Manager Commentary
As of March 31, 2012
How did the Fund perform for the period?
For the three-month period ended March 31, 2012, the Individual Investor Class and Institutional Class of the Fund had total returns of 9.14% and 9.19%, respectively, vs. 7.56% for the Blended Index1.
What factors contributed to the Fund’s performance?
Equities were the biggest absolute contributor to the Fund’s performance for the period. An overweighting of stocks helped the Fund as equities outperformed bonds for the quarter. Our stock selection within the industrial sector and our overweight and stock selection in the information technology sector helped the Fund’s equity component outperform the S&P 500 Index2. During the period, the Fund’s fixed income component outperformed the Barclay’s Capital U.S. Aggregate Bond Index3. The Fund’s underweight of U.S. Treasuries and overweight of corporate bonds were major contributors to relative fixed income outperformance.
Can you discuss any significant changes in the Fund’s positioning throughout the period?
Acknowledging a slowly recovering economy and persistent low interest rates, we continue to position the Fund toward dividend paying companies. We have been focusing on companies that are raising their dividends due to strong underlying businesses. We believe dividends will play a larger role in a stock’s total return.
Which stocks contributed positively to performance?
On an absolute basis, Apple, Inc., a designer and manufacturer of personal computers and mobile communication devices, was a strong contributor to the Fund’s performance for the period. Strong quarterly results, the release of the new iPad, an initiation of a dividend and the announcement of a stock buyback pushed the shares significantly higher during the period. EMC Corp., a leader in enterprise storage systems and software, delivered strong results during the period. EMC’s earnings beat analysts’ consensus estimates driven by robust revenue growth which helped propel the shares higher.
Which stocks detracted from performance?
Oneok, Inc., a diversified energy company, detracted from performance during the period. In February, the company posted strong quarterly results and announced a dividend increase. However, the earnings were basically in-line with analysts’ estimates and we believe investors took profits as the company hit a 52-week high in mid-January and dropped in value soon after its earnings announcement. EQT Corp., an integrated energy company with an emphasis on natural gas, also declined during the period. While earnings and cash flow beat consensus estimates during the period, a significant drop in the price of natural gas weighed heavily on the shares.
What is your market outlook, particularly with respect to how it will impact your Fund?
The S&P 500 Index has gained 12.59% year-to-date on favorable economic news. The speed and magnitude of the recent gains has surprised many, including the investment management team at Pax World. We acknowledge that recent economic reports in the U.S. have been encouraging and indicate signs of a recovery. Job and wage growth have been improving and an increase in bank lending to consumers and small businesses has finally started to materialize. For now, Europe’s sovereign debt crisis appears to be stabilizing as a result of the European Central Bank (ECB) announcement of the Long Term Recovery Operation (LTRO). Similar to our own version of Troubled Asset Relief Program (TARP), LTRO provides banks with low cost money in the belief it will create more lending. While the environment has been noticeably better for investors, it has not gone unnoticed by markets.
We believe several headwinds exist that may cap near-term appreciation. Based on recent economic reports, China appears to be exhibiting signs of weakness. The question remains: will China have a soft or hard landing? While we believe the recent ECB initiatives (LTRO) is a step in the right direction, many challenges remain. Higher gasoline prices are also a drag for the economy, especially where the consumer is concerned. The Fed has indicated keeping interest rates low well into 2014. They should continue to be accommodative until stronger signs of employment appear and, ultimately, a sustained recovery in housing prices. Against this backdrop, we believe the U.S. economy will continue to show signs of a recovery. However, we feel there will be limited upside to the equity and bond markets in the near-term. In this environment, we believe dividends will be an important part of a portfolio’s total return. We have been positioning the Fund to take advantage of attractive current dividend yields. In particular, we have been focusing on companies that are raising their dividends despite the weak economic environment. We believe several investment themes continue to hold promise. Due to the increasing population and growing demand by the emerging markets for food, we believe agriculture remains an attractive area for investment. Energy efficiency has become a dominant theme as more companies and the general population seek to reduce their energy costs. Many industrial companies will likely benefit from demand for their products and services to satisfy the need to feed the world’s growing population and reduce energy consumption.
Equity investments are subject to market fluctuations, the fund’s share price can fall because of weakness in the broad market, a particular industry, or specific holdings. Yield and share price will vary with changes in interest rates and market conditions. Investors should note that if interest rates rise significantly from current levels, bond fund total returns will decline and may even turn negative in the short term. Mortgage related securities tend to become more sensitive to interest rate changes as interest rates rise, increasing their volatility. There is also a chance that some of the fund’s holdings may have their credit rating downgraded or may default. Investments in smaller companies generally will experience greater price volatility.Emerging market and international investments involve risk of capital loss from unfavorable fluctuations in currency values, differences in generally accepted accounting principles, economic or political instability in other nations or increased volatility and lower trading volume. Derivatives involve special risks and may result in losses.
Portfolio holdings as of 03/31/12: Apple, Inc. (3.4%), EMC Corp. (3.2%), Oneok, Inc. (2.2%), EQT Corp. (1.6%). Holdings are subject to change.
An investment in the Fund involves risk, including loss of principal. Performance data quoted represents past performance, which does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. To obtain performance for the most recent quarter- and month-end, click here.
As of 12/31/11, total annual Balanced Fund operating expenses are 0.95%. The Balanced Fund Institutional Class operating expenses were 0.70%.
1The Blended Index is comprised of 60% S&P 500 Index and 40% Barclays Capital U.S. Aggregate Bond Index. The S&P 500 Index is an unmanaged index of large capitalization common stocks. The Barclays Capital U.S. Aggregate Bond Index represents securities that are U.S. domestic, taxable and dollar denominated. The index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities and asset-backed securities. Investors cannot invest directly in any index.
2The S&P 500 Index is an unmanaged index of large capitalization common stocks. Investors cannot invest directly in any index.
3The Barclays Capital U.S. Aggregate Bond Index represents securities that are U.S. domestic, taxable and dollar denominated. The index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities and asset-backed securities. Investors cannot invest directly in any index.
PAX002374 (7/12)
