Market Commentary as of 3/31/08
Global equity markets remained volatile during the first quarter as the subprime crisis in the US and subsequent global credit freeze rocked investors. Despite signs of inflation, the Federal Reserve Board and several of the world's central banks supplied infusions of capital to the market through interest rate cuts and other measures. Still, investor confidence remains bruised given the lingering economic uncertainty.
Winners and Losers
The Fund underperformed its MSCI World Ex-US Small-Mid Cap Index benchmark during the quarter. Returns were, on average, negative across most sectors of the benchmark with only Consumer Staples providing investors a safe haven from losses. Interestingly, the decline in the Fund and the benchmark was less than that experienced by the large-cap part of the foreign market—an area typically considered more stable than small- and mid-caps.
Stock selection remained the key driver of performance rather than relative over- or underweight position in various countries or sectors. For example, the Fund's 22% stake in Industrials was equal to that of the benchmark, but a number of holdings in the sector disappointed. Japanese electronic-components manufacturer NGK Insulators suffered from its close ties to automotive and construction industries plagued by concerns about a ripple effect from the potential global economic slowdown. Business transport stocks Orient Overseas and Neptune Orient Lines experienced steep declines of more than 14% on concerns about the impact of surging oil prices on profits. The Fund's real estate holdings detracted from performance as well, with Hong Kong holding company Shenzhen Investment and Japan-based Urban Corporation being constrained by financing issues. Both were among the portfolio's weakest performers.
Other Financials-related positions added during the fourth quarter of last year fared better, however. These included France-based Viel et Cie and Irish insurance company FBD Holdings, as well as select bank stocks less exposed to the ongoing subprime issues, like Japanese bank Hokuhoku Financial—a company with zero subprime exposure. All three investments contributed positively to absolute and relative performance during the first quarter.
The Fund's investments in the Materials sector, specifically metals and mining, benefitted from higher commodity prices linked to the weak US dollar. Finnish-stainless steel company and top-three holding Outokumpu gained ground on the back of rising ferrochrome prices as well as business enhancement strategies it implemented to lessen the cyclical nature of its business. Australia's largest gold mining company Newcrest Mining was another big contributor. In addition, Australian biotechnology firm CSL and Swiss-based pharmaceutical company Actelion added positively to performance within Healthcare.
Looking Ahead
Although we believe that global trade may be experiencing a slowdown, we don't think it will reach recessionary levels. While US import demand may be suffering due to the weak dollar, many foreign industries are benefiting from offsetting increases in trade among South American, European and Asian trading partners. For example, marine shipping and transport companies recently hurt by rising energy prices are seeing healthy rises in the volume of trade going to China and Europe. We believe that numerous economies overseas are still in the early stages of long-term economic growth. Unlike in the US, it is not unusual for small- to mid-size foreign companies to have a diversified set of country trading partners, allowing firms with good management teams and strong technology to identify and shift toward more favorable business opportunities. Thus, our bottom-up, quantitative security selection process is finding ample investment opportunities among international small- and mid-cap stocks.
Strategic Global Advisors (SGA)
Newport Beach, CA
Note: Risks of investing in international markets include but are not limited to social and political instability, market illiquidity and currency volatility. Small and 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.
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.