Manager Commentary
Co-Portfolio Managers
Christopher H. Brown has over 20 years of investment experience. He joined Pax World in April 1998 as co-manager of the Pax World Balanced Fund and has served as its sole manager since October 2001. Prior to joining Pax World, Mr. Brown was an Investment Consultant at Fahnestock & Co., Inc., a New York Stock Exchange brokerage firm, from 1987 to 1998, and a First Vice President from 1994 to 1998. He is a graduate of the Boston University School of Management with a concentration in finance.
Anthony Trzcinka, CFA has over 10 years of investment experience and 15 years of overall finance experience. He has been associated with the Adviser since 2003. Prior to joining the Adviser, Mr. Trzcinka spent over 3 years at AEW Capital Management as an Assistant Vice President. He has an MBA degree from Northeastern University, a Bachelor of Arts from the University of Massachusetts and holds the CFA designation. Mr. Trzcinka is a member of the Boston Security Analyst Society and the CFA institute.
Management Style
The Fund’s portfolio manager believes that attractive growth stocks are found across a range of market capitalizations, from up-and-coming smaller companies in growth industries, to accelerating mid-size high achievers, to acknowledged large-company industry leaders. The Fund’s holdings are focused within economic sectors that seem likely to grow faster than the overall rate of GDP growth. As a key element of the stock selection process, the manager looks for companies with accelerating sales and earnings growth rates. The manager seeks to purchase stocks at prices that represent reasonable value when compared to industry peers. Cash is used as a buffering element and to provide a resource for opportunistic stock purchases.
Portfolio Commentary (as of March 31, 2008)
The start of 2008 has brought us an unusually volatile market. We have seen oil prices rise to above $110 a barrel and watched the continuation of the subprime/credit crisis as the Federal Reserve intervened to prevent a major Wall Street investment house, Bear Stearns, from collapsing. So it comes as no surprise that all three major market indexes were down for the first quarter, with both the S&P 500 and Nasdaq Composite Indices sustaining double-digit losses.
The major economic news revolved around the Federal Reserve’s actions, the most prominent of which was its assistance rescuing Bear Stearns. In an emergency weekend meeting JPMorgan (1.2%*), with the Federal Reserve providing a degree of financing, agreed to buy Bear Stearns for $2 per share. This was a shock to many, as Bear Stearns had traded at more than $120 per share less than six months earlier. This near-collapse sent a scare through Wall Street, with investors speculating about the fate of other large banks. So far, it seems the Fed’s intervention has provided some assurances to the market.
The Fed also cut rates from 3% to 2.25%, believing that inflation risk is secondary to the risk of a major economic slowdown. Declines in various economic indicators (such as consumer confidence, gross domestic product and new home sales), as well as earnings revisions, seem to indicate that an economic slowdown is upon us. Gross domestic product, for example, recently came in at a weak 0.6%.
The Pax World Growth Fund has continued to follow a defensive strategy seeking out growth companies well positioned to weather the current economic uncertainty, such as CVS Caremark (3.9%*) and Thermo Fisher Scientific (3.8%*). We have overweigthed sectors such as health care and telecommunications, sectors that have typically outperformed in a slowdown. So far, this strategy has served us well.
Going forward, we plan to gradually move from a defensive growth to a reflationary portfolio. We expect that the markets will experience a turnaround in the second half of the year and into 2009. The Fed has exhibited a willingness to keep rates low and provide liquidity. Many of the financial and technology stocks have dropped to attractive valuations. These factors should serve us well as we slowly reshape the portfolio.
This commentary does not constitute an endorsement of any company’s attractiveness as an investment.
*Portfolio holdings as of 3/31/08.