Portfolio Commentary

U.S. Growth Leaders Portfolio

Growth managers were the most challenged group in 2011 with only 11% beating the benchmark stock index.  In fact, last year growth funds lagged the benchmark on average by about 4.6%.  Our growth portfolio followed the herd in 2011 and struggled with performance.  But what worked well in 2011 (defensive stocks and sectors such as utilities) is not following up with a repeat performance.  In January 2012, 69% of growth managers beat the index, with the average fund outperforming by almost a half percent.  Our U.S. Growth Leaders portfolio has had a great start to 2012, advancing by over 10% on a year-to-date basis through Feb. 15th.  The themes that hurt us last year have rebounded strongly.  Our financial sector holdings, as a group, were the worst performers in 2011.  This year, Nomura is up 45% in value, Franklin Resources by 22%, Charles Schwab has advanced by 13%, and Northern Trust is up 11%.   Thus our staid patience and belief that these stocks were grossly undervalued have, to date, been rewarded.  In energy, our largest holding Transocean rebounded strongly, advancing by 31% in the past six weeks.  Within technology, Apple continues to defy gravity up an additional 25% year-to-date.  Our semiconductor holdings also have fared well, with Broadcom, Xilinx, and Altera all advancing by double digits.  Within healthcare, our two standouts have been Gilead Sciences and St. Jude Medical.  They advanced by 15% and 26% respectively.  We took advantage of the rise in price and sold half our position in Gilead, as the stock had reached the 6% weight level in the portfolio.  Our poor performers have been those more defensive stocks like Pepsi (down 5%), Roche (up 2%), and Merck (flat).  Google also has struggled, dropping by 6% as earnings disappointed.  Overall, we remain nearly fully invested and believe that most of the stocks we hold in the growth portfolio remain substantially undervalued.

 U.S. Value Leaders Portfolio

As our growth portfolio shined, our value product had a less inspiring six week run, advancing by 4%.  Value tends to outperform growth in January, but that was not the case in 2012. With technology and industrials outperforming (these two groups represent over 40% of the growth index), the growth style of investing has been the winner to start the year.  What worked best for our value portfolio in 2011 has not fared well in 2012.  The stellar high dividend healthcare stocks like Bristol Myers and Eli Lilly performed poorly, declining by 7% and 6% respectively.  Utilities have also struggled, with Duke Energy dropping by 5% and Southern by 3.5%.  High dividend stock Verizon also performed below par, dropping by 4% in 2012.   Other declining stocks were the food industry, where we own both Proctor & Gamble and Sysco Foods.  Each firm fell by single digits in the last six weeks. To nose surprise, the advancing stocks were those firms that had poor 2011 performance.  Our financials rebounded, with Mitsubishi Tokyo Bank up 22%, J.P. Morgan Chase up 16%, and Bank of New York advancing by 11%.  Other big winners included technology names Microsoft (up 20%) and Texas Instruments (up 17%).  Our cyclical holdings Ford and Dow Chemical also advanced by solid double digits.  We made no alterations in the portfolio during the quarter-to-date, and expect that the value style will rebound somewhat in the latter half of the quarter.  It is the attractive dividend yields of the stocks in the portfolio that should be rewarded as investors continue to migrate from low interest money market funds into high yielding stocks and bonds.