First Quarter 2008
It was a very difficult first quarter for both the market and FQ Tax-Managed Fund as the U.S. equity market felt the brunt of an escalating credit crisis amid constant talk of a potential recession. All market sectors within the benchmark delivered negative returns for the quarter with the information technology and telecomm services struggling the most.
For the Fund, the quarter’s relative underperformance can be attributed primarily to weak stock selection compared to the benchmark Russell 3000® Index. This weak stock selection was slightly mitigated by solid sector positioning relative to the benchmark. Style factors generally did not add or detract value as the Fund remained broadly in line with the benchmark as we continued to maintain a defensive position compared to the Index.
The weak stock selection was primarily concentrated in the consumer and health-care sectors. In addition, there was weakness within information technology as many of these stocks lagged on fears of a slowing economy. For instance, our single biggest negative contributor was Apple, which was down -28% for the quarter despite rising sales of its laptops and iPhones. We continue to believe that our technology holdings are well-positioned in the current market environment since they are larger-capitalization companies that are exposed to non-U.S. market growth that can thrive in an environment with a weak U.S. dollar.
Our health-care holdings were also down significantly led by disappointing performance from hospital chain Humana, down 41%, and medical-insurance provider Aetna, down 27%. The first quarter was an unusual period for health-care stocks, which normally provide a safe haven during difficult markets as the sector was battered by investors concerns about the upcoming presidential elections and the candidates view on the health-care industry.
Another area of stock selection weakness for the Fund was within the energy sector. This was primarily due to the holding of Tesoro which declined -27%. Notwithstanding, we continue to believe that refiners, such as Tesoro, represent a compelling investment opportunity. Otherwise, we have begun to sell certain energy positions as it looks as though energy prices are now rising more on speculation rather than fundamentals. History tells us that energy demand tends to be very sensitive to economic growth. Therefore, the current market environment would seem to be a difficult headwind for the sector.
The positive positioning that added value to the Fund’s quarterly performance was primarily driven by the overweight to the defensive consumer-staples sector. Not surprisingly, consumer-staples stocks were the best performers in the broader U.S. equity market for the quarter. The Fund also continued to benefit from the underweight to the shaky financials sector.
The current market environment continues to be challenging as the question to us is not whether we are in a recession, but for how long. The dollar has fallen significantly and, as a result, exporters are one of the few bright spots in terms of earnings. We believe the impact of those macroeconomic conditions will be reflected in market prices in the shorter term. As we move into the second quarter, our models are seeing a host of opportunities as certain sectors now have very compelling valuations after the difficult start to the year.
This commentary reflects the viewpoints of the portfolio manager, First Quadrant, as of 4/7/08.
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. 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. Performance data shown is current to the most recent month end.
The Fund invests in large-capitalization companies that may underperform other stock funds (such as funds that focus on small and medium capitalization companies) when stocks of large-capitalization companies are out of favor.
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.
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