Small Cap Value ESG Equity Strategy - Investing in responsible companies that appear under-scrutinized, irrationally mispriced and attractively ...
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QUARTERLY UPDATE Small Cap Value ESG Equity Strategy Investing in responsible companies that appear under-scrutinized, irrationally mispriced and attractively valued
Market Commentary
Q2 2021 UPDATE
Small cap value stocks rose 4.6% in Q2, which actually appears MARKET INDICES TOTAL RETURN
subdued when compared to recent quarterly gains but is still QTR YTD 1 Year Comments
above the long-term average 3.3% quarterly return. While they Narrowing market
trailed large cap stocks for Q2, over the year-to-date and trailing breadth as
12-month periods, small cap value stocks remain the best S&P 500 Index 8.6% 15.2% 40.8%
sentiment gets
performing U.S. equity style by a large margin. more “defensive”
As interest rates have trended lower in recent weeks, some Russell 1000
11.9% 13.0% 42.5% Large cap wins in
investors are wondering how much longer the recent period of Growth Index
Q2, with growth
small cap outperformance can last. History suggests that this Russell 1000
5.3% 17.0% 43.7% setting the pace
small cap rally may have much farther. When small cap value Value Index
stocks have outperformed small growth or large growth by 5% or
Russell 2000
more over a six-month period (like we have just witnessed), the 3.9% 9.0% 51.4% Value wins in
Growth Index
subsequent one-year and three-year returns have historically small cap but loses
favored small cap value outperformance as well. Russell 2000 in large cap
4.6% 26.7% 73.2%
Value Index
Market breadth narrowed during the period as investors shifted
Micro cap value
toward a more “defensive” posture, and large and mega cap growth Russell Micro
4.8% 35.6% 83.6% still holding up
stocks were the beneficiaries. Cap Value Index
well
With small cap value earnings rising faster than stock prices this Russell 2000
quarter, absolute valuations have fallen to slightly below longer 4.3% 17.5% 62.0% Small ESG stocks
Index
term averages. Relative valuations continue to strongly favor small enjoy a second
MSCI USA Small consecutive
cap value stocks.
Cap ESG 4.5% 17.9% 59.8% quarterly win
Even though less ESG-friendly energy stocks outperformed again Leaders Index
in the 2nd quarter, small cap ESG companies (as measured by the
Data through June 30, 2021. Source: Morningstar. The total return performance of
MSCI USA Small Cap ESG Leaders Index) outpaced the broader these market indices does not represent the past or future performance of any
Russell 2000 Index. Fund flows into ESG continue at a torrid pace, Bailard strategy, account or product. Past performance is no indication of future
results. All investments have the risk of loss. Please see the Market Index section of
keeping the wind at the backs of ESG focused investors.
pages 20-21 for additional information.
Small Cap Value ESG Equity Strategy FOR INVESTMENT PROFESSIONAL/ADVISOR USE ONLY. NOT FOR DISTRIBUTION TO THE PUBLIC | 2
Performance Commentary as of June 30, 2021
Q2 2021 PERFORMANCE1
The Bailard Small Cap Value
Composite’s 2nd quarter performance TOTAL RETURN NET OF FEE1, 2
was gratifyingly solid given the
incredibly strong quarter and year that Quarter YTD 1 Year 3 Years 5 Years 10 Years
preceded it. The Small Cap Value ESG Bailard Composite 5.52% 28.11% 76.13% 11.27% 12.38% 10.75%
Equity Strategy produced a nice win
Russell 2000 Value Index 4.56% 26.68% 73.24% 10.24% 13.60% 10.84%
against the Index in spite of another
round of retail investor driven “meme” Russell Micro Cap Value Index 4.80% 35.64% 83.60% 11.64% 17.13% 12.80%
stock speculation. AMC Entertainment
(AMC) rose over 455% in the quarter to
become the largest single stock position ACTIVE RETURN NET OF FEE1,2
in the Russell 2000 Value Index. At the
Quarter YTD 1 Year 3 Years 5 Years 10 Years
Index’s annual rebalancing on June 25,
Vs. Russell 2000 Value Index 0.96% 1.42% 2.89% 1.03% -1.23% -0.09%
GME and most other “meme” stocks
were removed from the Index, but due to Vs. Russell Micro Cap Value
0.71% -7.54% -7.47% -0.37% -4.75% -2.05%
a quirk of Russell’s methodology (using a Index
late May cutoff date for measurement) 1 The “Bailard Composite” is the Bailard, Inc. Small Cap Value Composite. The benchmark is the Russell 2000 Value
AMC was small enough at the time to Index. The indices presented do not have fees. Please see additional performance on page 13. See pages 19-21 for
market definitions and important disclosures. Sources: Morningstar, Bloomberg.
remain in the small cap index for the
2 Active return is the difference between the return of the strategy and the return of the index. Performance
next 12 months. Given our belief that
statistics are annualized for periods greater than one year.
there is a massive disconnect between
AMC’s current valuation and its future
prospects, having it remain in the Index
may turn out to be a blessing in disguise.
