Fund Performance
Quarterly Overview1
In the third quarter, equity markets rallied strongly as a decrease in risk aversion led to improved valuations in equities in general — and lower quality equities in particular. While such a backdrop could have caused the fund to underperform due to our avoidance of severely distressed companies, we nonetheless were able to participate in the general upward market movement by virtue of our stock selection and portfolio positioning.
During the third quarter, small-cap stocks outperformed large-cap stocks by 300 bps with the Russell 2000 Index returning 19.28% versus 16.31% for the Russell 3000 Index. Since the March 9 low, the Russell 2000 Index gained 76% to the S&P’s 56% gain. Small value outpaced small growth as the Russell 2000 Value Index returned 22.70% versus the 15.95% return of the Russell 2000 Growth Index. Columbia Small Cap Value Fund II finished close to the Russell 2000 Value Index’s return of 22.70% and leads the benchmark on both a year-to-date and one-year basis.
Most sectors in the fund returned strong double-digit performances. Materials and energy were the strongest sectors with returns of 42% and 39%, respectively, followed by industrials, telecommunication services and consumer discretionary. Utilities and health care returned single-digit performance but were still in positive territory.
Stock selection again was strongest in financials. Selection in commercial banks, thrifts and mortgages, and insurance drove much of the portfolio’s performance. Positions in mortgage insurers MGIC Investment and Radian Group along with insurers XL Capital and Assured Guaranty benefited the fund as these names generated returns in excess of 50% each. The real estate investment trust industry generally did not keep pace with the benchmark and was an overall negative for the quarter on a relative basis. The lone standout was LaSalle Hotel Properties, which did perform well.
Stock selection was also positive in energy where we began to slowly add to the sector after an extended period of weak gas prices.
Conversely, selection was weakest in consumer discretionary, health care and information technology, driving downside performance. In consumer discretionary, while the fund continued to benefit from stock selection in specialty retail, it was challenged by its holdings in media, as well as the auto components industry where there were many low-quality names. In health care, our holdings in equipment and supplies, and providers and services industries both suffered again on a relative basis. Nursing home and long-term care companies lagged during the recovery. In information technology, positions in several semiconductor companies delivered negative returns and detracted on a relative and absolute basis.
The fund benefited from its ongoing underweight to utilities where we are constantly challenged to uncover stable companies that offer upward inflection points.
Outlook
We often discuss sector and industry positioning in our quarterly reviews. However, our strength lies in our investment process, which is to unearth attractively valued companies. We focus our research on those companies where we believe the valuation gap is likely to shrink in the near term. We accomplish this by focusing on what we call an “upward inflection point,” which essentially means we want stocks that are both inexpensive and are showing improving operating performance/metrics. In thinking about the types of situations that are attractive to us, our opportunities typically encompass one or more of the following:
- “Out-of-the-limelight” companies missed by the Wall Street research community
- Cyclically driven opportunities in industries that may be out of favor
- Companies with compressed operating margins that the managers believe are poised to expand within a reasonable timeframe
As we move into the fourth quarter, the fund’s most active weights remain in the information technology, consumer staples and health care sectors. Our largest underweights remain in the interest-rate sensitive sectors of financials and utilities.
Performance data quoted represents past performance, and current performance may be lower or higher. 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 Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index.
The Russell 3000 Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization, which represents approximately 98% of the investable U.S. equity market.
The Russell 2000 Growth Index is an unmanaged index that measures the performance of those Russell 2000 Index companies with higher price-to-book ratios and higher forecasted growth values.
The Russell 2000 Value Index tracks the performance of those Russell 2000 Index companies with lower price-to-book ratios and lower forecasted growth values.
Unlike mutual funds, indices are not investments, do not incur fees or expenses and are not professionally managed. It is not possible to invest directly in an index.
1Determinations 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 transaction 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. |