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Review of the Quarter 1
The MSCI Emerging Markets Index had a second consecutive strong quarter, up 21.04% during the period and 63% for the second and third quarters combined. This represents the best two quarters on record for the index. The index was driven higher by continued improvement in the macro data, both in emerging markets and the developed world, as investors became convinced that the worst is behind us and the world will soon emerge from recession.
The MSCI EM Index again outperformed developed markets during the quarter. Returns were consistently strong across the globe with all sectors and regions posting positive returns. Latin America was the best performing region, highlighted by strong returns from Brazil, Peru and Columbia. Countries seen as being leveraged to a global recovery posted very strong quarters, such as the export-orientated economies of South Korea and Taiwan. Hungary, Poland and Russia, which were thought to be further out on the risk spectrum earlier this year, continued to outperform. Investors became more comfortable with the macro situations for these three countries as credit markets continued to improve. Many of the countries with accommodative economic policy continued to outperform. Brazil and Turkey now boast single-digit interest rates after a series of cuts in the last year buoyed growth in their domestic economies. China was the one major constituent that lagged the market, albeit still posting positive returns. The market is concerned that the government will soon pull back on its very accommodative policies. On a sector basis, it is no surprise that with improved economic data, the more cyclical sectors such as information technology, consumer discretionary and materials strongly outperformed. The less economically sensitive sectors of health care, telecommunications services and utilities underperformed the market.
Performance1
The fund’s relative performance was helped by overweight positions in the economically sensitive sectors of consumer discretionary and materials, as well as underweight positions in the less-cyclical sectors of utilities and telecoms. Stock selection in the energy sector was buoyed by Rosneft, and in industrials by Turk Hava Yollari. Stock selection suffered in technology due to a position in Suprema, and in materials with a position in China Zhonwang. On a country basis, the fund benefited from overweight positions in Indonesia, Turkey and Russia. Underweight positions in Poland and Hungary, which outperformed the index, hurt performance.
Outlook
Our outlook and strategy remain unchanged. We are encouraged to see many emerging market economies stabilize and believe they will soon return to growth. Our long-term focus continues to be on companies that can benefit from the emergence of a strong middle class in developing nations and from the continued industrialization of these economies. We believe these are secular trends that will continue to play out.
The fund continues to focus on countries with solid long-term growth characteristics such as good demographics, low-debt levels and a willingness to stimulate their economies through accommodative monetary policy and fiscal stimulus. On a sector basis, we have maintained a more-cyclical bias that we took during the second quarter. We continue to focus on quality companies that will be able to gain market share and hence grow their earnings power throughout the cycle. Valuations have returned to more normal levels but we still find many compelling growth opportunities throughout the universe. With continued signs of economic stabilization in the developed world, the growth prospects of emerging markets are returning to the investment spotlight.
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 Morgan Stanley Capital International Emerging Markets Index (MSCI EMI) is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. As of June 2006, the MSCI Emerging Markets Index consisted of the following 25 emerging market country indices: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand and Turkey.
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. 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. |