Small Cap Value ESG Equity Strategy FOR INVESTMENT PROFESSIONAL/ADVISOR USE ONLY. NOT FOR DISTRIBUTION TO THE PUBLIC | 3Attribution Commentary as of June 30, 2021
Q2 2021 ATTRIBUTION
Our primary stock selection tool, the multi-factor,
behavioral Bailard Ranking Model (BRM), produced a small
win for the quarter. Value factors were a minor help to
BAILARD COMPOSITE ATTRIBUTION VS. BENCHMARK
performance in spite of the market’s renewed interest in
(TOTAL RETURN)*
growth. Quality factors were neutral, while hype
characteristics (excessive investor attention) were actually Q YTD
negative for the period. Our analyst herding bias factor
turned in a good quarter and has been strongly positive 2.6%
YTD. 1.6%
0.9% 1.1%
Our subsector-specific stock selection models fared better 0.3% 0.5%
0.0%
than the BRM for the quarter, with wins in banks, REITs,
insurance and utilities and a loss in pharmaceuticals. -0.2% -0.1%
-1.0%
Sector allocation was a very slight performance detractor
for the period, while style bets were additive, due to good
performance by value stocks tilted more toward the
growth end of the spectrum.
BRM Model CAQC Sector Style Bets Non-systematic
CAQC (Curated Assessment of Qualitative Conviction, our Allocation
proprietary measure of sophisticated investor interest in
stocks that lack quantifiable appeal) was essentially flat in * The benchmark is the Russell 2000 Value Index. Please see pages 19-21 for important
the 2nd quarter as success elsewhere in the portfolio was disclosures. Our Behavioral Ranking Model (BRM) is a proprietary, multi-factor,
quantitative tool for determining relative stock attractiveness within each of the 24
offset by underperformance in pharmaceuticals. economic sub sectors. CAQC (Curated Assessment of Qualitative Conviction is our
proprietary measure of sophisticated investor interest in stocks that lack quantifiable
Our non-systematic tilts (primarily fee income focused appeal). Sources: Russell, Bailard.
banks and less carbon intensive utilities) did well in the
2nd quarter.
Small Cap Value ESG Equity Strategy FOR INVESTMENT PROFESSIONAL/ADVISOR USE ONLY. NOT FOR DISTRIBUTION TO THE PUBLIC | 4ESG Capture® Over the Quarter
Small Value ESG Capture® Model Portfolio Excess Return versus Russell 2000 Value Index
3/31/15 – 6/30/21
In Q2 2021, our ESG Top Quintile ESG Capture® Bottom Quintile ESG Capture®
Capture® model 40.0%
30.0%
portfolio had strong 20.0%
performance 10.0%
Excess Return
separation between 0.0%
-10.0%
the top and bottom -20.0%
quintiles of our ESG -30.0%
Capture® scores. -40.0%
-50.0%
Apr-15
Jul-15
Apr-16
Jul-16
Apr-17
Jul-17
Apr-18
Jul-18
Apr-19
Jul-19
Jan-20
Jan-21
Oct-15
Oct-16
Oct-17
Oct-18
Oct-19
Apr-20
Jan-16
Jan-17
Jan-18
Jan-19
Jul-20
Apr-21
Oct-20
The excess return shown above are hypothetical in nature – please see important disclosures regarding hypothetical returns at the end of this document. ESG Capture® is
Bailard’s proprietary process of scoring ESG attributes at the individual security, sector, and/or total portfolio level. This chart shows the excess return of the Top Quintile and
Bottom Quintile portfolios over Russell 2000 Value index. Top (Bottom) Quintile ESG Capture® portfolio consists of all the stocks within Russell 2000 Value universe that scores
in the top (bottom) 20% when ranked by MSCI Weighted Average ESG score. Both portfolios were rebalanced monthly from 3/31/2015 to 6/30/2021. Sources: Bailard, MSCI.
