A return to 60/40 balance? [PODCAST]
This strategy fell out of favor, but it may be poised for a return.
This strategy fell out of favor, but it may be poised for a return.
By Chad Miller, CFA, Senior Portfolio Manager | 10/04/2022
An introduction to the new Thrivent Small-Mid Cap ESG ETF. Portfolio manager Chad Miller, CFA, describes the Fund’s strategy and how his team finds opportunities.
An introduction to the Fund
Hi, I'm Chad Miller. I'm the portfolio manager on our Small-Mid Cap ESG ETF.
Thrivent Small-Mid Cap ESG ETF is an actively-managed product that invests in small- and medium-sized companies who have a demonstrated commitment to ESG initiatives and furthering sustainable business practices. When we combine our fundamental research with our ESG research in our investment process, we're left with a portfolio of companies that has a strategy [that seeks] to outperform the benchmark and also further ESG initiatives and sustainable business practices.
Why is Thrivent launching this Fund?
At Thrivent, everything we do is with the aim of providing financial clarity for our clients through purpose-based financial advice. And, we know that our clients care deeply about purpose and the positive impact they're having on the causes that they support. These are charities; this is their communities, their family and friends.
We also know that our clients [seek] an attractive financial return. We have combined the element of purpose and positive impact, and ultimately, we attach this to a goal of generating a strong financial return to this purpose-driven approach.
Why small- & mid-cap stocks?
We focus on small- and mid-sized companies in this Fund because we have a number of very strong-performing funds across the small- and mid-cap space. So, we're able to leverage the unique experience and knowledge that our investment team brings to the table.
On top of this, we integrate our ESG process with a key tenant being engagement with the companies. As a long-term investor, we are able to establish ourselves as partners with these companies and engage in discussions that really get to the long-term principles of where they are headed.
Lastly, we believe that small- and mid-sized companies offer a very long runway for financial success as they are helping solve some of our biggest challenges today, both from the environmental perspective as well as other issues [with which] they can help. This runway, by that definition, is long and broad. Those companies who can feed into being a part of the solution into the future have the opportunity to become extremely large companies at some point in the future.
How do you reduce risk?
We focus on ESG for two primary reasons: first, to reduce risk; and second, to identify opportunities in the marketplace.
If we explore the ability to reduce risk, it's our belief that many companies who face challenges or potential scandals, their issues ultimately trace back to one of the topics under E, S, or G. It could be a disregard for the environment and the knock-on effect that that is having on their communities, their customers, and their employees – and that eventually causes problems in their business. It could be a social issue where those companies don't have proper ethics or investments in their workforce to create a structure where feedback can flow through the company and identify problems before they become too large. It could be a governance issue where companies don't have the correct policies and procedures in place to make sure risk is managed appropriately.
And so, having a framework to address and analyze how companies are performing across the various E, S, and G buckets helps us to identify potential risks in our investments.
How do you find opportunities?
In order to identify ESG opportunities, we rely on our stakeholder analysis process. It's our belief that those companies who can sustainably and successfully serve the primary stakeholders in their business ecosystem are better positioned than most to achieve attractive financial results into the future.
Typically, we define six primary stakeholders that each company needs to successfully serve. Those being the environment, their employees, their customers, their suppliers, the communities they operate in, and then having effective corporate governance over the top. And what we do is we step through each of these primary stakeholders, and we try and make an assessment. Is the company successfully serving the needs of that stakeholder today and into the future? And if so, what do they need to continue to do to be on the leading edge of those needs and anticipate changes that might occur into the future? And if not, what are some steps that they can potentially take to address the needs of each stakeholder?
And what we're left with after we complete this process is a better understanding of the company's risks and opportunities through their business ecosystem to help us make a better investment decision. And then [we] also engage with those companies on the issues that we think are financially material from an ESG perspective.
What sets this Fund apart from ESG index funds?
As an actively-managed ESG fund, [we believe] we have an advantage over a passively-managed ESG fund because we can actively engage and consider the various topics.
We have a number of different resources to help us analyze and understand the topics that we're looking into and their ultimate ramifications on stakeholders. So, we can go into the individual circumstance and make a determination on what is best in this specific scenario, as opposed to making overarching decisions that have to take place in the passive fund that owns 300 to 500 or so individual securities. We're really looking for the top 50 or so companies that are doing a good job of addressing these material ESG issues across their business.
An advantage we believe we have, as opposed to a traditional ESG index fund: we have the ability to look at an issue from all different angles. We can go in and see what the company is saying, we can go in and see what their customers, what their employees and other stakeholders are saying, and try and use that context to make a determination of: in this specific situation, what is the best thing a company can do to address this issue?
Mr. Miller is discussing the asset classes and portfolios he manages. The views expressed are as of Oct. 4, 2022, may change as market or other conditions change, and may differ from views expressed by other Thrivent Asset Management, LLC associates. Actual investment decisions made by Thrivent Asset Management, LLC will not necessarily reflect the views expressed. The commentary should not be considered as investment advice or a recommendation of any particular security, strategy, or product.
The concepts in this presentation are intended for educational purposes only. They may not be suitable for your clients’ particular situation. The suitability of any specific product or strategy will be dependent upon your clients’ particular situation.
This ETF is different from traditional ETFs. Traditional ETFs tell the public what assets they hold each day. This ETF will not. This may create additional risks for your investment. For example:
The differences between this ETF and other ETFs may also have advantages. By keeping certain information about the ETF secret, this ETF may face less risk that other traders can predict or copy its investment strategy. This may improve the ETF’s performance. If other traders are able to copy or predict the ETF’s investment strategy, however, this may hurt the ETF’s performance. For additional information regarding the unique attributes and risks of the ETF, see the Principal Risks section of the prospectus.
Additional risks associated with the fund: The ETF is newly formed and does not have any operating history. Small and medium-sized companies often have greater price volatility, lower trading volume, and less liquidity than larger, more established companies. The ETF’s value is influenced by a number of factors, including the performance of the broader market, and risks specific to the Fund’s asset classes, investment styles, and issuers. Markets may also be impacted by domestic or global events, including public health threats, terrorism, natural disasters or similar events. ESG strategies may result in investment returns that may be lower than if decisions were based solely on investment considerations. Because ESG criteria exclude certain securities/products for non-financial reasons, investors may forego some market opportunities available to those who do not use these criteria. ETFs trade like stocks, are subject to investment risk, and will fluctuate in market value. Unlike mutual funds, ETF shares are not individually redeemable directly with the Fund, and are bought and sold on the secondary market at market price, which may be higher or lower than the ETF's net asset value (NAV). Transactions in shares of ETFs will result in brokerage commissions, which will reduce returns. The Adviser's assessment of investments and ESG considerations may prove incorrect, resulting in losses, poor performance, or failure to achieve ESG objectives. The Adviser is also subject to actual or potential conflicts of interest. These and other risks are described in the prospectus.