I awoke the other night in a cold sweat from a dream I was having. When the market went down, I saw party balloons, deserts, smiles, and laugher. However, when the market went up I saw the grim reaper leering around the corner. Unfortunately it wasn’t a dream, but first quarter large-cap growth performance. The nightmare was not as scary as first thought since large-cap value beat the benchmark and small-cap core smoked the benchmark (no small feat according to some consultant’s I spoke with). All-cap returned 6.6% ahead of the benchmark as well. Which gives us continued confidence that our model continues to perform. So what the heck happen to large-cap growth returns? A great deal of the return came from the small cap portion of the Russell Growth index which doesn’t help us since we only purchase stocks with cap weightings near or larger than $5 billion dollars as a minimum company capitalization size. Also, our technology holdings did not fair as well as the benchmark holdings (-8.0% vs. +4.0%). Only four stocks of the fourteen stocks held during the period were up. Although we maintained an equal and did not over-weight portfolio weightings to the benchmark, however, technology still accounted for 21% of portfolio holdings. Health care was another dull spot in portfolio returns this quarter, plus 1% for the benchmark vs. a loss of 2.9% in the portfolio which accounted for 19% of portfolio holdings. The only bright spots this quarter were telecommunications, up 18.6%, but only an 8.4% portfolio weighting, and transportation up 28%, but only a 2.2% portfolio weighting.
We still are suspicious of the ability of the market to sustain the rally into summer. As noted earlier, the two highest ranked sectors qualifying as over-weights were telecommunications and transports, with basic materials and capital goods showing improvement, not exactly the sectors, save capital goods, bull markets are made of.
The model continues to do its job, evidenced by the fact that our value, all-cap and small cap portfolios all out performed their benchmarks. We did managed to pick-up some additional return vs. the benchmark at the end of the quarter, but it was too little too late. If we happen to be early, then we’ll make it up this quarter. At any rate the nightmare ended March 31, 2006. None of our portfolio managers accept under-performance, and I am certainly not the exception, but we should point out that we have had 11 quarters within our ten year history (40 quarters) where we did not beat the benchmark, and chances are that it would happen again. Beating the benchmark 72.5% of the time is a pretty good wining percentage. However, it’s hard to accept not being perfect!
Meanwhile the indexes finished up the first quarter with the Standard & Poor 500 up 3.7%, while the broadest index, the Russell 3000 was up 5.3%. Russell Large cap Growth and Russell value up 5.9% and 3.1% respectively. The little guys continue to shine with the Russell 2000 small cap index up 13.9% for the period and their larger mid-cap brothers and sisters up 7.6% year to date.
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