Our Funds - Fund Commentary
Market Commentary as of 3/31/08
The Fund outperformed both its S&P 400 MidCap Index benchmark and the broader S&P 500 Index amid an extremely negative market environment during the quarter. The best-performing holding in the portfolio, ATM manufacturer and electronic security provider Diebold, rose more than 29% following an unsolicited take-over offer from United Technologies. In addition, trucking companies Con-way and Werner Enterprises both made significant contributions. The market often views transportation firms as early indicators of economic activity, and the two stocks rebounded in anticipation of a bottoming in the dour US economic outlook. Lastly, The New York Times Company gained ground as a large shareholder increased its holdings in the firm and secured two seats on the company’s Board of Directors—signaling possible strategic changes.
Laggards
The breadth of the sectors holding the Fund's worst performers reflected the widespread declines in the overall market during the quarter. The stock of electronics manufacturer Jabil Circuit sank after management announced disappointing forward earnings guidance in the wake of a slowdown in consumer electronics end-markets. Still, we think the firm is well-positioned in the medium- to long-term as bigger companies continue to outsource projects to Jabil for cost savings and manufacturing efficiencies. Chicago Bridge & Iron fell sharply on news of a Federal Trade Commission ruling that may possibly lead the firm to divest a piece of its liquid natural gas business. CB&I is a market leader in the design and construction of energy-related storage and processing facilities, with a record order backlog and a recent strategic acquisition that will expand its international presence.
Although the portfolio continues to be severely underweight Financials relative to the benchmark—and has no direct exposure to the banking industry—the Fund did suffer from a drop in Eaton Vance. The asset manager declined on liquidity concerns in relation to the Auction-Rate Preferred Securities (ARS) market, a source of leverage for certain Eaton Vance sponsored closed-end funds. The firm has moved to reduce its use of the ARS market by securing alternative debt financing. To put this decline in perspective, however, the Fund's financial holdings were down only 8.9% compared with an 18% decline for the financial stocks in the benchmark during the previous twelve months.
Buying FactSet
The Fund initiated a position in FactSet Research Systems, a financial data provider specializing in sophisticated financial risk modeling tools, during the quarter. We think FactSet is attractively valued relative to its growth potential, particularly in terms of its opportunities in non-US financial markets. In addition, the completion of the takeover of Cognos by IBM eliminated it from the portfolio. The Fund also sold the CommScope shares received as part of the takeover of long-term holding Andrew Corporation.
One of our investing principles that we think is especially important to point out given the current market environment is the practice of investing in companies with high-quality balance sheets and attractive valuations. As an example of this in practice, the portfolio's current weighted average debt-to-capitalization ratio is just 24% compared with 30% for the S&P 400 MidCap Index, 34% for the Russell Midcap Index, and 32% for the broader S&P 500. In addition, close to half of the holdings in the portfolio derive more than fifty-percent of their revenues from outside the US, thereby insulating them in part from softer US economic conditions. With the current earnings-reporting season likely to contribute to near-term volatility by providing evidence as to the health of the economy, these defensive characteristics in the Fund's holdings should offer a measure of stability.
The Mid-Cap Investment Team
Optimum Investment Advisors, LLC
Note: Mid-Cap company stocks are generally riskier than large-company stocks due to greater volatillity 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.
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.