Our Funds - Fund Commentary
Market Commentary as of 9/30/08
The third quarter of 2008 was notable for the steep decline in equity markets during the month of September. The S&P 500 Index finished the quarter down 8.4%, but September alone was responsible for most of that decline. The Fund began the quarter with 20% cash and no bond ETFs, by the end of the quarter the cash position had grown to 37% of assets and bonds represented 15% of the portfolio. In addition, the portfolio held no commodity positions or specific energy holdings, other than the energy stocks that comprise part of broad-based indexes.
Clearly, the Fund's quantitative strategy of analyzing ETF price and volume characteristics to select securities used the quarter to raise cash and seek safety. It lightened exposure to some promising sectors that could not fight the market trend to the downside. A common characteristic of tops and bottoms in a market is that stocks, ETFs, and the like lose their individuality, so to speak, as everything becomes more highly correlated to the overall market. During the third quarter, market sectors that had been leading the market one by one began to succumb to the weight of the sell-off. At times like these, the Fund's system will migrate to fewer positions and broader-based indices, with few distinct sector ETFs represented. The portfolio will likely move farther and farther in that direction until the character of the market changes to one providing more opportunities and positive returns.
The problem with this strategy manifests itself when the equity market does manage to rally. With a rally after a prolonged decline, the equity exposure of the portfolio is likely to be disappointingly small. This light exposure results from the large defensive cash and cash equivalents that the strategy accumulated relative to fully invested stock indexes. Still, instead of buying and holding equities, and being exposed to the market during a particularly volatile time, we are willing to sacrifice some of the early upside of any potential rally for the added near-term stability that cash and its equivalents provide.
Economic cycles favor different sectors and asset classes at different times, and active management is designed to attempt to take advantage of that changing environment. In times like these, market leadership not only is hard to find—it simply may not exist. The choice then is to move only when leadership reappears. At market bottoms, and during the period when new market leadership is being born, we think holding large amounts of cash puts the Fund in an enviable position. Although results may be disappointing in the short-run amid any rallies, we are convinced that over the long haul this is a prudent strategy to follow until a positive trend is once again established.
New Century Capital Management
Hinsdale, Illinois
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.