Portfolio Management
Co-Portfolio Managers
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Christopher H. Brown has 19 years of investment experience. He joined Pax World in April 1998 as co-manager of the Pax World Balanced Fund and has served as its sole manager since October 2001. Prior to joining Pax World, Mr. Brown was an Investment Consultant at Fahnestock & Co., Inc., a New York Stock Exchange brokerage firm, from 1987 to 1998, and a First Vice President from 1994 to 1998. He is a graduate of the Boston University School of Management with a concentration in finance. -
Anthony Trzcinka, CFA has 10 years of investment experience and 14 years of overall finance experience. He has been associated with the Adviser for approximately 4 years. Prior to joining the Adviser, Mr. Trzcinka spent over 3 years at AEW Capital Management as an Assistant Vice President. He has an MBA degree from Northeastern University, a Bachelor of Arts from the University of Massachusetts and holds the CFA designation. Mr. Trzcinka is a member of the Boston Security Analyst Society and the CFA institute.
Management Style
The Fund’s portfolio manager believes that attractive growth stocks are found across a range of market capitalizations, from up-and-coming smaller companies in growth industries, to accelerating mid-size high achievers, to acknowledged large-company industry leaders. The Fund’s holdings are focused within economic sectors that seem likely to grow faster than the overall rate of GDP growth. As a key element of the stock selection process, the manager looks for companies with accelerating sales and earnings growth rates. The manager seeks to purchase stocks at prices that represent reasonable value when compared to industry peers. Cash is used as a buffering element and to provide a resource for opportunistic stock purchases.
Portfolio Commentary (as of December 31, 2007)
2007 has been a year of many challenges and some opportunities for the average investor. For the one-year period ended December 31, 2007, the Dow Jones Industrial Average, S&P 500 Index, and NASDAQ Composite Index returned 8.88%, 5.49%, and 10.66%, respectively. These returns are respectable considering the challenges facing the markets — rising energy prices, the subprime mortgage crisis and ensuing liquidity crunch, soft corporate profits, and the weak dollar.
The economy seemed to be largely unaffected by higher energy prices. However, the subprime mortgage situation and related liquidity crisis were not dealt with so easily. For the past few years the American consumer depended on hybrid loans for cheap credit and on rising home prices when they needed to be bailed out. This cycle ended in 2007, and the after-effect was felt not only by the consumer but also by mortgage lenders, banks, and investment houses. The resulting liquidity crisis forced banks to tighten lending, further weakening the housing market. The full effect has yet to be determined.
Certainly the subprime/liquidity mess was a major story in 2007. However, there were some opportunities for investors with a global perspective. Much of the rest of the world, including both emerging and more developed markets, has been growing at a much faster rate than the United States. At Pax, we viewed this as an opportunity and increased our exposure to global markets. This provides the dual positive effect of solid diversification with potentially higher returns.
Other opportunities that we attempted to take advantage of include the growth of alternative energy and the rise in commodity costs. The price of a barrel of oil is now approaching $100. Consequently, we have seen a strong push for alternative energy by governments around the world. Solar stocks have provided strong growth in the Pax World Growth Fund.
Along with the rising energy prices there has also been a general rise in the price of commodities. The strong demand in commodities is due in some part to large countries such as China, Russia, Brazil, and India experiencing above-average growth. To benefit from this, we have been investing in companies that provide agricultural equipment and infrastructure services. We believe this trend will continue.
The threat of a recession in 2008 remains. We could, in fact, be in a recession now and not know it until some time in the future. We do think that the subprime/liquidity mess will continue to pose problems for the market. We expect continued higher energy prices and believe that global growth will need to slow significantly before there is relief on that front.
On the positive side, there is a strong chance that the Federal Reserve will continue its rate cutting. Lower rates would certainly provide a boost to our economy. How this will impact the markets is unclear. Until we get the liquidity mess behind us we will continue to see above-average volatility in the markets. However, we believe that the markets should show single digit gains despite the volatility.
Given our outlook on the United States and global markets, our current strategy is to stay defensive with U.S. companies and look for companies that can take advantage of the global growth. We expect to continue to move the portfolio toward large capitalization companies, which typically perform better in a slowing economic environment due to their product and geographic diversification.
In line with the previously discussed strategies we have added companies such as PowerShares DB Agriculture Fund (0.6%*), eBay (1.7%*), Focus Media (0.5%*), Fuel Technologies International (1.2%*), and Intel (0.4%*). We have eliminated or trimmed positions in Hain-Celestial, Asbury Automotive and Humana.
This commentary does not constitute an endorsement of any company’s attractiveness as an investment.
*Portfolio holdings as of 12/31/07.