Small Cap Value ESG Equity Strategy FOR INVESTMENT PROFESSIONAL/ADVISOR USE ONLY. NOT FOR DISTRIBUTION TO THE PUBLIC | 5Small Cap Value ESG Outlook OUR OUTLOOK On balance, historically significant return drivers continue to favor small cap value stocks. With small cap value earnings rising faster than stock prices in the 2nd quarter, absolute valuations have fallen to slightly below longer term averages. Relative valuations continue to strongly favor small cap value, as it is the only equity style that is not currently overvalued. CURRENT P/E TO 20-YEAR AVERAGE As of 6/30/2021 Value Growth Russell 2000 Index 94% 134% Russell 1000 Index 138% 178% Source: Bloomberg Value vs. Growth While small cap value stocks have historically outperformed in most portions of the economic cycle, they have typically been at their best in the years following a bear market bottom corresponding with the early stages of an economic recovery. With the stock market bottoming in March of 2020, small cap value’s outperformance was delayed this time around due to pandemic uncertainty, but began in earnest in the 4th quarter and continued through the 1st quarter. While we saw a slight pause in relative performance in the 2nd quarter, we believe that significant outperformance potential remains, and will most likely correspond with another rise in interest rates before year end. Value stocks of all sizes benefit from investors shortening their investment time horizons, as value stock returns tend to be of a more immediate nature (current earnings, current dividend yields) versus growth stocks whose expected payoffs are farther into the future. Higher interest rates increase the discount rate applied to future earnings, making them less valuable today. Interest rates plateaued and then began to slip lower in the 2nd quarter, to the benefit of growth stocks. Past performance is no indication of future results. All investments involve the risk of loss. Please see important disclosures on pages 19-21. Small Cap Value ESG Equity Strategy FOR INVESTMENT PROFESSIONAL/ADVISOR USE ONLY. NOT FOR DISTRIBUTION TO THE PUBLIC | 6
Small Cap Value ESG Outlook (continued) Similarly, uncertainty about the future WHEN THE RUSSELL 2000 VALUE INDEX OUTPERFORMS OVER THE PRIOR 6 MONTHS BY reduces confidence that distant prospective 5% OR MORE returns will materialize, reducing the appeal Small Value Annualized of growth stocks and increasing the appeal of Small Value Advantage Advantage Over the more rapid returns on investment that Over Subsequent 1 Year Subsequent 3 Years value stocks provide. Investor uncertainty Against Russell 2000 Growth Index 5.71% 3.37% can be approximated and quantified using Against Russell 1000 Growth Index 6.36% 3.29% expected measures of future market volatility. Derived from the price inputs of S&P 500 Index options, the CBOE VIX Index represents the market’s expectation of 30-day forward-looking volatility. The put/call ratio measures the relative volume of put options versus call options currently traded in the market. A low ratio has historically tended to favor value stocks performance over growth stocks, while a high ratio has corresponded with growth stocks marginally outperforming or performing as well as value stocks. VIX declined though most of the 2nd quarter, and at quarter’s end was just below its average level over the past five years. The put call ratio has bounced around recently, but is down slightly for the quarter and remains low versus its five-year average levels. VIX is now neutral regarding value versus growth outperformance, but the trend continued toward growth, while the put call ratio still favors value. Small Cap vs. Large Cap Large cap companies derive more of their revenues and profits internationally than do small cap companies. A strong dollar makes US goods and services relatively more expensive to foreign purchasers, and also lowers the profits of US based companies’ overseas operations when those profits are repatriated into US dollars. While the dollar weakened in April and May, it strengthened in June and ended the quarter down only slightly, indicating no clear advantage for larger or smaller companies. ESG Investing ESG investing continues to grow by leaps and bounds and appears to have accelerated during the pandemic. We believe that ESG adoption remains in the early innings and should act as a tailwind for those employing sustainable investing methodologies for the foreseeable future. There currently seems to be a race between funds flowing into ESG companies and funds flowing into economically cyclical sectors like energy with lower average ESG scores. Over the long run, we believe that ESG wins this race, but the course may not always be a smooth one if valuation disparities become particularly large. Past performance is no indication of future results. All investments involve the risk of loss. Please see important disclosures and market definitions on pages 19-21. The periods of measurement for the table above are Jan 1979 through June 2020 for the one year subsequent, and Jan 1979 through June 2018 for the three year subsequent. Small Cap Value ESG Equity Strategy FOR INVESTMENT PROFESSIONAL/ADVISOR USE ONLY. NOT FOR DISTRIBUTION TO THE PUBLIC | 7
Small Cap Value ESG Outlook (continued)
SMALL VALUE RETURN DRIVERS
Positive Neutral Negative Comments
Absolute Valuations Currently slightly overvalued.
Relative Valuations Relatively cheap versus style alternatives.
Early recovery is historically the best time for small cap
Economic Cycle
value.
Rates plateaued and then trended lower on the belief
Interest Rates
that recent inflation may be transitory.
VIX continues to decline and now slightly below historical
Volatility/Sentiment average levels (neutral). Put/Call Ratio remains at low
levels, favoring value.
Shifted from positive to negative, in contrast to slightly
Earnings Revisions
positive for large cap stocks.
Dollar weakened early in the quarter, then strengthened
Dollar
in June.
ESG outlooks remains bright, but cyclical recovery in less
ESG ESG friendly industries still threatens to cause some
near-term volatility.
Source: Bailard. All investments involve the risk of loss.
