Fourth Quarter 2007
For the fourth quarter of 2007, the First Quadrant Small Cap Value Portfolio generated modestly positive relative returns against its primary benchmark, the Russell 2000® Value Index. The Portfolio’s relative performance gains came primarily from stock selection. Meanwhile, style tilts along with sector and industry positioning relative to the benchmark yielded largely neutral results.
During the fourth quarter, the small-cap value market finished down sharply amidst concerns about credit quality and economic growth prospects in the wake of the housing bust’s impact on markets. From a style perspective, the Portfolio maintains a tilt toward larger and more liquid names within the small-cap universe. This tilt towards more liquid holdings has been driven by the relatively flat yield curve, which portends slower economic growth. This positioning modestly added to performance during the fourth quarter. The Portfolio also benefitted by a tilt away from more leveraged stocks, as the current credit crunch hurt those shares. On the downside, the Portfolio was hurt by a tilt away from stocks with greater foreign sensitivity and with greater variation in earnings. Overall, the style tilts in the Portfolio were flat for the quarter.
From an economic-sector perspective, an underweight to the energy sector was the main source of modestly weak positioning during the quarter. This sector was one of the few that posted positive performance during the difficult fourth quarter. However, the Portfolio did benefit by maintaining an overweight to the health-care sector, which, once again, significantly outperformed the broader small-cap value market.
Stock selection was a positive contributor to performance during the fourth quarter. This positive stock selection was primarily driven by holdings within the health-care sector. In fact, the top two contributors to performance during the quarter, generic drug manufacturer Perrigo and medical services provider Magellan, were health-care holdings. Other stocks that performed well in the Portfolio during the fourth quarter include utilities Northwest Natural Gas and Portland General Electric, as well as trash hauler Waste Connections. On the downside, several holdings performed poorly within the consumer-discretionary sector, including hotel operator Gaylord Entertainment, apparel firm Perry Ellis, and cable operator Charter Communications. Overall, however, stock selection was positive during the fourth quarter, leading to the outperformance against the benchmark.
The views expressed represent the opinions of First Quadrant, L.P. as of December 31, 2007 and are not intended as a forecast or guarantee of future results.
Disclosure
Any sectors, industries, or securities discussed should not be perceived as investment recommendations. 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.
The Russell 2000® Value Index is a trademark of Russell Investments. Russell® is a trademark of Russell Investments. An investment cannot be made directly into an Index.
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