Our Funds - Fund Commentary
Market Commentary as of 3/31/08
Financial Crisis or Recession?
The first quarter of 2008 was the worst opening quarter to a year for the stock market since 1939, and it produced the worst return for any quarter since the third quarter of 2002. It also contributed to the Fund's worst quarterly return since the third quarter of 2002, and ranked as the third worst quarter in absolute returns in the history of the Fund. Given the scope and magnitude of the current financial crisis and the news media hinting at a deep recession, if not depression, it could have been a lot worse. If we had been in a coma for the past year, awakened, and learned of all the bullets and torpedoes the US economy and markets suffered, we would have estimated the Dow Jones Industrial Average to be at roughly 8000. It's not. Which begs the question, "Why not?" We are definitely in, and have been in, a housing recession for almost two years. That is not news. We have argued and continue to argue that this is a financial crisis and not a recession, at least not yet.
Fourth quarter 2007 earnings, ex-Financials, were up 13.4% and expectations are for first quarter earnings on the same basis to be up 11.4%. A myriad of economic data have yet to reach recessionary levels. The holdings in the Fund's portfolio came in 16.7% above earnings expectations, and more importantly, earnings estimates for 2008 and 2009 are rising. This environment is much different from the one encountered from 2000 to 2002, which we navigated quite deftly up until 2002. A downturn in capital spending along with a lofty market multiple of 25 times earnings led to that recession. At the time, stocks relative to bonds were the most expensive in history. A consumer-led slowdown is driving the current environment. The difference now being that the market is at a multiple of 14 times earnings and stocks are as cheap relative to bonds as they have ever been.
Technology Stocks Suffer
The Fund underperformed its peers and the benchmark due to extreme weakness in Industrials and Technology. The portfolio's industrial position lost 19.7% during the quarter and the Fund's tech exposure dropped 26.4%. Closely linked to the economy, these two areas succumbed to the perception that the country is in a recession. The Fund's best performing sector during the period was Healthcare, which was down only 0.3% during the quarter.
While we underestimated the scope and magnitude of the current credit crisis, we want to emphasize that we still do not hold the consensus viewpoint that we are in the midst of a prolonged recession. While certainly a mid-cycle slowdown has cost the Fund valuable performance, getting rid of the recent excesses of the credit markets is likely a favorable development over the long haul. We feel that this is the greatest buying opportunity for growth stocks that has existed during our careers.
The Fund continues to prefer Industrial and Technology stocks, and we have recently added to the portfolio's Consumer Discretionary position. This market is likely to go from the exotic back to the basics—namely earnings--and by that measure growth stocks are definitely where the value lies.
B. Anthony Weber
Charles P. McCurdy, CFA
Note: Small company stocks may by subject to a higher degree of market risk than the securities of more established companies because they tend to be more volatile and less liquid.
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.
As the fund is actively managed, the securities as presented do not represent the current or future composition of the portfolio.
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.