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Fund commentary

The Fund delivered positive absolute returns, but finished modestly behind its benchmark as stock selection pared back its gains, notably within financial services and health care. The former sector weakened over the quarter – notably so among larger names like JP Morgan and Goldman Sachs – after investors took profits amid concerns over the sector’s growth outlook and the potentially negative consequences of stricter regulation.

Within health care, the Fund’s holdings detracted, notably within biotechnology research & production, where shares in Genzyme slumped after a contamination scare surrounded its treatments for rare genetic disorders.

In the consumer staples sector, retailer CVS was hit by concerns over the outlook for its Caremark acquisition after releasing weak results. In contrast, the Fund’s producer durables holdings proved positive.

Growth manager BlackRock finished broadly in line with the benchmark over the quarter, driven largely by its advantageous sector positioning, notably an overweight to technology and stock selection within producer durables. Delta Airlines was a key contributor as BlackRock’s overweight to the Air Transport industry proved beneficial. Elsewhere, internet retailer Amazon delivered the biggest positive contribution at a stock level.

Columbus Circle, a growth manager, finished modestly ahead of the Fund’s benchmark in favourable conditions for growth investing. At the sector level, gains were pared back by being significantly overweight financial services and underweight technology. Stock selection within the consumer discretionary sector was additive, particularly due to automobile and leisure time stocks. However, selection in the energy (crude oil producers), technology (communications and computer stocks) and consumer staples sectors detracted.

ICAP, a value manager, underperformed as value investing trailed growth. ICAP had a significant underweight to the financial services sector, which proved beneficial, as did an overweight to health care. The manager was helped by strong selection in the producer durables (railroads and machinery stocks) and technology sectors (semi-conductors and electronics). However, this was negated by its consumer staples holdings (particularly drug stores).

Value manager Palisades endured a difficult quarter as growth outperformed value. Both stock selection and sector positioning proved ineffective, notably within the financial services and consumer discretionary sectors. The manager is significantly overweight financials, which proved detrimental, while its holdings within the sector, notably the larger investment banks detracted.

SGA outperformed as investors favoured companies with more consistency and sustainability in their business momentum and earnings growth. The manager’s consumer discretionary holdings led the way as internet retailer Amazon performed well after it continued to gain market share and enjoyed strong holiday sales. An exposure to financial services companies geared towards consumer credit transactions proved beneficial. The portfolio’s underweight to the consumer staples sector, historically considered to be more defensive, also added value, as investors sought superior earnings growth opportunities.

31 December 2009

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