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Market Overview
The domestic equity markets continued to rally during the third quarter on increasing evidence that the economy had stabilized and might soon be on a path to higher growth. The Russell 3000 Index, a proxy for the U.S. stock market, posted a gain of 59.31% for the period beginning with the market low reached on March 9, 2009 through quarter end. During that time period, the federal government injected an enormous amount of liquidity into the financial system to help speed the economic healing process. Signs that the stimulus is beginning to take hold included improved readings in business and consumer confidence, housing and manufacturing, tightening credit spreads resulting in increased corporate bond issuance, and merger and acquisition activity.
From a market capitalization perspective, large-cap equities underperformed small-cap equities during the quarter, based upon benchmark performance for the Russell 1000 Index and Russell 2000 Index (16.07% and 19.28%, respectively). In terms of investment style, value indices outperformed growth indices across the market-cap spectrum. Within the benchmark Russell 1000 Growth Index, all 10 Global Industry Classification Standard (GICS) economic sectors posted positive absolute returns, led by the financials, consumer discretionary and materials sectors, while the telecommunications, utility and health care sectors lagged the benchmark on a relative basis.
Columbia Select Large Cap Growth Fund1
Columbia Select Large Cap Growth Fund underperformed the benchmark Russell 1000 Growth Index during the third quarter of 2009. Relative performance was helped by stock selection within the energy, consumer staples and telecommunications sectors while security selection within the industrial, health care and material sectors detracted from performance.
During the quarter, the portfolio’s sole energy holding, FMC Technologies, was awarded two significant contracts for its subsea products and services, as oil companies increased their deep-water drilling and exploration activity. Within the consumer staples sector, a holding in wholesale club operator Costco helped performance, as concerns over factors such as the stronger dollar and deflation seem to have been overblown relative to the company’s strong underlying fundamentals. The portfolio’s underweight posture in the defensive consumer staples sector has also helped relative performance, as the market has migrated to more economically sensitive sectors. Within the consumer discretionary sector, a position in online travel agent priceline.com contributed to performance, as hotel and airline traffic trends have shown improvement recently. Online travel agents such as priceline.com continue to gain market share, both domestically and internationally, from traditional offline travel agents and have shown increased levels of bookings in a period where overall travel trends have weakened. Consistent with this theme is a holding in cruise line operator Carnival, which is expected to benefit from higher bookings and improved pricing as the cruise industry recovers from the economic downturn.
A holding in First Solar, the world’s largest designer and manufacturer of thin-film solar modules, hurt performance, as the company’s share price sold off during the quarter. Increased manufacturing capacity across the solar value chain relative to end demand for solar energy has raised concerns about downward pricing pressure. Within the financials sector, a holding in futures exchange operator CME Group detracted from performance, as trading volumes for the quarter were expected to decrease from levels a year ago because of a decline in market volatility. The stock was also held back during the quarter on the potential for increased regulatory oversight and the impact this would have on its business. Within technology, BlackBerry manufacturer Research in Motion reported earnings that exceeded analyst expectations on profitability, but reported deteriorating fundamentals in the areas of units sold, subscriber growth and declining revenues. The stock sold off on market concerns of a commoditization, an oversupply of smart phones and a sense that margins would continue to be squeezed.
Within health care, medical device manufacturer St. Jude Medical detracted from performance after posting disappointing second-quarter earnings. Sales of heart devices, the company’s primary product, declined over the period, with the weak dollar also weighing on company results. A holding in Gilead Sciences underperformed on valuation concerns despite positive strides in its treatments for the HIV/AIDS virus and the media focus on the H1N1 virus from which the GILD Tamiflu product is expected to benefit.
Outlook
Investment sentiment has remained a tug of war between optimists who want to focus on the improvement in second derivative macro indicators and pessimists who point to a lack of actual first derivative growth. We continue to believe that real growth in the economy and corporate earnings are likely to remain hard to come by for at least the next six to 12 months. Markets have stabilized and the worst case scenario for the economic and investment crisis has passed. Volatility has subsided and cross-sectional return correlations continue to moderate, making this environment particularly attractive for active management. Despite the hard times, the United States still represents a $14 trillion economy — nearly 25% of the global GDP. There will be wallet-share winners and losers, and our research focus has to be on identifying timely opportunities in companies with strong, sustainable earnings growth prospects. We believe investors will be increasingly willing to pay a premium for high-quality consistent growers, which makes the total return opportunity for those winners uniquely appealing.
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 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 1000 Index is an unmanaged index that tracks the performance of 1,000 of the largest U.S. companies based on market capitalization.
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 1000 Growth Index is an unmanaged index that measures the performance of those Russell 1000 Index companies with higher price-to-book ratios and higher 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. |