Our Funds - Fund Commentary
Market Commentary as of 3/31/2008
Growth Pause
In addition to being one of the weakest quarters for stocks since 2002, the first quarter of 2008 was notable for its extreme volatility in the credit and equity markets. Investors had no shortage of bad news to keep them awake at night, including ongoing credit market turmoil, fears of bank and brokerage failures, the actual collapse and subsequent rescue of investment bank Bear Stearns, elevated inflation readings, and concerns about the health of corporate profits amidst a credit crunch and slowing economy. Consequently, the Federal Reserve responded with interest rate cuts at an unprecedented pace along with implementation of other funding and liquidity measures. Not to be outdone, Congress approved a fiscal stimulus package totaling more than $100 billion.
Based on the Russell Indices, the first quarter also marked the first time in a year that value outperformed growth. According to Merrill Lynch Research, stocks with long-term growth rates of less than 10% dropped 4%, while those with growth rates greater than 20% declined more than 16%. Despite this recent shift, we continue to believe that the rotation toward growth stocks is in its early stages and that the first quarter marked merely a pause in a longer-term trend as investors sought to protect profits in winning stocks and sectors from last year. Indeed, 2007 was just the second calendar year this decade, and the first since 2003, that the Russell Midcap Growth Index outperformed the Russell Midcap Value Index.
Winners and Losers
The Fund slightly underperformed its Russell Midcap Growth Index benchmark during the first quarter. Although the market turmoil spared few sectors in absolute terms, the portfolio did enjoy several bright spots in terms of as stock selection within the Energy and Industrial sectors. Natural gas producer Southwestern Energy and industrial supplier Fastenal headed the list of notable performers. A significant overweight in the less cyclical Consumer Staples sector also helped, as did a solid performance from discount retailer TJX (parent company of the T.J. Maxx and Marshalls brands).
Despite an underweight stake relative to the benchmark, Financials weighed on the performance during the quarter. Stocks in market sensitive areas such as asset management with Affiliated Managers Group and investment banking through Lazard hurt. In addition, concerns about slowing capital-spending trends amid the weaker profit environment dampened the Fund's Technology holdings.
Following already tepid economic growth during the fourth quarter of 2007, the outlook for the first half of 2008 is for little to slightly negative growth. We are hopeful that the housing recession will start to wind down during the closing months of the year, however. Although we expect continued volatility in the near-term, we believe the market is in the process of bottoming and that the outlook should improve from here. As economic and corporate profit growth improves, investors will likely continue to seek the consistent earnings growth offered by high-quality growth stocks. We continue to find attractive opportunities among mid-growth companies due to a combination of falling bond yields and continued advances in earnings, which have had a beneficial impact on valuations.
M. Scott Thompson, CFA
Co-Portfolio Manager
Andrew W. Jung, CFA
Co-Portfolio Manager
Note: Small and Mid-cap stocks are generally riskier than large-cap stocks due to the 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.
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.