Our Investment Approach
As the stewards of our shareholders’ capital, we focus on preservation of capital first and foremost. This discipline has led us to invest in securities where we believe the potential price depreciation is limited and the potential upside is substantial. To identify such investments, we conduct a thorough, bottom-up analysis of a company’s financial statements, business model, and quality of management. When we invest in companies, we do so with a long-term time horizon; we are not traders speculating on short-term moves. Rather, we view our investment commitments as if we were purchasing the entire company rather than a small minority stake. The fundamental characteristics of our investment process include the following:
- We consider the strength of the economy and overall market conditions, but we are ultimately bottom-up rather than top-down investors.
- We seek out quality companies with healthy balance sheets, positive cash flows, solid business models, and strong management.
- We tend to be contrarian investors by purchasing stocks of companies that we believe are only temporarily out-of-favor.
- We search for responsible management teams that are focused on delivering long-term value to their customers.
We are long-term investors who recognize that value is not created in a single quarter or even in a single year. Long-term, enduring value is created over years of hard work with smart decisions and prudent long-range planning. As the adviser to Appleseed, we examine a company’s Environmental, Social, and Governance (ESG) factors when we evaluate an investment, when we communicate with management, and when we vote on shareholder initiatives.
By considering environmental, social, and governance performance when we invest, we believe we can reduce our investment risks. When a company focuses on improving its safety performance, it reduces the risk of a safety-related lawsuit. When a management team is already looking to improve its own environmental performance, the likelihood of a large environmental-related liability is diminished. When management incentives are properly aligned with shareholders, managers are less likely to risk a company’s competitive positioning for a short-term gain of the stock price.
We focus our impact efforts in three different areas.
- We integrate environmental, social, and governance factors into our investment process.
- We engage with management teams and boards to help them improve their impact.
- We invest in underserved areas of local communities, through our deposits in community-based banks and credit unions.
Environmental, Social, and Governance Factors
The Fund performs both negative and positive ESG screens on its investments, and the research involved provides us with important insights into a company’s culture and management’s ability to take a long-term view of the business. We apply responsibility screens as an important risk management tool. We also perform these screens to ensure that we own responsible companies with managers who make decisions with an awareness of their impact on the environment and on their community.
We exclude fossil fuel producers from the Appleseed portfolio along with several other industries including but not limited to tobacco, gambling, and weapons. We also seek to make investments in companies that are making a positive impact through the product or service that they sell or by structuring their business processes in a socially and environmentally responsible way.
We vote on Fund proxies in a manner that considers shareholder interests and that encourages company boards to govern more responsibly. Our votes support management incentives that are aligned with the creation of long-term, enduring value for stakeholders, encourage more transparent reporting on companies’ sustainability initiatives, and bolster boards’ efforts to balance the interests of its stakeholders.
Another way we encourage companies to become more sustainable is by submitting formal resolutions to ratify or request a specific action be taken by a corporate board.
Appleseed Fund generally holds between one and two percent of its portfolio in investments which have a direct, positive impact on local communities. We have allocated a portion of the Fund’s capital to CDs in various Community Development Financial Institutions (CDFIs). These CDFIs provide loans to individuals and businesses which are under-served by traditional banks.
The universe of acceptable investments for the Fund may be limited as compared to other funds due to the Fund’s ESG investment screening. Because the Fund does not invest in companies that do not meet its ESG criteria, and the Fund may sell portfolio companies that subsequently violate its screens, the Fund may be riskier than other mutual funds that invest in a broader array of securities. Although Pekin Hardy believes that the Fund can achieve its investment objective within the parameters of ESG investing, eliminating certain securities as investments may have an adverse effect on the Fund’s performance.