Market Commentary as of 6/30/08
The equity market turned negative in June, erasing a significant portion of gains made in April and May. The Fund was somewhat insulated from the worst of the declines due to its limited exposure to the Financials sector. The portfolio also significantly outperformed its S&P 400 MidCap Index benchmark in the Technology and Healthcare sectors. Indeed, three of the Fund's top performing stocks were tech stocks, two of which—Jabil Circuit and Mentor Graphics—rose substantially.
Winners and Losers
Better-than-expected earnings boosted electronic circuit board maker Jabil, which rebounded strongly from its 37.7% decline during the first quarter. We took advantage of the first quarter weakness to add to the portfolio's position, thus enhancing the subsequent gains during the most recent quarter. Mentor Graphics soared following an unsolicited take-over offer from competitor Cadence Corporation. Oil services firm, and top-holding, FMC Technologies, however, was the greatest contributor during the quarter on the strength of solid earnings and a reported order backlog. The company produces 'sub-sea trees' which are oil and gas pumping stations on the ocean floor. Its newest technology separates water from the oil and gas at the bottom of the ocean, significantly reducing the volume of liquids pumped to the surface.
Negative contributors to performance for the quarter were Cincinnati Financial, Belo Corporation, and New York Times Company. Property and casualty insurer Cincinnati Financial suffered from two unrelated disasters: One natural—flooding in the Midwest—and the other financial in the form of a dividend cut by Fifth Third Bank, a large equity holding of firm. Still, Cincinnati Financial has a long history of strong performance built on a loyal network of agents in local markets, and we continue to hold it in the portfolio. Television station owner Belo Corporation also dropped significantly on heightened concerns of a deeper recession and its possible impact on local advertising spending—a key source of revenue for the company.
The New York Times
Although industry struggles continue to plague The New York Times, it still holds a top place within the portfolio. A premier brand of news and information, the firm continues to invest and grow their digital offerings. The company also is aggressively cutting costs, including reducing headcount and moving overhead costs to lower costing local affiliates. While it's unclear whether they can monetize its high growth digital segment of the business from a price/sales perspective the stock is extremely cheap, especially when one accounts for the value of its various real estate properties and other assets—including other newspapers such as the Boston Globe. Finally, shareholder activists have helped to elect two new outside directors potentially able to broaden and influence the opinions on the board of this closely-held family company. Given recent acquisitions in the media space, we view The New York Times as extremely undervalued, particularly in view of its significant assets and healthy yield.
Stagflation?
Looking ahead, the possibility of stagflation is becoming a concern as inflationary pressures from high energy and raw material costs threaten to further depress economic activity already hurt by illiquid credit markets. This environment has become difficult for policymakers who must weigh the inflationary consequences of future stimulus efforts. We continue to underweight Financials (with no direct exposure to the banking industry) and to invest only in companies with high-quality balance sheets and attractive valuations. In addition, close to half of the Fund's holdings derive more than 50% of their revenues from outside the US, partly insulating them from the softening US economy.
The Mid-Cap Investment Team
Optimum Investment Advisors, LLC
As of June 30, 2008, Jabil Circuit comprised 3.61% of the portfolio's assets, Mentor Graphics - 1.74%, FMC Technologies - 5.36%, Cincinnati Financial - 2.02%, Belo Corporation - 1.13%, and New York Times Company - 4.34%.
Note: Mid-cap stocks are generally riskier than large-cap stocks due to greater volatility and less liquidity.
The views expressed above are for informational purposes only and is not intended as investment advice. Since the date of the commentary, economic, market conditions and the portfolio manager's views may have changed. Holdings and weightings are subject to change daily. Holdings are provided for informational purposes only and should not be construed as a recommendation to buy or sell the securities mentioned.
Past performance does not guarantee future results. Investment return and principal value of mutual funds will vary with market conditions, so that shares, when redeemed, may be worth more or less than their original cost.