Market Commentary as of 6/30/08
Soaring oil prices and renewed concerns about the financial viability of government-sponsored entities Fannie Mae and Freddie Mac caused June stock prices to record their biggest loss since 1930. Despite the June swoon, the Fund bested its S&P 500 Index benchmark by more than five percentage points, in contributing to its outperformance for the year-to-date through June 30, 2008. While the US economy teeters on the edge of recession, we think investors have sought refuge in stocks that stand to benefit from global growth.
Although the unprecedented rise in energy and commodity prices may eventually afflict economic growth around the world, during the recent quarter the Energy and Materials sectors provided the largest contribution to the Fund's performance. Weatherford International and Ensco International in the Energy sector both delivered strong positive returns as two of the portfolio's best performers. Materials stocks BHP Billiton and Freeport-McMoran Copper & Gold also made significant contributions. We continue to overweight Materials in the Fund, and Energy is now slightly underweight, mostly due to the sharp rise in the market-capitalization of the sector within the S&P 500.
Consumer Discretionary stocks hurt performance. Whirlpool, which the Fund bought and sold during the quarter, along with Johnson Controls were the two biggest disappointments. Industrial company Boeing and telecommunications firm American Movil also detracted from performance. Although most Financials stocks suffered during the quarter on an absolute basis, the Fund's underweight stake in the sector actually provided a slightly positive contribution relative to the benchmark.
Correctly or not, the perception of inflation and the price of oil and gasoline are having a profound effect on the stock market, such that we think that they will continue to be the key drivers of investment performance going forward. Fears of recession are real, but setbacks are a normal part of the economic cycle, one typically followed by a recovery and higher stock prices. The best news we can envision for stocks during the next few months is if one or more of the following take place—lower oil prices, lower mortgage rates combined with a smoothly functioning credit system, and/or a resumption of a vibrant merger and acquisition market. The latter would provide tangible evidence that investors recognize good value in the marketplace.
As a final note, reality rarely follows the worst-case scenario. While we take seriously the risks lurking in the economy and both the stock and bond markets, we also look forward to taking advantage of the opportunities created during market corrections such as the one we're in now.
The Optimum Large-Cap Team
As of June 30, 2008, Weatherford International comprised 3.37% of the portfolio's assets, Ensco International - 3.43%, BHP Billiton - 3.26%, Freeport-McMoran Copper & Gold - 3.31%, Johnson Controls - 2.64%, Boeing – 2.60%, and American Movil SA – 2.60%.
Note: Mutual funds that invest in growth companies may be more volatile than other funds because they are generally more sensitive to market moves.
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.