Small Cap Value ESG Equity Strategy FOR INVESTMENT PROFESSIONAL/ADVISOR USE ONLY. NOT FOR DISTRIBUTION TO THE PUBLIC | 8Small Companies Making a Big Difference ESG SOLUTIONS COMPANY FOCUS EXAMPLE Beyond generally enlightened business practices, the companies profiled here each quarter are providing actual solutions to some of the major concerns of ESG investors. “We invest in assets that are environmentally sustainable and we manage them sustainably. We follow policies that analyze, evaluate and propose measures oriented at minimizing the environmental impacts of our business activity.” Atlantica Sustainable Infrastructure owns and manages renewable energy assets including thirteen solar power generation plants in four countries (USA, Spain, South Africa & Chile), three wind farms in Uruguay, and a hydroelectric power plant in Peru. The company owns two natural gas cogeneration plants in Mexico. Cogeneration is the simultaneous production of electricity and useful heat from the same power source, resulting is more efficient use of the input fuel, in this case, natural gas. Beyond generating cleaner electricity, Atlantica owns six electrical transmission lines in two countries (Peru and Chile), and hold one majority and two minority interests in three water desalination plants in Algeria. According to the company, “Atlantica is well positioned to benefit from the expected transition towards a more sustainable power generation mix. We intend to take advantage of, and leverage our growth strategy on, favorable trends in the clean power generation, energy scarcity and the focus on the reduction of carbon emissions.” The reference to a specific security is intended only to illustrate the type of company/stock that Bailard’s portfolio strategy might hold. The company equity mentioned here was a holding within Bailard’s portfolio strategy as of June 30, 2021, but it does not represent any past, present, or future recommendation of Bailard. Small Cap Value ESG Equity Strategy FOR INVESTMENT PROFESSIONAL/ADVISOR USE ONLY. NOT FOR DISTRIBUTION TO THE PUBLIC | 9
Performance: Portfolio Risk
ANNUALIZED ACTIVE RETURNS NET OF FEE AGAINST RUSSELL 2000 VALUE INDEX1,2 5/31/2006– 6/30/21
3-Year Trailing 5-Year Trailing Percent of Time Composite's Rolling Period Total Returns
Were Above the Russell 2000 Value Index
5.0% Rolling 3 Year Rolling 5 Year
4.0% Calculated Monthly 60.44% 52.20%
3.0%
2.0%
1.0%
0.0%
-1.0%
-2.0%
-3.0%
-4.0%
-5.0%
Performance Summary as of 6/30/21
TOTAL RETURN (ANNUALIZED FOR PDS > 1 YR) ANNUALIZED STD. DEV. SHARPE RATIO
1 Year 3 Years 5 Years 10 Years 15 Years 3 Years 5 Years 10 Years 15 Years 3 Years 5 Years 10 Years 15 Years
Composite (Gross of Fee) 76.75% 11.68% 12.80% 11.16% 8.84% 26.47% 22.00% 19.07% 19.46% 0.39 0.53 0.55 0.40
Composite (Net of Fee) 76.13% 11.27% 12.38% 10.75% 8.43% 26.47% 21.99% 19.06% 19.46% 0.38 0.51 0.53 0.38
Russell 2000 Value Index 73.24% 10.24% 13.60% 10.84% 7.89% 26.49% 22.13% 19.21% 20.60% 0.34 0.56 0.53 0.33
vs. Russell 2000 Value Index ACTIVE RETURN
1 Year 3 Years 5 Years 10 Years 15 Years
Composite (Gross of Fee) 3.51% 1.44% -0.81% 0.32% 0.94%
Composite (Net of Fee) 2.89% 1.03% -1.23% -0.09% 0.54%
1Please see additional performance on page 3, and pages 19-21 for important disclosures. Sources: Morningstar, Bloomberg. 2 Bar graph calculated monthly. 3 Performance
statistics are annualized.
Small Cap Value ESG Equity Strategy FOR INVESTMENT PROFESSIONAL/ADVISOR USE ONLY. NOT FOR DISTRIBUTION TO THE PUBLIC | 10Portfolio Characteristic Comparison1
As of 6/30/2021
Bailard, Inc.
Small Cap Value Russell 2000
Composite2 Value Index
BRM Score 80.8 51.6
ESG Capture® Score 65.5 53.1
Price/Book Value 2.7x 2.5x
Price/Earnings
26.5x 32.6x
(trailing 12 mo.)
Price/Cash Flow 10.8x 42.1x
Dividend Yield 2.6% 3.0%
Return on Equity 3.9% 3.1%
Debt to Capital 43.6% 42.6%
Number of Holdings 284 1357
Avg. Market Cap $MM $2,893 $3,080
% Micro Cap Stocks 34.2% 17.5%
Sources: Bloomberg, Bailard. 1 The information presented on this page, while representative of the Bailard Institutional Small Cap Value ESG Equity Strategy, should not be
solely relied on as it can differ from client to client and could vary over time. 2 Data regarding the portfolio characteristics of the Composite reflect ownership information as of
the date shown and are not intended to represent any past, present or future specific investment recommendations. Portfolio characteristics are subject to change without
notice. The Small Cap Value Composite (“the Composite”) consists of a Bailard Institutional portfolio that is invested solely in small and micro capitalization U.S. equities which
exhibit value characteristics. The Small Cap Value ESG Equity Strategy is implemented within the Bailard Small Cap Value Composite. Please see the end of this document for
important disclosures regarding this Composite.
