Fund Performance
Review of the Quarter
During the third quarter, equity markets continued to recover lost ground. Stocks posted another round of solid returns, fueled by lower-quality stock appreciation. As expected, however, Columbia Large Cap Value Fund did not keep pace with the Russell 1000 Value Index benchmark, given the portfolio’s higher-quality holdings relative to the outperforming stocks in the benchmark. For the quarter, Columbia Large Cap Value Fund underperformed the Russell 1000 Value Index and its 18.24% return. Positive selection in health care, an underweight and positive selection in telecommunication services and an underweight in utilities were more than offset by negative selection in financials, industrials and materials.
Contributors1
On the positive side in health care, the fund’s underweight in the pharmaceuticals industry aided returns during the quarter. Within that industry group, Johnson & Johnson and Pfizer both contributed. In July, health care provider Medco Health Solutions reported better-than-expected second-quarter operating results and was beneficial to performance. Amgen benefited returns as the company reported a 40% rise in second-quarter profits and offered a brighter outlook for 2009 based on better-than-expected sales of its key drugs.
In telecommunication services, the fund’s underweight in the sector, especially the underperforming wireless services industry, helped performance. The fund’s holdings in both Verizon Communications and AT&T aided returns. In September, we decreased the fund’s holding in AT&T as we became concerned about downward pricing pressure, especially in the prepaid area.
In utilities, while stock selection was a negative during the quarter, the underweight in the sector, specifically in the independent power producers and multi-utilities industries, benefited the fund’s returns. AES Corporation was a significant contributor to returns, after reporting better-than-expected earnings and higher guidance for both earnings and cash flow for the balance of 2009.
Elsewhere in consumer staples, J.M. Smucker was positive on an absolute basis. In September, we increased this position as we continued to believe that the combination of the Folgers acquisition and moderating input costs may lead to an upside in its margins. In addition, personal products company Avon was a positive to performance. Earlier in the quarter, the company reported better-than-expected second-quarter profits, attributed to stronger-than-expected underlying sales and operating profit growth. In September, we increased the fund’s holding of Diageo.
Detractors1
For industrials, negative stock selection detracted from performance. Navistar adversely affected returns, as investors worried over the company’s stated 2010 engine strategy and possible weakness in its military business moving forward. We maintained the position in the stock, as we continued to believe that a recovery in truck demand, driven by an aging fleet and more stringent emissions requirements, may lead to upside. In September, we initiated a position in Manpower, as we believed that stabilization and sequential improvements in temporary staffing levels, both domestically and internationally, may benefit the company and lead to upside.
In financials, negative stock selection hurt performance, as we did not own many financial institutions that participated in the low-quality rally that occurred during much of the quarter. Additionally, Bank of New York was a negative detractor to performance during the quarter.
In materials, while the overweight in the sector was a positive, its impact on performance was more than offset by negative stock selection along with not owning a major chemicals firm that outperformed during the quarter. Potash was the largest detractor from performance in the sector.
Other Transactions
In energy, we initiated a position in Apache, as we believed that the company’s 50/50 product mix of oil versus natural gas may prove beneficial moving forward and lead to upside. We also increased the fund’s holding of Occidental Petroleum. In September, we exited the fund’s holding of Hess as we became concerned that, given a nine-month lull in exploration activity, further erosion of the company’s exploration premium may drive down the share price.
Outlook
Considering where the market was only six months ago, many investors are wondering if valuations are becoming stretched and if value opportunities can still be found at these new levels. There have been many discussions revolving around whether the recovery will be V-shaped (sharp recovery) or W-shaped (double-dip recovery) and if the positive news of stabilization has already been priced in the stocks. The team still believes that there are margin expansion opportunities in many industries going forward. As seen during last quarter’s earnings season, many companies have done a great job bringing their cost base down, which has enabled them to surpass revised and lowered analysts’ profitability estimates. In many instances, companies have planned for little to no growth in the near term, which would make some of their cost cutting efforts permanent. With the cost base of these firms coming down significantly, one possibility would be that even a modest positive move of 2%-3% in top line revenue growth could generate powerful margin expansion stories going forward. This effect has already been seen in the technology sector as inventories were drastically reduced during the downturn, only to have some of these companies regain confidence to replenish inventories as demand perked up off the bottom. While the economy is certainly still not in a strong position at this time, it is at least improving directionally. The team feels that many of the overarching risks, especially to the financial system, are at least known to the market overall. In general, we are not expecting a significant market selloff, barring any large extraneous event given this environment. As always, we remain focused on the core tenets of our investment process. These include a focus on operating margins for undervalued companies that we expect to expand, as well as a focus on broad portfolio-level risk. We believe these factors will provide our investors with a solid risk-versus-reward proposition over the long-term.
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 1000 Value Index measures the performance of those Russell 1000 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. |