June 16, 2014 –
Green Century is pleased to share this market commentary, which was prepared in conjunction with Trillium Asset Management, the sub-advisor for the Green Century Balanced Fund since 2005.
While the stock market continues to act “predictably unpredictable” so far in 2014, Green Century remains as committed as ever to seeking competitive returns and investment opportunities, while keeping your money out of the companies with the worst environmental track records, such as coal, oil and gas companies.
Humans, and especially economists, like to think that our expectations are largely rational and that we calmly and coolly evaluate the range of our past experiences as the context for current events. In fact, expectations are heavily influenced by more recent experience.
Take this winter, for example. Most of the mid-west and eastern parts of the country experienced the past winter as an exceptionally difficult, cold, and snowy season. Many statisticians and companies attribute the first quarter of 2014’s marked slowing in economic activity to the weather.
But a comparison of meteorological records indicates that snowfall and temperatures were well within historical norms, albeit colder and snowier than the last 20 years. Surprisingly, just two weeks were exceptionally cold. But the key is in our perception. Our cognitive sensitivity to indications of changing climate may have been heightened by the devastation wrought by Hurricane Sandy, and by severe droughts across Texas, the Great Plains, and California.
Our shopping activity, our willingness to go outside, and our general sense of comfort are firmly anchored in our experience of the last twenty years. And we all agree that it was a very bad winter that perceptibly slowed down the economy!
We confess to feeling a bit of market-induced vertigo — the kind that comes from swift changes in direction and rapid ups and downs rather than just the dizzying heights. In addition to the weather, the stock and bond markets reacted to a change in leadership at the Federal Reserve and the sudden annexation of the Crimea by Russia in the aftermath of the Ukrainian revolution.
For the first quarter of 2014, the S&P 500® Index¹ returned 1.8%, including dividend income. But that included a 3.6% price drop in January, a 4.3% rally in February, and a nearly-flat 0.7% rise in March. The long-term historical average for large capitalization U.S. stocks is around 10%.² So a 1.8% return, which would compound to a 7.4% return for the year, is just slightly below average and well within the norm.
The outsized U.S. stock market returns in 2013 primarily reflected higher valuations, anchored on greater confidence in U.S. economic growth and a growing expectation that the European monetary union might not self-destruct, in our view. This year, in contrast, the portfolio managers expect that U.S. stock market returns will reflect increased corporate earnings rather than an increased valuation of those earnings.
The portfolio managers also expect U.S. economic growth to continue at a slow and measured pace, between 2.5% and 3%. We believe this is sufficient to support solid, but not exciting, corporate profit growth of 8% to 10% overall, limiting U.S. stock market returns to the same range.
With corporate profits as the defining driver for stock returns, we expect greater differentiation between stocks. Which stocks we own will be more important than just owning stocks. Recent purchases in the Green Century Balanced Fund portfolio include Trimble,* which integrates its positioning expertise in GPS (global positioning system), laser, optical and inertial technologies with application software, wireless communications, and services for the agriculture, engineering and construction and transportation industries; and Umpqua Holdings Corporation,* a Portland, OR–based financial holdings company that provides commercial banking operations and other related financial activities.
We will continue to focus on companies that we believe are managing environmental risk well, appropriately managing and rewarding their employees, and pursuing good corporate governance. We believe that these companies will, over the long term, experience stronger and steadier profit growth.
We have been hearing questions about whether it is time to reduce our allocation to stocks, based on valuation. After prices rose over 30% while earnings grew 9.5% on average in 2013, stocks are definitely pricier than they were a year ago. However, we believe a stronger economy provides a solid foundation for stock prices.
We continue to monitor economic conditions carefully, but without a change in economic direction, the portfolio managers expect stocks will continue to be much more attractive than bonds, so we have continued to position the Balanced Fund’s portfolio at a high allocation of stocks.
Within equities, we are emphasizing sectors that we believe are supported by improving economic growth rates such as industrials, technology, and financial services. With higher interest rates available on bonds, investors may tend to move toward bonds and away from high-dividend yielding stocks such as utilities and steady growth stocks such as healthcare and consumer staples, so we are slightly underweighted in these sectors.
Overall, we are gearing up for another, most likely, volatile year. We expect that in hindsight 2014 will look about average, but we will see. As always, we continue to stay alert for any signs of a changing economic direction that would warrant a modification and re-alignment of the investment portfolio.
* As of March 31, 2013, Trimble comprised 0.00% and 0.00%; and Umpqua Holdings Corporation comprised 1.78% and 0.03% of the Green Century Balanced Fund and the Green Century Equity Fund, respectively. References to specific investments, which will change due to ongoing management of the Funds, should not be construed as a recommendation of the securities by the Funds, their administrator, or their distributor.
¹ The S&P 500® Index is an unmanaged index of 500 selected common stocks, most of which are listed on the New York Stock Exchange. The S&P 500® Index is heavily weighted toward stocks with large market capitalization and represents approximately two-thirds of the total market value of all domestic stocks. It is not possible to invest directly in the S&P 500® Index.
You should consider the Funds’ investment objectives, risks, charges, and expenses carefully before investing. To obtain a Prospectus that contains this and other information about the Funds, please click here, email firstname.lastname@example.org, or call 1-800-93-GREEN (1-800-934-7336). Please read the Prospectus carefully before investing.
Stocks will fluctuate in response to factors that may affect a single company, industry, sector, or the market as a whole and may perform worse than the market. Bonds are subject to risks including interest rate, credit, and inflation. The Funds’ environmental criteria limit the investments available to the Funds compared to mutual funds that do not use environmental criteria.
This information has been prepared from sources believed reliable. The views expressed are as of the date of publication and are those of the Advisor to the Funds.
The Green Century Funds are distributed by UMB Distribution Services, LLC. 6/14.