Manager Commentary
Portfolio Manager
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Sujatha R. Avutu, CFA is Portfolio Manager of the Pax World Value Fund and Women's Equity Fund. Prior to joining the Adviser, she spent over eight years at Evergreen Investments, where she was Managing Director and lead Portfolio Manager for Evergreen Equity Income Fund. She has over fifteen years of investment management experience. Ms. Avutu received her Bachelor of Science degree from the University of Dayton with a concentration in Finance, and a Masters of Business Administration with concentrations in Finance and Management Information Systems from Miami University. She is a Chartered Financial Analyst and is a member of Boston Security Analyst Society and Boston Bank Analyst Society.
As of June 30, 2008
In the second quarter, equity markets continued to struggle trying to gauge the depth of the credit crisis, sky-rocketing commodity and energy prices, and the resulting slowdown in economic growth. Energy prices were up over 40% during the quarter, threatening demand. Following Bear Stearns near collapse and the subsequent bailout by the Federal Reserve (Fed) and J.P. Morgan at the beginning of the quarter, the financial sector appeared to be headed toward a reconciliation mode. Towards the end of the quarter, rising unemployment combined with parabolic energy and food prices left the Fed and Central Banks around the world in a precarious position of trying to balance growth and curb inflation. Investor concerns over the risk of ‘stagflation,’ a condition of rising inflation with slowing economic growth, led the markets into bear territory.
For the quarter, the Pax World Value Fund returned -3.94%, outperforming the Russell 3000 Value Index benchmark by 1.23%. Stock selection in industrials and technology were the biggest positive contributors to the Fund’s relative performance during the first half of 2008. Despite our underweighting in the sector, energy stock selection contributed significantly to the Fund’s relative performance. Stock selection in financials and consumer discretionary was the biggest detractor to the Fund’s relative performance. The Value Fund has had five take-outs or takeout offers in 2008—Bright Horizons*, Diebold*, Teliasonera (0.4%*), Calpine (1.0%*), and Corn Products*. This is very notable, as deals made this year are down 35% from a year ago.
With stagflation concerns seemingly dominating the market fears, the Fed may keep interest rates on hold in the short term. The three main culprits—energy, commodity prices, and housing—are proving to be strong headwinds to consumers and corporations alike. Under this scenario of rising input costs coupled with slowing demand, corporate profits are likely to be squeezed in the intermediate term. In this environment, we expect market returns to mirror corporate profits. The catalysts for growth and expanded multiples will be a drop in energy prices, earnings visibility, and contained inflation expectations.
Volatility of individual stocks will very likely remain at higher levels in the near term. Historically, when volatility increases and profit growth decelerates, high-quality large-cap companies with defensive positioning perform well. The Pax World Value Fund’s strategy continues to be based mainly on recurring revenues and valuation. The portfolio has a contrarian tilt with an approximate 60% weighting in large capitalization companies and 30% international exposure. On a sector level, the Fund is underweight in consumer discretionary, energy, and materials and overweight in technology.
We have been increasing our weightings in financials following the massive correction in the sector. Restoring confidence in the sector comes slowly; however, a steeper yield curve and attractive valuations point to a bottoming process, although banks still have some ways to go in strengthening loan loss reserves and capital base. We believe that we are closer to the bottom than top, providing us with some very attractive entry points. Some of the major themes that we are investing in include alternative energy, water and waste, and agriculture and food.
*Portfolio holdings as of 6/30/08. Holdings are subject to change. Bright Horizons, Diebold, and Corn Products are currently not held by the Fund.
An investment in the fund involves risk, including loss of principle. This Fund is designed for long-term investors who can accept the special risks associated with value investing. 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 Value Fund operating expenses, gross of any fee waivers or reimbursements, are 10.61%. The Value Fund’s investment adviser has contractually agreed to reimburse expenses (excluding Acquired Fund Fees and Expenses) allocable to Individual Investor Class shares of the Value Fund to the extent such expenses exceed 1.24% of the average daily net assets of Individual Investor Class shares of the Value Fund. This reimbursement arrangement will remain in effect for a minimum of three years, through December 31, 2011.
The Russell 3000 Value Index measures the performance of the broad value segment of U.S. equity value universe. It includes those Russell 3000 companies with lower price-to-book ratios and lower forecasted growth values.
PAX000161 (11/08)