Manager Commentary
Portfolio Manager
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.
View Q1 Market Commentary
As of March 31, 2009
How did the Fund perform for the period?
For the three-month period ended March 31, 2009, the Pax World Small Cap Fund returned -2.36%, outperforming the -14.95% return of the benchmark Russell 2000 Index1.
What factors contributed to the Fund’s performance?
The Fund’s relative outperformance of its benchmark was primarily due to stock selection in the financials and energy sectors. In addition, a relative underweight in financials — the worst performing sector in the Russell 2000 Index1 — contributed to the Fund’s performance. We used the sector’s weakness to increase the Fund’s financial’s weighting, adding to well-capitalized banks and insurance companies.
Can you discuss any significant changes in the Fund’s positioning throughout the period?
We decreased the Fund’s position in the consumer discretionary sector. This is based on our view that the U.S. consumer is in the process of deleveraging and that near-term consumption could be restrained as consumers make purchases based on income, not additional debt. I believe unemployment is likely to increase in the coming months and consumption trends will likely shift towards “needs” versus “wants.” In this environment, companies which offer consumers a strong value proposition should fare well.
Which stocks contributed positively to performance?
GameStop Corp. (2.6%*), a retailer of videogames, increased significantly during the quarter. Strong quarterly results and increased financial guidance drove the shares higher. While videogames are discretionary, I believe they will be resilient as they are relatively inexpensive versus other forms of entertainment. VCA Antech Inc. (3.0%*), an operator of veterinary hospitals, also increased during the quarter. The business isn’t recession-proof but offers some insulation, as Americans are typically hesitant to deprive their pets of medical care.
Which stocks detracted from performance?
Continental Airlines (2.2%*) declined significantly during the quarter and was the Fund’s worst performing stock. Concerns over deteriorating economic growth and reduced business travel led to the sharp decline. I remain positive on Continental as I believe the company should benefit from lower fuel prices and increased margins. Natus Medical (2.0%*), a medical device company focused on newborns, also declined during the quarter. I believe tightness in the credit markets has caused hospitals to reign in capital spending budgets. Natus remains well-positioned and with valuation levels at low levels, I find the shares compelling.
What is your market outlook, particularly with respect to how it will impact your fund?
I believe the Pax World Small Cap Fund continues to be defensively positioned in higher-quality companies with strong balance sheets and steady cash flows. I remain cautiously optimistic that the U.S. economy will see a gradual improvement during the second half of this year. The market has rallied sharply off the March lows, suggesting that an economic recovery is becoming the consensus view. I expect the recovery could be both muted and choppy, keeping volatility levels elevated. In this environment, I intend to continue to actively manage portfolio risk by remaining focused on quality, valuation and defensive growth.
*Portfolio holdings as of 3/31/09. Holdings are subject to change.
An investment in the fund involves risk, including loss of principal. 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. 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 14.13% for the Individual Investor Class shares and 13.88% for the Institutional Class shares. 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 and 0.99% of the Institutional Investor Class shares. This reimbursement arrangement will remain in effect through at least December 31, 2012.
1The 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. Investors cannot invest direclty in any index.