The Fund’s Investor shares declined 3.70%, underperforming the MSCI EAFE Index return of -1.24%. Security selection was the largest driver of underperformance, with stronger selection in the consumer staples sector more than offset by weaker selection in information technology and industrials. Sector allocation also had a negative impact on relative results, primarily because the Fund was significantly underweight to the energy sector, which was MSCI EAFE’s top performing sector for the quarter. The Fund maintains this underweight largely due to its exclusion of oil and gas exploration and production companies‡. Geographically, security selection was weakest in Asia, particularly in Japan, while the Fund’s out-of-benchmark emerging-markets positions also detracted from relative results.
At a security level, the largest detractions to relative results came from the Fund not owning benchmark constituents Shell and BP, which returned almost 13% and 15%, respectively, for the Index. Both companies are ineligible for investment by the Fund due to Domini’s oil and gas exclusion‡.
Among Fund holdings, the largest individual detractor was Japanese social networking service Mixi, which fell 31.5%. The company reported mixed results for its fiscal fourth quarter, and its Media Platform is expected to remain sluggish due to the suspension of its ticket resale business, TicketCamp, which was discontinued in May due to trademark-related violations. Mixi issued lower-than-expected guidance for its coming fiscal year, expecting declines in sales and operating profits as it invests for future growth.
Another Japanese company that was among the largest detractors was Yamada Denki, a consumer electronics retailer that declined almost 18%. The company reported weak results in May, with a decline in operating profit attributed to restricted purchases and increased use of discounts to reduce inventory levels. Yamada lowered guidance even further below expectations due to the need to rebalance divisional inventories in preparation for a new store format.
Our non-benchmark position in Turkey’s VakıfBank (Türkiye Vakıflar Bankası) also detracted significantly from relative results. The bank plunged nearly 35% amid Turkey’s monetary crisis. With maturities looming on overseas debt, the recent collapse in the value of the Turkish lira could make repayment significantly more expensive for VakıfBank.
Helping offset these weak results, were overweight positions in a number of strong performers. The largest individual contributor for the quarter was French luxury-goods company Kering, which gained almost 28%. The company reported strong first-quarter results, driven by sales growth for its Gucci brand, which saw higher volumes and prices. Kering’s Balenciaga and Yves Saint Laurent brands were also strong, offsetting soft sales for Bottega Venetta.
Two UK grocery retailers were also among the top contributors: Sainsbury’s and Morrisons, which rose almost 30% and 15%, respectively, with both stocks benefitting from improved sentiment across the sector. In late April, Sainsbury’s announced a surprise merger agreement with Walmart-owned Asda. The deal would make the combined entity the largest grocery retailer in the UK, surpassing Tesco, and could lead to greater long-term margin stability for the UK’s large grocers. Morrisons, which reported another quarter of strong sales volume growth, would become the country’s third largest grocery retailer, and could also stand to benefit from ongoing industry consolidation.
Other top contributors included Danish pharmaceutical company Lundbeck, which rose nearly 26%, and Japanese railway operator JR Central (Central Japan Railway Company), which gained 9.5%. Lundbeck reported better-than-expected results for the first quarter, underscored by higher revenues and cost savings, which are expected to be maintained throughout the year. The beat was driven by strong sales for Cipralex, an antidepressant, and for Onfi, a drug used to treat epileptic seizures. JR Central issued a better-than-expected forecast for fiscal-year operating profit, with strong business and leisure travel expected to drive revenues.