As we have listened to quarterly corporate earnings calls for the second quarter, followed by meetings with many management teams over the course of the third quarter, one oft-repeated theme expressed is rising input costs, whether labor, freight, materials or components. Company management teams are also experiencing some commodity price pressures for materials such as copper, nickel and pockets of oil price challenges. This trend is reflected in the core consumer price index (CPI) which, while barely breaching 2.0% in its last print, is showing some signs of pricing pressures. Most of our companies are passing these rising materials costs onto their customers, which should cause some finished goods inflation. Freight costs are increasing, as exhibited by the two charts below. The first shows the rising Baltic Exchange Dry Index, which is up 60% since April, and the second, rising transportation costs as shown by U.S. diesel prices, which have increased 20% since last year.
We believe margin price pressures will continue, placing a premium on productivity and corporate efficiency. This is a challenge where the transformative technologies represented by the Essex Environmental Opportunities Fund are well represented and positioned across our themes and holdings, from energy efficiency, to renewable energy. What better way to limit commodity price risk at a commercial or industrial setting, than to lower electricity costs by installing LED lighting, and solar power systems to eliminate natural gas commodity risk?
A major challenge for companies is balancing growth amidst increasing input costs. Since 2010, our domestic unemployment rate has declined from 10.0% to 3.9% as of September. Tight labor markets and little slack in the economy with increasing costs means companies must continue to hone their productivity skills, investing in their business operations with efficiency and returns on investment as the key criteria. The Fund has significant exposure to industrial automation technology, including asset tracking systems to improve operational efficiencies throughout the manufacturing and fulfillment process. Asset tracking systems enhance communication and information so companies can optimize manufacturing and shipping, ultimately increasing productivity and throughput. We have heard frequently that as commodity prices rise, companies limit inventory levels in favor of quick-turns of materials and finished goods. Asset tracking systems can sort and identify objects with much greater accuracy than RFID technologies. Fleet management can also be improved with technologies that lessen fuel, truck and driver use, a key solution as commercial industry faces a driver shortage.
We believe the Fund holdings are well positioned for the longer-term as our world is facing the greatest environmental challenges in history. We believe these challenges provide significant long-term investment opportunities, yet the nearer-term challenges of rising input costs also present opportunities for transformative technologies that limit business risks and enhance returns.
You should carefully consider the Fund's investment objectives, risks and charges and expenses before investing. This and other important information is contained in the Fund's prospectus and summary prospectus, which should be read carefully before investing. To obtain a fund prospectus or summary prospectus, call (800) 700-9929. The Fund is distributed by Ultimus Fund Distributors, LLC.
Investing involves risk, including loss of principal. There is no guarantee that the fund will meet its investment objective. Because the Adviser's GEOS criteria exclude securities of certain issuers for non-financial reasons, the Fund may forego some market opportunities available to funds that do not follow the environmental themes inherent in the GEOS strategy.
As of 9/30/18, the Fund's top ten holdings are Kornit Digital (4.8%), Trimble (4.2%), TPI Composites (3.9%), Xylem (3.8%), Raven Industries (3.6%), Itron (3.6%), Lindsay (3.5%), Umicore (3.2%), Keyence (3.1%) and Kingspan (2.9%).
The Baltic Dry Index is a shipping and trade index created by the London-based Baltic Exchange that measures change in the cost of transporting various raw materials.
The opinions and analyses expressed in this newsletter are based on Essex Investment Management Company, LLC’s (“Essex”) research and professional experience, and are expressed as of the date of our mailing. Certain information expressed represents Essex’s opinion and assessment at a specific point in time and is not intended to be a forecast or guarantee of future results, nor is it intended to speak to any future periods. Essex makes no warranty or representation, express or implied, nor does Essex accept any liability, with respect to the information and data set forth herein, and Essex specifically disclaims any duty to update any of the information and data contained herein. This newsletter is for informational purposes only and does not constitute an offer to sell or the solicitation of an offer to purchase any security or investment product, nor does it constitute a recommendation to invest in any particular security. Any individual securities listed herein do not currently represent any securities purchased, sold, or recommended to clients.
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