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Market Overview
The rally that began in mid-March continued through the summer, as second-quarter earnings and increased credit flows bolstered optimism that the worst of the credit crisis had passed. As perceptions of financial risk abated, the relative value of the U.S. dollar to most major currencies fell, further lifting U.S. dollar returns of foreign investments. The increased prospect of earnings growth returning in 2010 drove the commodity-centric markets of Australia, Canada and Brazil, as well as the industry-centric markets of Europe, to post 25% gains in U.S. dollar terms. As has been the case for most of the year, the Japanese component of the small-cap universe was the major regional laggard, posting a single-digit return.
A key element of the investment style of the Columbia Acorn funds is finding companies with high-quality managements that can develop and execute a successful business strategy in normal times and also react wisely in times of crisis. Several of the quarter’s major performance contributors were industrial stocks of companies that instituted aggressive management restructuring and a focus on cash flow conservation, efforts that proved effective in protecting shareholders’ equity and allaying investors’ concerns.
Performance Overview
In the third quarter, performance for Columbia Acorn International slightly trailed the 20.68% rise of its primary benchmark, the S&P Global Ex-U.S. Between $500 Million and $5 Billion Index. The large-cap MSCI EAFE Index posted a similar return of 19.47%.
Contributors1
Both Finnish equipment rental company Ramirent, up 82%, and Swedish cabinet maker Nobia, up 54%, effectively restructured operations to further improve cash flow and protect profit margins. Management of Dutch-listed Aalberts Industries, up 71%, saw its share price rewarded for finding financing alternatives to a proposed equity rights issue that would have been dilutive to existing shareholders. Brazilian car rental company Localiza Rent A Car, up 62%, was rewarded for being able to generate significant free cash by delaying new-car purchases and alleviating investor’s and banker’s concerns over potentially tight credit.
Detractors1
Sometimes, however, new business strategies can take awhile to reach fruition. Eurofins Scientific is a French operator of food screening and testing laboratories. For the past few years, management has been aggressively buying smaller competitors with plans to consolidate assets, improve the operational focus and scope at individual sites and reorganize the commercial support. The up-front costs of this exercise have been considerable, however, in an environment of weak demand. In the first half of 2009, the company’s net profit was almost annihilated. Its stock fell following this announcement and ended the third quarter down 20%.
Outlook
As we enter the fourth quarter, most major economies find themselves at a crossroads. While fears of a global financial meltdown have abated, there remain many major hurdles before investors can feel confident about the prospects for the global economy. While U.S. consumption has provided a tailwind to many exporting economies, the United States now faces the twin challenge of an increased need for savings and an eventual end to the large fiscal stimuli. International markets must look inward for demand growth rather than to exports. This presents new challenges for economies such as China’s, which has long prospered on cheap local savings of its citizens to fund internal growth. Fortunately, with more than 3,000 small-cap companies in our universe, there are a great many companies to investigate, some of which we expect will have quality management teams poised to take advantage of the recent crisis to profitably grow their businesses.
Past performance is no guarantee of future results.
Please read and consider the investment objectives, risks, charges and expenses for any fund carefully before investing. For a prospectus, which contains this and other important information about the fund, contact your Columbia Management representative or financial advisor or go to www.columbiamanagement.com.
The S&P Global Ex-U.S. Between $500 Million and $5 Billion Index is a subset of the broad market selected by the index sponsor representing the mid- and small-cap developed and emerging markets, excluding the United States.
The Morgan Stanley Capital International Europe, Australasia, Far East (MSCI EAFE) Net (USD) Index is a capitalization-weighted index that tracks the total return of common stocks in 21 developed-market countries within Europe, Australia and the Far East. They are unmanaged and unavailable for investment.
Unlike mutual funds, indices are not managed and do not incur fees or expenses. It is not possible to invest directly in an index. 1 Determinations of contributors and detractors are based on performance relative to the fund’s benchmark.
Since economic and market conditions change frequently, there can be no assurance that the trends described here will continue or that the forecasts will come to pass. The views and opinions expressed are those of the portfolio managers and analysts of the affiliated advisors of Columbia Management Group, are subject to change without notice at any time, may not come to pass and may differ from views expressed by other Columbia Management associates or other divisions of Bank of America. These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security or sector.
There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive this report or that securities sold have not been repurchased. It should not be assumed that any securities transactions or holdings discussed were or will prove to be profitable, or that the investment recommendations or decisions made in the future will be profitable or will equal the investment performance of the securities discussed herein.
Columbia Management Group, LLC (“Columbia Management”) is the investment management division of Bank of America Corporation. Columbia Management entities furnish investment management services and products for institutional and individual investors. Columbia Funds are distributed by Columbia Management Distributors, Inc., member FINRA and SIPC. Columbia Management Distributors, Inc. is part of Columbia Management and an affiliate of Bank of America Corporation.
Columbia Wanger Asset Management, L.P. (CWAM) is an SEC-registered investment adviser and an indirect, wholly owned subsidiary of Bank of America Corporation. |