by less-than-favorable trends in commodity markets. Banco do Brasil dropped almost 25% during the period held during the quarter amid declines driven by losses from small-and-medium-enterprise and auto loans.
The Fund’s overweight position in Hong Kong real estate company Wharf Holdings was another significant detractor, as stock pulled back more than 3%.
Investor Shares Performance Commentary
The Fund invests primarily in mid- to large-cap equities across Europe, the Asia-Pacific region, and throughout the rest of the world. It is managed through a two-step process designed to capitalize on the strengths of Domini Impact Investments and Wellington Management Company, the Fund’s subadvisor. Domini creates an approved list of companies based on its social, environmental and governance analysis, and Wellington seeks to add value using a diversified stock selection approach, while managing risk through a systematic and disciplined portfolio construction process. Download Commentary as a PDF.
Total Returns as of June 30, 2017
2017
2017
2017
2017
Year
Year1
Year1
Year1
(12/27/06)1
Market Overview
For the second quarter of 2017, international equities remained in positive territory, with the MSCI EAFE Index returning 6.12%2. Despite heightened geopolitical risks and political uncertainty in Europe, equity markets were resilient, fueled by generally solid economic data and strong corporate earnings growth. European markets rallied around the results of France’s presidential election, which saw centrist Emmanuel Macron soundly defeat Marine Le Pen, providing needed reassurance around the stability of the European Union. Economic indicators out of the Eurozone suggested that regional growth momentum remains strong: the composite purchasing managers’ index held steady at a six-year high as manufacturing and services exceeded expectations, unemployment fell to its lowest level since the global financial crisis, and consumer confidence improved. However, volatility sparked in June after inflation dropped below the European Central Bank’s target, casting increased uncertainty over the pace on which the ECB should rein in its stimulus program.
Conversely, In the United Kingdom inflation accelerated to its fastest pace in nearly four years, prompting consumers to reduce discretionary spending and causing retail sales to tumble. Risk uncertainties escalated significantly after the snap election on June 8 backfired against Prime Minister Theresa May, who called the election in an attempt to strengthen her hand going into Brexit negotiations, but instead wound up losing her Conservative majority in Parliament. The resulting increase in uncertainty over the Brexit timetable further exacerbated concerns over the UK’s leadership and caused the British pound to fall.
Stocks in the Asia-Pacific region advanced for the fourth consecutive quarter. In Hong Kong, GDP growth accelerated, manufacturing data turned positive, and international visitors increased. In Japan, equities received continued support from the Bank of Japan’s ongoing accommodative monetary policy, as well as improving export growth and business sentiment. Although inflation is on an uptrend, it remains well below the central bank target of 2%. Australia underperformed the region, despite a falling unemployment rate, as manufacturing growth and consumer sentiment dipped.
Emerging markets had a very strong quarter, fueled by improving economic conditions, a weaker U.S. dollar, and upbeat corporate earnings. Asia drove the majority of gains, led by South Korea, which was boosted by receding political noise and strong corporate earnings, and China, which was supported by better-than-expected real estate sales in third-tier cities and MSCI’s decision to add China A-Shares to emerging market indexes.
Fund Performance
For the quarter, the Fund’s Investor shares returned 6.01%, modestly underperforming the MSCI EAFE Index net return of 6.12%2. Security selection was neutral, with strong selection in Consumer Discretionary and Financials offset by weaker selection in Consumer Staples, Energy and Information Technology. Sector allocation made a slight positive contribution to relative performance, thanks mainly to an underweight to Energy, which was the quarter’s worst performing sector.
Geographically, security selection was very strong in Europe, with strong selection in the Netherlands and United Kingdom slightly offset by weaker selection in Norway. Selection was also strong in Japan, but was more than offset by weaker selection in Hong Kong. Relative performance benefitted from the Fund’s out-of-benchmark emerging-market positions—with strong contributions from South Korea, China, and Turkey—but this benefit was mostly offset by weakness from its out-of-benchmark positions in Brazil.
Top Relative Contributors
Top Relative Detractors
The top individual contributor to relative performance was French luxury goods company Kering, which gained more than 28% for the quarter after reporting first-quarter results that far surpassed expectations. Improving Chinese demand and European tourism are providing a boost for luxury brands, and Kering is outpacing peers. Comparable sales improved 28.6% from prior-year quarter, driven by 48% growth for Kering’s largest brand, Gucci—its strongest quarterly growth in more than 20 years. The Saint Laurent brand also saw strong sales growth at 33%, while Bottega Veneta unexpectedly reversed its decline.
Spain’s Aena, which is primarily engaged in the operation of airports, was the second largest contributor for the quarter, returning almost 25%. Aena reported above-consensus results for the first quarter, driven by better-than-expected cost control, lower interest costs, volume growth in Spain, and across-theboard higher revenue.
The other top contributors this quarter came from the Financials sector. UK-based private equity and venture capital company 3i Group returned almost 28% for the quarter, reporting a 93% increase in total return for the year ended March 31, driven by gains in its private equity and infrastructure investments. Banking and financial services groups Crédit Agricole, based in France, and ING Groep, based in the Netherlands, respectively returned over 23% and almost 17%. The European banking sector, and French banks in particular, were fueled by Macron’s victory. With the political risk diminished and less cause for uncertainty on Europe’s macroeconomic recovery, investors refocused their attention on banks’ solid fundamentals, including strong credit and deposit growth and improving margin dynamics thanks to the steepening yield curve.
The largest individual detractor to relative performance this quarter was a benchmark holding that the Fund did not own: Swiss food and beverage company Nestlé, which gained almost 17% this quarter. Nestlé is not approved for investment by the Domini Funds primarily due to its leading role in the infant formula and bottled water industries, and related concerns.
The largest relative detractor that the Fund did hold was Australia’s Fortescue Metals, which declined almost 16%, as an oversupply of iron ore caused worse-than-expected pricing and shipments, leading to lower production and higher costs. Fortescue lowered full-year guidance as the price for iron ore hit a disappointing low.
Among the other largest detractors were two non-benchmark holdings: Südzucker, a German company engaged in the processing of sugar and other agricultural raw materials, and Banco do Brasil, a Brazilian financial services group. Südzucker fell more than 17% during the quarter, as progress for fiscal year 2018 is threatened by less-than-favorable trends in commodity markets. Banco do Brasil dropped almost 25% during the period held during the quarter amid declines driven by losses from small-and-medium-enterprise and auto loans.
The Fund’s overweight position in Hong Kong real estate company Wharf Holdings was another significant detractor, as stock pulled back more than 3%.