Third Quarter 2008
Over both the past year and the third quarter, CEP’s model has done well at identifying poor-performing stocks ranked in our bottom quintile. The market vacillated widely between momentum and valuation preferences during the quarter. This was most significant in the wake of the extreme turmoil in the financial markets in September. In the third quarter, on an excess return basis the Fund saw its strongest performance from our selections in the finance sector. Materials, industrials, and consumer staples proved to be the most challenging.
The Fund’s overall relative performance benefited both from the stocks that we owned, as well as from the avoidance of many lower-quality names. On an individual holding basis, we mitigated many of the pitfalls in the financial sector and did not have exposure to Lehman Brothers and American International Group (AIG). The decision not to hold these securities was a significant contributor to relative performance over the trailing one year. Offsetting these gains, the Fund was hurt by holdings in Mosaic, Fluor Corp., and McDermott International.
A significant development in the fixed income markets took place during the quarter, when the U.S. government took over Fannie Mae and Freddie Mac in September. This action was taken to add confidence in the credit markets and to maintain liquidity within the residential lending sector of the economy.
The other significant development for the quarter was the increase in corporate spreads. The option-adjusted spread on the overall corporate component of the Lehman Brothers U.S. Aggregate Index increased by 176 basis points (1.76%) versus Treasuries. Corporate index spreads ended September at 441 basis points (4.41%). As recently as June 2007, this spread was 97 basis points (0.97%). The excess return for the corporate sector year-to-date is -1344 basis points (13.44%).
Within the fixed income portion of the Fund, the biggest contributor to excess returns was security selection. The Fund had no exposure to the distressed financial issuers, and we maintained a yield advantage to the benchmark through the agency-backed mortgage exposure. As corporate spreads widened to all-time highs, our avoidance of the lower-quality sectors continued to aid performance. The Fund’s bulleted yield curve positioning also helped as the curve steepened.
The Fund’s agency and mortgage-backed securities holdings helped increase the yield of the Fund so that income was additive during the year. Our financial sector underweight continued to add value in the face of the widely publicized problems with many of the money-center banks and brokerage houses. Overall performance for the year continues to be strong, with the majority of excess returns coming from sector allocation and security selection.
Similar to our past experiences, we are confident that the equity market will return to focus on long-term fundamentals, which are embedded in our investment process. We will continue to manage the fixed income portion with caution, taking advantage of the changing conditions that are currently in play. We greatly appreciate your perseverance during this challenging environment.
This commentary reflects the viewpoints of the portfolio manager, Chicago Equity Partners, as of 10/09/08.
Disclosure
Investors should carefully consider the fund's investment objectives, risks, charges, and expenses before investing. For this and other information, please call 800.835.3879 or download a free prospectus. Read it carefully before investing or sending money.
The performance shown represents past performance and is not a guarantee of future results. Current performance may be lower or higher than the performance data quoted. The investment return and the 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. From time to time the advisor has waived fees or reimbursed expenses, which may have resulted in higher returns. The listed returns and yields on the Fund are net of expenses and the returns and yields on the indices exclude expenses. Current performance of the Fund may be lower or higher than the performance quoted.
Investments in foreign securities, even though publicly traded in the United States, may involve risks which are in addition to those inherent in domestic investments.
The Fund is subject to the risks associated with investments in debt securities, such as default risk and fluctuations in the perception of the debtor's ability to pay its creditors.
Changing interest rates may adversely affect the value of an investment. An increase in interest rates typically causes the value of bonds and other fixed income securities to fall.
Any sectors, industries, or securities discussed should not be perceived as investment recommendations. The views expressed represent the opinions of Managers Investment Group and are not intended as a forecast or guarantee of future results. Any securities discussed may no longer be held in an account’s portfolio. It should not be assumed that any of the securities transactions discussed were or will prove to be profitable, or that the investment recommendations we make in the future will be profitable.
Unlike the Fund, the Index is unmanaged, is not available for investment and does not incur expenses. Please see Index Definitions for all our funds' benchmarks.
The Russell 2000® Index, and Russell 2000® Value Index are trademarks of Russell Investments. Russell® is a trademark of Russell Investments. An investment cannot be made directly into an Index.
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