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Equity markets moved sharply higher in third quarter
As the federal government injected an enormous amount of liquidity into the financial system, the economy showed signs of healing. Measures of business and consumer confidence showed improvement, as did housing and manufacturing activity. As the yield gap narrowed between Treasuries and other fixed-income sectors, corporate bond issuance and merger and acquisition activity rose, both signs that stimulus programs were beginning to take hold. In this environment, the U.S. stock market continued to move sharply higher in the third quarter. The Russell 3000 Index, a broad proxy for the U.S. equity market, advanced 59.31% from its March 9, 2009 low. Large-cap equities underperformed small-cap equities for the third quarter. For the quarter, the Russell 1000 Index returned 16.07% while the Russell 2000 Index returned 19.28% for the same period. Value outperformed growth across the market capitalization spectrum. Within the Russell 2000 Growth Index, all 10 economic sectors posted positive returns, led by the energy, materials and consumer discretionary sectors. Telecommunications, consumer staples and utility sectors lagged the benchmark return.
In this environment, Columbia Small Cap Growth Fund I performed in line with its growth benchmark, the Russell 2000 Growth Index, which returned 15.95%. It underperformed the Russell 2000 Index, which returned 19.28%. The fund’s return was also lower than the 16.39% average return of its peer group, the Lipper Small-Cap Growth Funds Classification.
Stock selection drove performance1
Stock selection in the consumer discretionary, financials and technology sectors benefited the fund’s relative returns while stock selection within health care and telecommunication services detracted from relative return. In the consumer discretionary sector, a position in housewares retailer Pier 1 Imports beat earnings estimates on lower expenses, as the company reduced available inventory and closed several stores nationwide. The company’s share price rebounded after having suffered over the past year as consumers retrenched and the housing market weakened. Mattress maker TempurPedic International contributed to quarterly performance on an improved outlook for consumer spending along with the launch of several new products. During the downturn, TempurPedic took steps to improve the company’s balance sheet by reducing debt and raising cash levels, a move that improved its strength relative to the competition. Decker’s Outdoor, makers of the fashionable UGG Boots, also contributed to returns as the company’s controlled distribution agreements have helped maintain the brand’s popularity and margins.
In the financials sector, real-estate-related industries, such as REITs LaSalle Hotel Properties and FelCor Lodging Trust, aided performance. Both companies benefited from the recent uptick in hotel traffic. Alexandria Real Estate Equities, which owns properties that house medical research laboratories, also helped performance during the quarter. The company enjoys predictable revenue streams and longer-term lease agreements because of the nature of its tenants. Its stock price advanced on signs of improving revenue growth. Within the technology sector, a position in TNS, a data communications company that enables payments to move around the world, helped performance as the company continued to make strides in entering several new growth markets. Savvis, a technology consultant that offers network outsourcing services to smaller companies, also contributed to performance. Savvis specializes in so-called “cloud computing,” which allows smaller companies to establish and operate information technology networks more economically and efficiently.
Stock selection in the health care sector detracted from performance. The sector suffered as the market shifted toward more economically sensitive industries at the expense of traditionally defensive industries. Shares of CardioNet, which provides outpatient monitoring devices and services, lost ground during the quarter as investors became concerned about reductions in third-party reimbursement rates, given the potential for health care reform. In addition, the fund had less exposure than the index to Human Genome Sciences, a biotech company whose share price rose early in the quarter after announcing positive trial results for a new treatment for lupus. Within the telecommunication sector, a position in business communications services provider Premiere Global Services detracted from performance after announcing that profit and revenue is expected to fall below analyst expectations because of weak demand for its conferencing technology. Neutral Tandem, which provides network interconnection services primarily to competitive wireless and wire line carriers, also declined during the quarter on fears that increased competition would reduce market share and compress the company’s profitability.
Outlook
The fund remains positioned in names that we believe can benefit from a cyclical economic recovery and also in companies that we expect to experience increased demand because of exposure to a new or existing product cycle. We have recently moved a portion of the portfolio into mid- to late- cycle areas of the market, which are trading at more attractive valuations because they have not yet experienced the recovery that some early cyclical industries have experienced. We remain focused on allocating capital to stocks that we believe offer the best balance between risk and reward in our investible universe.
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 rep resents 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.
Unlike mutual funds, indices are not managed and do not incur fees or expenses. 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. |