Fund Performance
Stock market rally continued; lower quality led the way
The stock market continued to move higher in the third quarter, supported by the tremendous liquidity in the system. As investors grew more comfortable with risk, they favored low-priced securities and low-quality companies, regardless of fundamentals. As a result, dividend payers, generally more stable and higher-quality companies, lagged in this rally. Although the Columbia Dividend Income Fund outperformed the market by a wide margin over the past year, it lagged in the third quarter of 2009 along with the other dividend payers. For the third quarter of 2009, the fund underperformed its benchmark, Russell 1000 Index.
Sector weights drove strategy performance
As investors looked ahead to a recovery in consumer spending, the consumer discretionary sector performed well in the third quarter. However, the fund lagged the benchmark in this sector with its overweight position in McDonald’s — one of the higher-quality names in the sector. McDonald’s continued to execute well in a tough economic environment, delivering strong sales. Investors preferred lower-quality consumer stocks on the belief that they are more highly exposed to the economic recovery cycle.
The fund also lagged in the strong-performing financials sector because of its focus on higher-quality financial stocks. As liquidity was pumped into the system by the U.S. government, investors grew less concerned about the possibility of more financial institution failures. In this environment, stocks such as American International Group and Citigroup rose by 50% or more. Although the strategy’s holdings in asset managers, such as Eaton Vance and T. Rowe Price, did well in the past couple of quarters, they did not participate fully in this low-quality rally, posting only high single-digit returns.
By contrast, the fund’s health care holdings made a positive contribution to relative performance during the quarter. The health care reform proposal encountered obstacles in Congress, and investors became less nervous about the potential impact of legislation on future profits for health care companies.
Portfolio activity
During the quarter we initiated a position in Allegheny Technologies. With revenues of $5.3 billion in 2008, Allegheny Technologies is one of the largest and most diversified specialty metals producers in the world. Its major markets are aerospace and defense, chemical process industry/oil and gas, electrical energy, medical, automotive, food equipment and appliance, machine and cutting tools and construction and mining, and its products include titanium and titanium alloys, nickel-based alloys and superalloys, stainless and specialty steels, zirconium, hafnium, and niobium, tungsten materials, grain-oriented electrical steel, and forgings and castings. Allegheny Technologies generates superior free cash flow from operations and has a stronger balance sheet than many of its peers. In addition, the stock offers a reasonable dividend yield.
We exited a position in Wyeth as its acquisition by Pfizer is expected to close in the fourth quarter. We deployed a portion of the cash back into Pfizer because we believed the stock could have additional upside following the acquisition. The combined company should offer solid free cash flow from operations, and a potential dividend increase as a result.
Looking ahead
We believe that recession is probably behind us. However, the strength of the recovery remains to be seen. With this in mind, we continue to favor companies with solid balance sheets that generate strong and sustainable free cash flow from operations. We believe that these companies have the potential to perform relatively well as investors start to pay more attention to company fundamentals. The fund is well positioned to benefit from a shift of favor from lower- to higher-quality companies.
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 objectives, risks, charges and expenses of any Columbia fund carefully before investing. For a prospectus, which contains this and other important information about the fund, contact your Columbia Management representitive or financial advisor or go to www.columbiamanagement.com.
The Russell 1000 Index is an unmanaged index that tracks the performance of 1,000 of the largest U.S. companies based on market capitalization.
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. |