Third Quarter 2008
Skyline believes owning stocks selling at below-average valuations with above-average earnings growth prospects provides exceptional performance potential. During 2008, application of this discipline has not led to the results we would have expected. The logical question becomes, has Skyline's management strayed from its investment philosophy or been unsuccessful in implementing it?
Looking at the data, it is clear that we have adhered to our investment philosophy. As of the end of the third quarter, the companies in the Fund generated average-earnings-per-share growth of 3% over the prior 12 months. This compares to a decline of -11.5% for the average small-cap value company. This is fairly consistent across sector lines, indicating that it is driven by stock selection rather than sector allocation. Clearly, the deteriorating economic environment has had a negative impact on some of the Fund's holdings, but as a whole, the fundamentals of the companies in the Fund have held up better than that of the average small-cap value stock.
We have been able to identify stocks we believe have superior growth prospects without violating our valuation discipline. The trailing 12-month P/E ratio of the Fund began 2008 at 12.3x, compared to 14.3x for the Russell 2000 Value Index. Again, the lower valuations were fairly consistent across economic sectors. We believe the Fund's holdings appear attractive on other measures of value as well, such as price-to-book and price-to-sales.
If, as the data indicates, Skyline's investment philosophy has been consistently and effectively applied during the current stock market cycle, why haven't the Fund's relative returns reflected that? It is our belief that in those infrequent environments where there are unprecedented macroeconomic events occurring, investors rely less on analyzing the underlying fundamentals of individual companies. Rather, investors buy and sell stocks based solely on their perceived exposure to the current economic environment. We believe the market is not properly valuing the Fund holdings that may be exposed to the problem areas of the economy but, in our opinion, are likely to survive and ultimately benefit from the dislocations created during this market upheaval.
The turmoil in the credit markets and a declining economy create a particularly uncertain environment for equities. Despite these uncertainties, we believe the return potential of the Fund outweighs the current risk for two main reasons. The first is valuation. The stocks in the Fund currently trade at 11.0x their trailing 12-month earnings levels. At these levels, we believe the market is already factoring in a very difficult earnings environment. Second, we believe the companies in the Fund are the survivors, and ultimately beneficiaries, of the current market turmoil. The companies' earnings have held up better than those of the average small-cap value stock, and they maintain strong balance sheets, leading market positions, and strong managements. It is our belief that, ultimately, stock prices must reflect the fundamentals of the underlying companies. When more clarity on the extent of the economic damage caused by the credit crisis emerges, we expect the market will shift its focus to finding those companies with the best valuations and growth prospects. We believe the Fund is extremely well positioned to benefit from that environment.
This commentary reflects the viewpoints of the Skyline Asset Management Company as of 10/8/08.
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.
The Fund is subject to risks associated with investments in small capitalization companies, such as erratic earnings patterns, competitive conditions, limited earnings history, and a reliance on one or a limited number of products.
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.
The S&P 500 Index is proprietary data of Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. All rights reserved.
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