Small Cap Value ESG Equity Strategy Page 11Small Cap Value ESG Equity Strategy Team
THOMAS J. MUDGE III, CFA
Portfolio Manager | SVP | Director, Equity Research
Investment experience: 34 years; 34 years with firm
Tom heads Bailard's equity research and serves as a portfolio manager of Bailard's small cap value ESG equity strategy. Tom earned his BA
at Northern Michigan University in 1985 and the Chartered Financial Analyst® designation in 1994, and is a member of the CFA Institute
and the CFA Society of San Francisco. He has also completed the certificate program in Investment Decisions and Behavioral Finance at
Harvard University's John F. Kennedy School of Government.
BLAINE TOWNSEND, CIMC®, CIMA®
Portfolio Manager | EVP | Director, Sustainable, Responsible and Impact Investing
Investment experience: 27 years; 5 years with firm
Blaine serves as an EVP, Director of Bailard Wealth Management’s Sustainable, Responsible and Impact Investing (SRII) group, and a
portfolio manager of Bailard's small cap value ESG equity strategy. Blaine began his career in SRI/ESG in 1991 at the Muir Investment
Trust, the nation’s first environmentally screened bond fund. From 1996 through 2009, he led the California office for Trillium Asset
Management, where he managed socially responsible and sustainably focused portfolios, served on the firm’s investment committee and
worked on corporate engagement efforts. Prior to Trillium, he spent 8 years at Wells Fargo’s ESG firm Nelson Capital Management as a
partner, senior portfolio manager, and on the firm’s leadership team and investment committee.
Blaine currently serves as an Advisory Board member for The Journal of Impact and ESG Investing. He holds a BA from the University of
California, Berkeley and CIMC® and CIMA® credentials.
OSMAN AKGUN, PH.D., CFA
Portfolio Manager | VP, Domestic Equities
Investment experience: 10 years; 9 years with firm
Osman serves as Vice President of Domestic Equities and as a portfolio manager for Bailard's small cap value ESG equity strategy. His
primary focus is quantitative research, model building, and portfolio optimization. Osman joined Bailard in 2012 after receiving his Ph.D.
in Industrial Engineering and Operations Research at the University of California, Berkeley. Prior to his Ph.D. program, Osman received
Masters' Degrees in Statistics as well as in Industrial Engineering and Operations Research, both from the University of California,
Berkeley. During this time, Osman worked as a Research Assistant focusing on stochastic modeling and optimization, with applications to
finance, service operations and computer communications. He was also a Teaching Assistant for Quantitative Methods for Business at the
Presidio Graduate School. Prior to his graduate work, he received a B.S. in Industrial Engineering from Bogazici University, Turkey.
Osman received his Chartered Financial Analyst® designation in 2017 and is a member of the CFA Institute and the CFA Society of San
As of June 30, 2021. Francisco.
Small Cap Value ESG Equity Strategy Bailard Institutional | page 12Small Cap Value ESG Equity Strategy Team
ANNALISE DURANTE
Senior ESG Analyst, Portfolio Associate
Investment experience: 7 years; 4 years with firm
Annalise joined Bailard in 2017 and serves as Senior ESG Analyst and Portfolio Associate for the Sustainable, Responsible and Impact
Investing (SRII) group. In this role, Annalise handles the day-to-day SRII account trading and also contributes to ESG/SRI research and
corporate engagement. Annalise earned a Bachelor’s degree in Finance at the University of Miami and subsequently completed a two-year
rotational analyst program at Citi Private Bank. Before arriving at Bailard, she spent some time volunteering in Cambodia for an
organization doing microfinance with populations underserved by conventional capital markets. In addition, Annalise has had fellowships
in the impact investing space, working with both The Civic Accelerator and ImpactSpace.
GLENN A. DAVIS, CFA
Senior Vice President | Head Trader
Investment experience: 30 years; 30 years with firm
Glenn joined the firm in 1991. As head trader, Glenn's responsibilities include execution of all purchases and sales of domestic securities.
He received his BS from Santa Clara University in 1988 and his Chartered Financial Analyst® designation in 1995. Glenn received his
Chartered Financial Analyst® designation and is a member of the CFA Institute and the CFA Society of San Francisco.
As of June 30, 2021.
Small Cap Value ESG Equity Strategy Bailard Institutional | page 13Investment Philosophy
• Behavioral anomalies can provide an enduring source of alpha.
– Market participant irrationality is recurring, predictable, and therefore
exploitable.
• Less investor scrutiny means greater opportunity in our Bailard Ranking Model
and ESG.
– Bargains or advantages are rare where everyone else is looking.
– Small and micro cap stocks are fertile ground for behavioral biases and
unidentified ESG opportunities. These can be effectively exploited through a
disciplined and systematic approach.
• Avoid unnecessary risk.
– Control for economic sector exposure, bankruptcy risk, idiosyncratic risk, ESG
risk, alpha instability, beta deviation and false precision in stock selection.
