At United Church Funds (UCF), we are consistently communicating with and evaluating the investment managers we utilize within our funds, and we want to make you aware of some significant changes we have made in the first half of 2020. We have eliminated Fiduciary Management as a value strategy manager in both the Domestic Core Equity Fund and Small Cap Equity Fund and added Nuveen’s Core Impact Bond Strategy to our Fixed Income Fund. We had several reasons for making these adjustments, which we’ll outline:
A Move Away from Value Strategies in Equity
Fiduciary Management’s primary investment philosophy for UCF’s funds was to invest in durable businesses that provide strong downside protection. However, their strategy hasn’t provided that protection recently, including the first quarter of 2020, nor has it kept up during positive market cycles we experienced in 2017 and 2019. Like many other value-focused managers, Fiduciary has been struggling with its performance and, in our view, has not come up with a good plan for improvement.
U.S. Small Cap – UCF’s Investment Team has been proactively reducing our investment in Fiduciary U.S. Small Cap over the last two years, with a goal to lock in its periodic outperformance and move toward a full removal from the manager line-up. This removal process was completed in Q2 2020. Most of the proceeds went to our relatively new small cap equity manager, BlackRock Russell 2000 Alpha Tilts, which added more than 5% alpha per year since inclusion in the UCF Small Cap manager stable in January 2019. (“Alpha” is a term used to describe returns that exceed the benchmark.)
U.S. Large Cap – The move away from Fiduciary Management in Large Cap has been a more recent development and was completed in Q2 2020. The assets previously managed by Fiduciary Management were allocated to other current managers – namely Quantitative Management Associates U.S. Large Cap Equity and State Street Global Advisors S&P 500 Screened Index. UCF’s Investment Team expects these adjustments will improve future performance.
Diversification in Fixed Income Strategies
UCF’s core fixed income strategy, previously managed solely by the UCC Pension Boards’ Fixed Income team, has delivered outstanding performance in Q1 and Q2 2020 due to its conservative positioning. Unfortunately, that same positioning tended to hinder performance in the past, particularly during positive market cycles. Therefore, we believe that more diversification would benefit UCF investors given current and anticipated market conditions for bond investors.
UCF’s Investment Team, supported by UCF’s Investment Committee, used Q2 2020 to diversify the core fixed income strategy with the addition of Nuveen Core Impact Bond Strategy. Nuveen’s strategy seeks to provide a long-term total return by investing in investment-grade securities, with special consideration to social impact. We believe the two core fixed income managers will complement each other going forward.
About BlackRock Russell 2000 Alpha Tilts
A Small Cap Quantitative manager that incorporates a blend of bottom-up stock selection insights and top-down thematic insights to generate risk-controlled returns. The investment model groups securities in three broad areas: Fundamentals, Sentiment and Macro Themes. Click here to learn more about BlackRock.
About Nauveen Core Impact Bond
A Core Fixed Income manager that seeks to provide a long-term total return through income by investing in investment-grade securities that meet the team’s ESG criteria, with a special consideration to social impact (Proactive Social Investments), which has been ~30-40% of the portfolio. Impact themes include affordable housing; community and economic development; renewable energy; and climate change and natural resources. Click here to learn more about Nauveen Core Impact Bond.