Letter to Shareholders
A talented and productive workforce is critical to maximizing corporate profitability in a globally competitive market. Companies focused on attracting, training and retaining the highest-quality talent become stronger competitors. However, this focus on labor has become more challenging as workers feel a growing pinch from years of inflation eating away at their real purchasing power.
After years of above-trend inflation, high prices are presenting a significant headwind, especially in the case of non-discretionary expenses like housing, food, interest, and health care, which are beginning to impact spending on discretionary purchases, such as travel.
Workers’ concerns about their income levels have increased dramatically, with the recent University of Michigan survey on U.S. Consumer Real Income Expectations near its lowest point in the last five decades. Higher inflation means companies must offer attractive compensation to compete for and retain talent or risk losing highly valuable employees.
As the Federal Reserve seeks to combat high inflation, businesses face higher labor costs and limited ways of passing along higher pricing. These challenges present headwinds for firms aiming to maintain or grow their profit margins and attract investors.
Those companies that are most proactive, looking out for the future of their workers, and providing career opportunities, training and competitive compensation, are likely better positioned to weather the bumpy road ahead. This is an important element we consider in identifying the ability to augment long-term value creation.
American Century’s Sustainable Research Team has identified five themes and subthemes to assess long-term sustainability-related risks and opportunities:
Human/labor rights, diversity, equity and inclusion, wage structures and upward mobility.
Recycling, production, food systems, and product life extension.
Alternative energy, biodiversity, water, climate mitigation, and climate technologies.
Innovative treatments, improved medical equipment and services, access to medicine and health care services, and solutions to reduce health care costs.
Related aspects of digitalization, financial technology, e-commerce, connectivity and automation.
Importantly, these themes are not siloed—they impact each other. This framework helps us to identify these interrelationships and take a holistic view of sustainability.
We continue to be encouraged by the sustainability commitments many companies are making across our five themes, and we highlight several in this report. While sustainable investing and investors’ expectations evolve, our core beliefs remain:
Companies that excel at managing business fundamentals and material sustainability issues will likely outperform their peers over time.
Environmental, social and governance (ESG) analysis complements traditional financial analysis and results in a more comprehensive understanding of risks and opportunities.
Integration, rather than exclusionary screening, improves diversification and produces a more robust opportunity set.
Authors
Senior Portfolio Manager
Portfolio Manager
Portfolio Manager
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The value and/or returns of a portfolio will fluctuate with market and economic conditions.
Different investment styles tend to shift in and out of favor depending upon market and economic conditions, as well as investor sentiment. A fund may outperform or underperform other funds that employ a different investment style.
There is no guarantee that the investment objectives will be met.
International investing involves special risks, such as political instability and currency fluctuations.
Diversification does not assure a profit nor does it protect against loss of principal.
Many of American Century’s investment strategies incorporate sustainability factors, using environmental, social, and/or governance (ESG) data, into their investment processes in addition to traditional financial analysis. However, when doing so, the portfolio managers may not consider sustainability-related factors with respect to every investment decision and, even when such factors are considered, they may conclude that other attributes of an investment outweigh sustainability factors when making decisions for the portfolio. The incorporation of sustainability factors may limit the investment opportunities available to a portfolio, and the portfolio may or may not outperform those investment strategies that do not incorporate sustainability factors. ESG data used by the portfolio managers often lacks standardization, consistency, and transparency, and for certain companies such data may not be available, complete, or accurate.
Sustainable Investing Definitions:
Integrated: An investment strategy that integrates sustainability-related factors aims to make investment decisions through the analysis of sustainability factors alongside other financial variables in an effort to make more informed investment decisions. A portfolio that incorporates sustainability factors may or may not outperform those investment strategies that do not incorporate sustainability factors. Portfolio managers have ultimate discretion in how sustainability factors may impact a portfolio’s holdings, and depending on their analysis, investment decisions may not be affected by sustainability factors.
Sustainability Focused: A sustainability-focused investment strategy seeks to invest, under normal market conditions, in securities that meet certain sustainability-related criteria or standards in an effort to promote sustainable characteristics, in addition to seeking superior, long-term, risk-adjusted returns. Alternatively, or in addition to traditional financial analysis, the investment strategy may filter its investment universe by excluding certain securities, industry, or sectors based on sustainability factors and/or business activities that do not meet specific values or norms. A sustainability focus may limit the investment opportunities available to a portfolio. Therefore, the portfolio may underperform or perform differently than other portfolios that do not have a sustainability investment focus. Sustainability-focused investment strategies include but are not limited to exclusionary, positive screening, best-in-class, improvers, thematic, and impact approaches.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.