Small Cap Value ESG Equity Strategy 14Unique Thinking Leads to Differentiated Results
The Small Cap Value ESG Equity Strategy uses novel behavioral finance techniques
and our proprietary ESG Capture® scoring to identify opportunities and avoid pitfalls
Value Added in Behavioral Factors Model Portfolios1,2 Value Added and Loss Avoided in the ESG Capture® Model
Top Quintile Value Added Portfolio1, 3
3/31/10-6/30/21 Top Quintile Value Added, Bottom Quintile Loss Avoided
3/31/15-6/30/21
Benchmark Fundamental Value Add Behavioral Twist Bailard ESG Capture® Top Quintile Bailard ESG Capture® Bottom Quintile
20.0% 4.0%
2.0%
15.0%
Benchmark
0.0%
10.0%
-2.0%
5.0%
-4.0%
0.0%
Hype Anchoring Bias -6.0%
Bailard’s Investor Scrutiny (Hype) and Anchoring Bias measures Bailard’s ESG Capture® methodology identifies ESG laggards that
added performance to our model portfolios beyond fundamental have underperformed in our investable universe and also reduced
value factors alone. our model portfolio’s volatility and drawdown risk in the process.
1 Thevalue added and losses avoided shown in these charts are hypothetical in nature – please see important disclosures regarding hypothetical returns at the end of this document.
2 Thischart decomposes the return of the Top Quintile Hype and Top Quintile Anchoring Bias model portfolios into benchmark return and value added over the Russell 2000 Value
benchmark return. Fundamental Value Add is the difference between the benchmark return and Top Quintile Fundamental Value model portfolio. Top Quintile Hype/Anchoring
Bias/Fundamental model portfolios (the “Behavioral Factors” model portfolios) consist of all the stocks within Russell 2000 Value universe that score in the top 20% when ranked by the
Bailard Hype/Anchoring Bias/Fundamental score. 3 This chart shows the value added by Bailard ESG Capture® model over the Russell 2000 Value benchmark return. Top (Bottom) Quintile
ESG Capture® portfolio consists of all the stocks within Russell 2000 Value universe that score in the top (bottom) 20% when ranked by Bailard’s ESG Capture® methodology.
Small Cap Value ESG Equity Strategy page 15Small Cap Value ESG Equity Strategy ESG Framework
Suitability Screens
No companies deriving more that 25% of revenues* from the following
Additionally, we screen
sources:
out companies that
• Firearms have egregious
• Controversial weapons (landmines, cluster munitions) patterns of behavior on
• Alcohol ESG issues. For
• Tobacco example, Ocwen
Financial’s history of
• Gambling
harming mortgage
• Adult Entertainment holders due to
• Predatory Lending (payday loans, rent-to-own) inaccurate statements,
• Private Prisons insufficient disclosures,
etc.
ESG Integration
• Exclude the bottom scoring 20% of Bailard’s ESG Capture®
rankings.
• Portfolio’s average ESG score will always exceed the benchmark’s
score.
* This revenue threshold removes clear offenders while not excluding grocery stores, hotels, airlines, restaurants, cable television, cell phone service providers, etc.
Small Cap Value ESG Equity Strategy Page 16About Bailard, Inc.1
1969 Founded in 1969
Independent, established and stable
65% Employee owned and controlled
Current and former employees own 65% and 11%, respectively
49% Women and minority owned
69 69 employees
• Average investment professional tenure exceeds 15 years
• 78% of professionals hold advanced degrees and/or industry
designations
• 44% of employees are female
$5.2B Assets Under Management2
1 Data as of June 30, 2021.
2 Bailard Institutional, a division within Bailard, Inc. that offers single asset class strategies, had $2.4 billion in assets under management as of June 30, 2021.
Small Cap Value ESG Equity Strategy page 17Why the Bailard Small Cap Value ESG Equity Strategy?
• Behavioral anomalies can be an enduring source of alpha. You can’t change
human nature, but you can seek to profit from it.
• Our ESG Capture® process offers thoughtful, in-depth assessment of
responsible company behavior and looks at long-term risks of the portfolio.
• Disciplined, systematic approach is ideally suited to small value universe.
• True to style and has provided consistent small value exposure.
• Scalability in a capacity-constrained market niche.
