Micro Cap Fund

Manager Commentary as of 06/30/10

The second quarter of 2010 erased most of the gains produced in the first three months of the year for the fund as it became evident that the global economic recovery, which had been showing signs of improvement for several quarters, was entering a "soft patch."  As the sovereign debt issues in Europe began to unfold, China's orchestrated slowdown continued and fresh evidence appeared that indicated the stimulus-induced U.S. economic rebound might began to fade.  This confluence of events triggered a dramatic sell-off in global equities, and as a consequence the fund declined 10.76% versus -7.67% for the Lipper Microcap peer group and -7.85% for the Russell Microcap Growth Index.

Data represented reflects past performance and is no guarantee of future results. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original value. Current performance may be lower or higher than the performance quoted. Performance current to the most recent quarter end may be obtained by clicking here. Performance current to the most recent month end may be obtained by clicking here.

This quarter's sharp pullback marked the first down quarter for the fund in over a year.  On both an absolute and relative basis versus the Russell Microcap Growth Index, the consumer discretionary sector was the primary cause of the underperformance due to poor stock picking. The healthcare and financials sectors were two other areas that detracted slightly from relative performance during the quarter.  On the positive side, good stock picking in technology and industrials helped performance.  Despite the underperformance for the quarter, the fund is still outpacing its benchmarks for 2010.

From an individual stock perspective, Coldwater Creek, Orthovita and McCormick & Schmick's declined the most during the quarter.  Coldwater Creek was by far the largest detractor due to investor disappointment at the pace of the company's turnaround.  Current company leadership continues to work through the impact of decisions made by prior management.  However, profitability was restored last quarter and the company should make money for the year.  While the turnaround may be slow,  we continue to see signs of progress that allow us to maintain conviction in this investment.  Despite being down so much in the quarter, there were a few bright spots on an individual stock basis.  Virtual Radiologic (VRAD) and Double-Take Software, two stocks that were laggards in the first quarter, were acquired for a premium to their current market value, and in the case of VRAD, it was a substantial premium.  

In last quarter's commentary we made the observation that the next debate would shift towards the magnitude and duration of the expansion.  Thus far the economic data that has presented itself seems to indicate that the stimulus-induced acceleration of 2009 is starting to show signs of weakness, and that unaided economic growth does not seem to be taking hold as one would normally expect in a recovery.  This is most likely due to a variety of reasons that can be seen or read in the media on a daily basis.  While current business trends remain solid, it is this weakened outlook that stocks are already starting to discount.  On the positive side, valuations are not as stretched and company cost structures remain lean with high levels of cash, which should help cushion any further market contractions.  In our ongoing attempt to search for high-quality, early-stage growth companies, we will continue to pursue strong companies that are able to reinvest for growth and further entrench their competitive positioning regardless of the economic environment.

Click here for holdings

Click here for definitions.

"Good stock picking in technology and industrials helped the Micro Cap Fund's performance. Despite underperformance for the quarter, the fund is still outpacing its benchmarks for 2010."