Fossil Fuel-Free Balanced Fund


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Objective

Seeks to provide a fossil fuel-free diversified, medium volatility option that balances assets that traditionally have higher growth potential with others that typically are more stable and/or tend not to move in lock-step.

Strategy

The Fossil Fuel-free Balanced Fund blends 60% global stock market exposure with 40% bond market exposure.

Fund Investments

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The Fossil Fuel-free Balanced Fund’s equity (stock market) exposure is very well diversified globally. The fund invests in the most developed economies, such as the United States and England, as well as emerging markets, such as China and India. The equity segment of the fund is passively invested to roughly mirror the MSCI All-country World (ACWI) Index. It is broadly representative of the equity market opportunities around the globe including large, well established companies, as well as those of smaller companies. Because it seeks to mirror, rather than outperform, the broad market, it uses a passive style of investing. This means that the fund manager does not choose among stocks on the basis of which are likely to perform better or worse than others. Although the equity segment of the fund seeks to track the index, its results may be lower due to 1) biases introduced by MMBB’s social screens, including the fossil fuel-free mandate; 2) the fact that certain instruments used to gain non-US exposure will not be able to fully replicate the movements of foreign markets; and 3) investment and administration expenses.

Equity holdings are subject to three levels of screening to avoid companies that could be considered fossil fuel culprits:

  1. Fossil Fuel Reserves – companies with evidence of owning fossil fuel reserves regardless of their industries, including companies that own less than 50% of a reserves field. Fossil reserves are defined as proved and probable reserves for coal and proved reserves for oil and natural gas. Evidence of owning reserves includes companies providing the exact volume of reserves, and companies making a statement about their ownership of reserves.
  2. Carbon Intensity – companies with most recently reported or estimated Scope 1 + Scope 2 greenhouse gas emissions, normalized by sales in USD, greater than 3,000 tCO2/m USD. Normalization allows for comparison between companies of different sizes.
  3. Any company not already eliminated in the above screens that is in the Barra Energy or Utility sectors (e.g., companies providing components that go into drilling rigs).

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The Fossil Fuel-free Balanced Fund’s bond exposure is predominantly comprised of US government, corporate and municipal bonds. It may also include bonds of non-US entities which are underwritten in the US, denominated in US dollars and trade like US bonds (because of these characteristics, we consider such bonds to be US bonds in nature).

The fixed income segment is actively managed, meaning that the manager aims to outperform the benchmark index for this segment, the Barclay’s Intermediate Government/Credit Index, by purchasing those bonds expected to perform better than others, while maintaining a reasonably well diversified portfolio.

The fixed income segment may hold credits of various quality but the overall quality of the bond portfolio strives to be investment grade.

Bonds in the portfolio are subject to three levels of screening to avoid holding bonds of companies that could be considered fossil fuel culprits:

  1. Fossil Fuel Reserves Screen – identifies companies with evidence of owning fossil fuel reserves regardless of their industries, including companies that own less than 50% of a reserves field. Fossil reserves are defined as proved and probable reserves for coal and proved reserves for oil and natural gas. Evidence of owning reserves includes companies providing the exact volume of reserves, and companies making a statement about their ownership of reserves.
  2. Low Carbon Reduction Screen – identifies any company whose reserves account for more than 1% of the remaining global carbon budget (about 867 GtCO2), or that has a carbon footprint greater than 0.33% of the annual world carbon-dioxide emissions (~35 GtCO2), or with carbon intensity that exceeds 3,000 tCO2/m USD of sales.
  3. Bonds issued by companies in the energy and utility sectors and taxable municipal electric revenue and other utility revenue bonds.

As its name implies, the Fossil Fuel-free Balanced Fund is largely “balanced,” or allocated, between the two major types of investments: equities (stocks) and bonds (fixed income) and thus is considered a medium risk option. It is intended as a standard, long-term investment vehicle for those members who feel strongly about avoiding fossil fuel exposure in their retirement plan savings.

The majority of this fund is invested in stocks and American Depository Receipts of a wide variety of corporations around the globe. Historically, over long periods of time, equities have tended to provide higher returns than other investments, such as bonds or money market funds. While there is no guarantee that this will be the case in the future, investment theory suggests that exposure to equities for a portion of a diversified investment portfolio is a key reason investors would select an option like this one.

Because bonds (fixed income) usually have return patterns that are different than stocks, and very often move in the opposite direction than stocks, the bond component of the Fossil Fuel-Free Balanced Fund tends to have a stabilizing effect on the entire portfolio. This can be particularly valuable when equities are in decline.

All investments risk the loss of capital. Although the combination of stocks and bonds in the Fossil Fuel-Free Balanced Fund creates a very well diversified fund that should cushion shocks in any one of those areas, the return of this fund could still be negative.

Like MMBB’s equity-only investment options, the portion of the Fossil Fuel-Free Balanced Fund that is allocated to stocks (equities) can decline in value. Among the reasons stocks can lose value include declines in the overall stock markets and reasons related to the profitability, or perceived profitability, of specific companies in which the fund invests.

That portion of the Fossil Fuel-Free Balanced Fund that is allocated to bonds (fixed income) will be subject to risks of the bond market. Most commonly these include losses from rising interest rates and the risk that issuers of bonds may not be able to meet their interest and principal payments. In addition, because the bond segment of the fund is actively managed – meaning that the manager selects certain bonds that he thinks will outperform others – the choice of bonds may be adverse and actually perform less well. The success of any actively managed portions is highly dependent upon the skill of the manager appointed to manage it.

Due to the latitude extended to an active manager, the portfolio may hold some securities that could be deemed to be riskier than those MMBB might include as stand-alone policy allocations (e.g., below investment grade bonds).

Significantly for members interested in investing in the MMBB Fossil Fuel-Free Balanced Fund, there is no guarantee that one will have a positive impact on the environment simply by investing in this option.

This investment option has been custom built for MMBB. As such, no actual, long-term track record exists at inception. A mitigating factor for this risk is that MMBB believes the managers selected to manage this option are excellent, established organizations, deeply experienced in custom building portfolios for clients with mandates similar to MMBB’s.

*If you are uncomfortable with the risks associated with the Balanced Fund, you may want to consider another MMBB investment option.*

The performance of the Fossil Fuel-Free Balanced Fund is summarized below. The longer the time period, the more likely it encompasses varying economic and market conditions.

TOTAL RETURN AS OF September 30, 2018
1-Mo YTD 1-Yr 3-Yrs 5-Yrs 8-Yrs 10-Yrs
Fossil Fuel-Free Balanced Fund -0.17%
Fossil Fuel-Free Fund Multi-Asset Class Benchmark 0.10%

Past performance is no guarantee of future results. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Performance is for the stated time period only; performance through the current date may be lower or higher than displayed above due to market fluctuations, manager performance or other reasons.

Parametric Portfolio Associates LLC
Breckinridge Capital Advisors

Annual Expenses

Fund Expenses — Year 2018
Investment Management Fees0.21%
MMBB Administrative Charge0.50%
Other Expenses0.12%
Total Annual Operating Expenses0.84%