Small Cap Value ESG Equity Strategy page 18Disclosures and Key Risks This presentation is confidential and can only be used by investment professionals. It cannot be reproduced in whole or in part or distributed to anyone else without the permission of Bailard. It is not for retail use. It does not constitute a recommendation of, or an offer to sell or a solicitation of an offer to buy any particular security or investment product. It does not take into consideration the particular investment objectives, financial situations, or needs of individual clients. The information is current as of the date indicated and Bailard undertakes no duty to update any of the information contained in this presentation. The presentation contains some forward-looking statements, which involve a number of risks and uncertainties, and actual results may differ materially from these forward looking statements. Any references to specific securities are included solely as general market commentary and were selected on criteria unrelated to Bailard’s portfolio recommendations or the past performance of any security held in any Bailard account or fund. There is no guarantee Bailard or this strategy will achieve their performance or investment objectives. Unless otherwise indicated, the performance data in this presentation does not reflect the performance of any Bailard product, strategy or account. Past performance is no indication of future results. All investments have the risk of loss. Key Risks The Bailard Small Cap Value ESG Equity Strategy is not by itself a complete investment program and is best suited for investors who can accept the above average risk generally associated with small cap and micro cap stocks. These companies may face greater economic cycle risk, credit risk, geographic risk, product, and customer concentration risk than that faced by larger companies. Small cap and—to a greater extent—micro cap stocks are more volatile and less liquid than larger cap stocks and may be more difficult to trade. There are times when the small cap value equity style underperforms other equity investment styles. The application of various environmental, social, and governance screens as part of a socially responsible investment strategy may result in the exclusion of securities that might otherwise merit investment, potentially resulting in higher or lower returns than a similar investment strategy without such screens. In addition, the Strategy is subject to the risk that the market value of an investment will fluctuate as the stock markets fluctuate and that investors can lose money. There can be no assurance that Bailard, Inc. will achieve its investment objectives. Other Disclosures The information in this presentation is for informational purposes only and is not an offer to provide investment advice, an offer to sell securities or the solicitation of any offer to buy securities. Before making any investment decision, you should review Bailard, Inc.’s Form ADV Part 1A and Bailard Institutional’s Form ADV Part 2A (available on the SEC’s website at https://adviserinfo.sec.gov/firm/summary/110550), as well as Part 2B of Bailard’s Form ADV (available from Bailard) and all other information that Bailard provides to you. You should also discuss all matters concerning any prospective investment that you desire with Bailard. The information provided herein is meant to demonstrate Bailard's general investment process. The outline of processes and steps taken is general in nature, and Bailard from time to time will deviate from the specific investment steps, limitations, screens, controls and overall process described. The description of the Bailard Ranking Model provided in this presentation is for conceptual illustration purposes only and is not meant to represent a complete example of the use of the model with respect to the Bailard Institutional Small Cap Value ESG Equity Strategy. Small Cap Value ESG Equity Strategy page 19
Performance Disclosures
Hypothetical Performance Disclosures
The Top Quintile Hype/Anchoring Bias/Fundamental model portfolios consist of all the stocks within Russell 2000 Value universe that score in the top 20% when
ranked by the Bailard Hype/Anchoring Bias/Fundamental Value score. The Bailard Hype score is a proprietary factor model examining a variety of measures of
investor attention. The Bailard Anchoring Bias score is a proprietary factor model that estimates investors’ likelihood of projecting recent trends linearly into the
future. The Bailard Fundamental Value score is a proprietary composite factor model measuring relative expectation bias by investors and future expectations bias by
professional sell-side analysts.
The Top Quintile Hype/Anchoring Bias/Fundamental model portfolios seek to illustrate the potential benefits of using Bailard’s novel stock selection factors in
addition to traditional measures of value. These model portfolios, as well as the Bailard ESG Capture® model portfolio, were rebalanced monthly in the 3/31/2015 to
3/31/2021 period. Russell 2000 Value Index is the benchmark for all the portfolios. The model portfolio returns and the Russell 2000 Value Index returns are total
returns, including the effect of dividends.
The hypothetical performance results were prepared with the benefit of hindsight. The hypothetical results have many inherent limitations; they do not reflect actual
trading and do not reflect the impact that client-specific factors and material economic/market factors might have had on Bailard’s decision-making. Bailard did not
offer the Small Cap ESG strategy over the entire performance period depicted in this document. The hypothetical returns presented here will likely not be the same as
the performance for future actual client accounts participating in the described strategies.
Actual individual account management and construction will vary depending on each client’s investment needs and objectives, including liquidity needs, tax situation,
risk tolerance, and investment restrictions.
The returns reflect the deduction of a 0.90% model investment management fee. They do not reflect brokerage costs, commissions, and other expenses a client would
have paid. In addition, no diversification, distributions, and cash flows are applied to the model portfolios. As a result, an account’s actual performance would likely
differ from the performance presented above.
In addition, performance does not reflect the effects of taxation, which would result in lower returns to taxable investors. An investment in the Small Cap Value ESG
strategy involves a risk of loss. The value of an investment in this strategy may decrease or increase as a result of incorporating the behavioral factors and ESG screens
and characteristics. No representation is made that any account will obtain similar results to the hypothetical returns or would achieve the value add/loss avoided
scenarios presented in this document.
Small Cap Value Composite Performance Disclosures
The Bailard Small Cap Value Composite (the “Composite”) includes a Bailard Institutional portfolio invested solely in small and micro capitalization U.S. equities that
exhibit value characteristics. As of June 30, 2021, the Composite consisted of a single mutual fund which has been managed in an advisory or sub-advisory capacity
since 2001 with a market value of $104.1 million, which represented 4.3% of the total assets under Bailard Institutional’s management. The ESG Capture component
was explicitly introduced to the portfolio at the start of 2020. Prior to 2006, the Composite had less consistent and lower overall exposure to micro cap stocks. The
Composite’s returns are total returns presented as labeled, either net of, or both gross and net of management fees (“net of fees”) payable to Bailard, and assume
reinvestment of dividends and other earnings. The returns do not reflect a fiduciary fulfilment fee payable to Bailard (where applicable), or custody and other account
expenses not payable to Bailard. The return of this Composite is not the NAV return of the mutual fund.
