Manager Commentary
Portfolio Manager
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Nathan Moser is the Portfolio Manager of the Small Cap Fund. Mr. Moser has been responsible for the management of the Small Cap Fund since its inception in 2008. Prior to joining the Adviser, Mr. Moser was a portfolio manager and equity analyst with Citizens Funds since 2002. Mr. Moser holds a Bachelor of Science from Babson College. He is a Chartered Financial Analyst and a member of the Boston Security Analysts Society.
As of June 30, 2008
In the second quarter, the market continued to face a myriad of issues ranging from financial/credit concerns to higher energy prices and rising unemployment. The Federal Reserve (Fed) has taken drastic steps this year to provide assistance to the financial services sector in the form of very low short-term interest rates, and by opening the discount window to provide liquidity to investment banks. The Fed has made a conscientious decision to support the financial sector at the risk of potentially higher inflation. The financial/credit crisis has begun to impact the U.S. consumer, and a strong recovery isn’t likely until home prices stop declining and energy prices soften.
The Russell 2000 Index returned 0.58% for the second quarter as stocks rallied sharply in April and May, and then reversed direction in June. The Pax World Small Cap Fund declined 2.21% during the period as stock selection within the industrials sector and an underweight energy position detracted from performance.
We remain cautious regarding our outlook as many of the issues facing the market have long- term consequences. Our core investment philosophy is to buy high-quality companies with superior growth prospects trading at reasonable valuations. We seek out companies with excellent management teams and which operate in defensible niches – allowing for steady growth in good times and bad. One company in which we’ve been increasing our position is Natus Medical (2.5%*), a medical device company focused on newborn diagnostics that dominates the hearing screening market with 80% market share, and it is poised to grow earnings by 25% per year over the next three years. The company has a significant growth opportunity internationally and would represent an attractive acquisition candidate for a larger healthcare company.
On the sector level, we’ve increased our healthcare and consumer staples weights. These defensive sectors will benefit from a flight to quality if the market remains volatile. We are underweight in both the energy and materials sectors as expectations are very high and commodities are overdue for a pullback. This may be our most out-of-consensus call, but we remain confident in our positioning given the demand destruction taking place and our expectation of slowing global growth.
Volatile markets present both challenges and opportunities. The small-cap market presents a diverse group of innovative companies. We believe that many of these companies are positioned to not only weather the current volatility, but thrive through mergers and acquisitions and by gaining market share. We continue to find great companies trading at reasonable valuations.
*Portfolio holdings as of 6/30/08. Holdings are subject to change.
An investment in the fund involves risk, including loss of principle. Funds that emphasize investments in smaller companies generally will experience greater price volatility. Performance data quoted represents past performance, which does not guarantee future results. 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 cost. Current performance may be lower or higher than the performance data quoted. Current performance may be lower or higher than the performance data quoted. To obtain performance for the most recent month-end, click here. For standardized performance, click here.
Total annual Small Cap Fund operating expenses, gross of any fee waivers or reimbursements, are 8.35%. The Small Cap Fund’s investment adviser has contractually agreed to reimburse expenses (excluding Acquired Fund Fees and Expenses) allocable to Individual Class shares of the Small Cap Fund to the extent such expenses exceed 1.24% of the average daily net assets of Individual Investor Class shares. This reimbursement arrangement will remain in effect through at least December 31, 2011.
The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index.. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.
PAX000160 (11/08)