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 13.96% and 14.03%, respectively, vs. 14.58% for the Russell 3000 Growth Index.1
What factors contributed to the Fund’s performance?
Stock selection within the energy, industrial and health care sectors was the biggest contributor to Fund performance for the period. Within energy, our holdings in Noble Corp. and Lufkin Industries, Inc. had strong relative outperformance. In addition, our continued exclusion of Exxon Mobil was a positive contributor.
Our information technology holdings and cash position were the largest negative contributors to performance.Our underweight of Apple, Inc. continues to negatively impact performance. Although Apple is the Fund’s largest holding at 2.5%, it remains a large underweight versus the Index. We believe that over the long term the underweight position will be beneficial for various reasons. While we believe strongly that Apple is a good company with great products, its revenue projections assume that every new product introduction will be a hit. This is especially worrisome given Apple’s short product cycle. In addition, there seems to be little attention paid to the possibility of competition taking market share or cutting into margins.
Can you discuss any significant changes in the Fund’s positioning throughout the period?
We continue with the gradual repositioning of the portfolio that commenced in mid-year 2011. We are gaining confidence that the modest economic recovery is sustainable and have added more cyclical companies in the energy, financial and consumer discretionary sectors.
Which stocks contributed positively to performance?
We had a number of companies that gained more than 30% for the period, including Apple, Inc., EMC Corp., Terex Corp., Cummins, Inc., BorgWarner, Inc. and JPMorgan Chase & Co. Most of these companies are in cyclically-sensitive sectors such as technology, industrials and financials, that have benefited from the positive trending of economic data.
Which stocks detracted from performance?
On the negative side, Baker Hughes, Inc., Acme Packet, Inc. and General Mills, Inc. were some of the largest detractors to performance. All three had company-specific issues that affected performance. Baker Hughes underperformed due to a decrease in natural gas rigs. Acme Packet felt the brunt of their customers’(telecommunication service providers) reductions in capital spending. And General Mills had weaker margins due to higher commodity costs.
What is your market outlook, particularly with respect to how it will impact your Fund?
As mentioned earlier, we are gaining confidence that the modest economic growth that we are seeing is sustainable. Recent economic data releases have been uneven but overall positive in our view. We have started to see some encouraging news on employment, housing, inflation and commodity costs. If this continues, or at least maintains at this level, the market could advance even while the economy, as measured by gross domestic product (GDP), slowly moves forward.
Our biggest worries are still macro driven with the slowdown in China leading the way. Many of our industrial and technology holdings have a significant amount of business in China. The recent announced slowdown in growth there is a concern which we are closely watching. Even with these macro issues we think the Growth Fund is positioned well to outperform.
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. 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.
Portfolio holdings as of 3/31/12: Noble Corp. (1.2%), Lufkin Industries, Inc. (0.6%), Apple, Inc. (2.5%), EMC Corp. (1.7%), Cummins, Inc. (1.2%), BorgWarner, Inc. (1.4%), JPMorgan Chase & Co. (1.2%), Baker Hughes, Inc. (0.9%), Acme Packet, Inc. (0.5%), General Mills, Inc. (1.8%). Terex Corp. was not held by the Fund as of 3/31/12. 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 Growth Fund operating expenses, gross of any fee waivers or reimbursements, are 1.47% for the Individual Class shares and 1.22% for the Institutional Class shares. Total Growth Fund operating expenses, net of fee waivers, reimbursements and acquired fund fees and expenses, are 1.29% for the Individual Class shares and 1.04% for the Institutional Class Shares.
The Growth Fund’s investment adviser has contractually agreed to reimburse expenses allocable to Individual Investor Class of the Growth Fund to the extent such expenses exceed 1.29% of the average daily net assets of Individual Investor Class shares and 1.04% of the Institutional Class shares. This reimbursement arrangement will remain in effect until at least December 31, 2015.
1The Russell 3000 Growth Index measures the performance of those companies in the Russell 3000 Index with higher price-to-book ratios and higher forecasted growth values. The Russell 3000 Index measures the performance of the 3,000 largest U.S. companies, as measured by market capitalization. Investors cannot invest directly in any index.
PAX002375 (7/12)