Both gross of fee and net of fee returns are taken directly from Bailard’s portfolio accounting system, and net of fee performance was calculated by netting down the
gross return by actual management fee paid by the mutual fund client to Bailard as of the date paid. Composite returns do not reflect a fiduciary fulfilment fee payable
to Bailard (where applicable), or custody and other expenses not payable to Bailard which the composite account incurred.
The Firm's annual fee schedule for new accounts is: 0.90% of the first $25 million, 0.70% of the next $25 million, 0.60% on the next $50 million, and 0.50% on assets over
$100 million. The Composite’s complete return history and a list of Bailard’s composites are available upon request.
Continued on next page
Small Cap Value ESG Equity Strategy page 20Performance Disclosures (Continued)
Market Indices Definitions
The S&P 500 Index, the Russell 1000 Growth Index, the Russell 1000 Value Index, the Russell 2000 Growth Index, the Russell 2000 Index, the MSCI USA Small Cap ESG
Leaders Index, the Russell 2000 Value Index, and the Russell Micro Cap Value Index shown in this presentation are different from a managed account in that they are
unmanaged, uninvestable and do not reflect any transaction costs.
The Russell 2000 Value Index is a commonly used index that measures the performance of the small-cap value segment of the U.S. equity universe. It includes those
Russell 2000 Index companies with lower price-to-book ratios and lower forecasted growth values. The Russell Microcap Value Index measures the performance of the
microcap value segment of the U.S. equity market. It includes Russell Microcap companies that are considered more value oriented relative to the overall market as
defined by Russell's leading style methodology. Unlike the Russell 2000 Value Index and the Russell Microcap Value Index, the Composite account can acquire stocks in
initial public offerings and can hold cash equivalents and exchange-traded funds. The Composite account’s stock holdings may differ materially from those of the Russell
2000 Value Index and the Russell Microcap Value Index, as the Composite: 1) can invest in stocks that are not in the indices; and 2) may omit securities that may
otherwise merit investment due to the application of various environmental, social and governance screens. The Composite can hold microcap stocks and will tend to
hold a higher percentage of microcap stocks (defined as stocks in the bottom 1% of major U.S. exchange-traded securities when measured by market capitalization) than
the Russell 2000 Value Index. The Composite can hold small value stocks and will tend to hold a higher percentage of small value stocks (defined as stocks with lower
price-to-book ratios and lower expected growth values and between 1% and 11% of major U.S. exchange-traded securities when measured by market capitalization) than
the Russell Micro Cap Value Index. The Small Cap Value ESG Equity Strategy’s model portfolio holdings will differ materially from the index due to the model portfolios’
selection of only a portion each of these indices’ securities. The Small Cap Value ESG Equity Strategy’s hypothetical returns differ materially from that of the indices. As a
result, the indices are not indicative of the past or future performance of the model portfolios.
S&P 500: The S&P 500 Index is a commonly used U.S. stock index of 500 large capitalization stocks.
Russell 1000 Growth: The Russell 1000 Growth Index measures the performance of the large cap growth segment of the US equity universe. It includes those Russell 1000
companies with higher price-to-book ratios and higher forecasted growth values.
Russell 1000 Value: The Russell 1000® Value Index measures the performance of the large cap value segment of the US equity universe. It includes those Russell 1000
companies with lower price-to-book ratios and lower expected growth values
Russell 2000 Growth: The Russell 2000 Growth Index measures the performance of the small cap growth segment of the US equity universe. It includes those Russell
2000 companies with higher price-to-value ratios and higher forecasted growth values.
Russell 2000 Index: The Russell 2000 Index measures the performance of the small-cap segment of the US equity universe. The Russell 2000 Index is a subset of the
Russell 3000 Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2,000 of the smallest securities based on a
combination of their market cap and current index membership.
MSCI USA Small Cap ESG Leaders Index: The MSCI USA Small Cap ESG Leaders Index is a capitalization weighted index that provides exposure to companies with high
Environmental, Social and Governance (ESG) performance relative to their sector peers. MSCI USA Small Cap ESG Leaders Index consists of small cap companies in the
US market. The Index is designed for investors seeking a broad, diversified sustainability benchmark with relatively low tracking error to the underlying equity market.
The index is a member of the MSCI ESG Leaders Index series. Constituent selection is based on data from MSCI ESG Research.
Other Performance Definitions
Standard deviation is the annualized standard deviation of monthly returns. “Information ratio” is the ratio of added value to tracking error. “Tracking error” is the
annualized standard deviation of monthly added value, where added value is [Composite return – benchmark return].
Past performance is no indication of future results. All investments have the risk of loss.
page 21
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