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 10.16% and 10.11%, respectively, vs. 12.44% for the Russell 2000 Index1.
What factors contributed to the Fund’s performance?
The Fund’s performance trailed its benchmark due largely to our more defensive positioning and poor stock selection within the information technology sector. This performance was partially offset by strong stock selection within the consumer discretionary and industrials sectors.
Can you discuss and significant changes to the Fund’s positioning throughout the period?
We reduced our weighting in the energy sector during the period. We have become increasingly concerned with the high level of oil prices and their impact on the overall global economy. In our view, demand destruction has begun and is poised to accelerate as the summer driving season approaches. This could lead to relative underperformance of oil-levered energy shares in the coming months.
Which stocks contributed positively to performance?
Shares of AboveNet, Inc., an Internet infrastructure company, increased sharply during the period. The company announced their pending sale to Zayo Group in an all-cash transaction. We are somewhat disappointed with the valuation being offered and continue to hold shares as the potential exists for a higher offer. Cinemark Holdings, Inc., an operator of movie theaters, was a strong contributor to Fund performance during the period. In our view, Cinemark is well-positioned to grow this year based on a better schedule of new movie releases, a mix shift to higher-priced 3D movies and continued strong growth in Latin America.
Which stocks detracted from performance?
United Financial Bancorp, Inc., a small bank serving western Massachusetts, detracted from performance during the period. We believe the lagging performance was a result of investors seeking out higher beta2 companies, rather than any change in the company’s fundamentals. We remain very positive and added to our position during the period. InterDigital, Inc., a wireless intellectual property company, was a significant detractor to performance during the period. The company ended a strategic review process that investors had hoped would end with a sale. While disappointed with the outcome of the strategic review, we are very positive on the company’s outlook and find their 4G/LTE patents especially valuable.
What is your market outlook, particularly with respect to how it will impact your fund?
2012 is off to a strong start with better-than-expected economic data contributing to increased investor confidence in the sustainability of the recovery. We are particularly encouraged by the housing and employment data reported to date. Encouragingly, European debt concerns have subsided as the European Central Bank’s liquidity programs appear to be working.
Energy prices have increased significantly over the past few months, driving U.S. gasoline prices above $4.00 per gallon in many states. If these prices are sustained or increase further, consumer spending and the overall economy could weaken. Given high investor expectations, this could lead to periods of increased market volatility. We believe the Fund is well-positioned and look forward to deploying capital into high- quality, attractively-valued companies.
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. Funds that emphasize investments in smaller companies generally will experience greater price volatility.
Portfolio holdings as of 03/31/12: AboveNet, Inc. (3.6%), Cinemark Holdings, Inc. (2.9%), United Financial Bancorp, Inc. (4.7%), InterDigital, Inc. (3.3%). Zayo Group was not held by the Fund as of 03/31/12. 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 Small Cap Fund operating expenses, gross of any fee waivers or reimbursements, are 2.71% for the Individual Investor Class shares and 2.46% for the Institutional Class shares. Total Small Cap Fund operating expenses, net of fee waivers, reimbursements and acquired fund fees and expenses, are 1.24% for the Individual Class shares and 0.99% for the Institutional Class Shares. The Small Cap Fund’s investment adviser has contractually agreed to reimburse expenses (excluding Acquired Fund Fees and Expenses) allocable to Individual Class shares of the Small Cap Fund to the extent such expenses exceed 1.24% of the average daily net assets of Individual Investor Class shares and 0.99% of the Institutional Investor Class shares. This reimbursement arrangement will remain in effect through at least December 31, 2013.
1The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000®; Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership. Investors cannot invest directly in any index.
2Beta reflects the sensitivity of a Fund's return to fluctuations in its benchmark; a beta for a benchmark is 1.00: a beta greater than 1.00 indicates above average volatility and risk.
PAX002379 (7/12)
