Third Quarter 2008
In an environment where equities were under pressure, small-cap stocks held up relatively well, outperforming their large-cap and mid-cap counterparts. Reversing course from the previous quarter, small-cap value stocks easily outpaced small-cap growth stocks by a margin of nearly 12%. There was also wide performance dispersion across sector lines. With a steep decline in commodity prices, the energy and materials sectors fell -33.6% and -14.1%, respectively. Financials, on the other hand, rallied back from a difficult second quarter to return 16.8%.
The Fund's performance was disappointing during the quarter, hampered by a combination of sector allocation effects and stock selection effects. An underweight to the top performing financials sector was a drag on relative performance, offset modestly by an underweight to the materials sector. Stock selection suffered across most sectors, with the largest underperformance coming within the financials, information technology and industrials sectors. Additionally, the Fund's emphasis on growth characteristics was clearly not in favor during the period. This was evidenced by the fact that small cap companies which had generated the strongest earnings growth numbers were among the worst performers during the quarter.
Smith Group continued to perform well relative to their growth-oriented benchmark, thanks in part to an overweight to the financial sector and an underweight to the energy sector. After a strong second quarter, Westport lost ground due primarily to disappointing performance from Orient Express Hotels, which was down more than 40% during the quarter. Westport's relative performance also suffered from an underweight to financials and an overweight to energy. Lord Abbett also had a difficult quarter, as it was a particularly challenging environment for their aggressive growth style.
Looking forward, we expect the near-term environment to remain volatile for equities, as a great deal of uncertainty remains about the future direction of the economy, and what the impact will be of the various policy responses of the Federal Reserve and the U.S. Treasury. In this type of environment, a disconnect can often be seen between a company's fundamentals and its stock performance. As the recent macro-related events are digested by investors, we expect companies with strong fundamentals should once again be rewarded, and believe that the Fund is well positioned for this environment. The Fund's largest deviation from the benchmark continues to be its underweight to the financials sector. The Fund is more modestly underweight the utilities and materials sectors. Offsetting these positions are overweights to the consumer discretionary, health care and information technology sectors.
On an organizational note, the Fund's Board of Trustees recently approved the addition of Federated MDTA, LLC and Ranger Investments, LP as subadvisors to the Fund. Concurrently, the Board of Trustees approved the removal of Donald Smith & Co. and Veredus Asset Management from the Fund's list of subadvisors. These changes were made with the goal of re-establishing a growth style orientation while improving the consistency of the Fund's performance results. Please visit our Web site at www.managersinvest.com for a full description of the investment philosophy and process of both MDT and Ranger.
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® Growth 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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