- Small-cap stocks produced positive returns in the second quarter of 2016, outperforming large-cap stocks. Year to date, however, large-cap stocks were the relative outperformers.
The Fund outperformed the small-cap benchmark for the quarter. Consumer discretionary and producer durables sectors made the largest contributions to performance. Insurance company Primerica and Shutterstock, an online stock photo and music provider, were the top holdings.
Looking ahead to the second half of the year, the U.K.’s “Brexit” from the European Union and U.S. presidential elections are likely to be sources of volatility. However, they will not distract us from our focus on investing in high-quality businesses as our firm has done for over 30 years.
Small-cap equities, as measured by the Russell 2000® Index, gained 3.79% during the second quarter after declining in the first quarter, bringing the year-to-date return to 2.22%. Year to date, small-capitalization stocks have lagged large caps, with the Russell 1000® Index rising 3.74%, compared with the S&P 500® Index which was up 3.84% through the first half of 2016.
During the quarter, commodity-related groups in the Russell 2000, including the materials and processing (+10.24%) and energy (+9.50%) sectors outperformed, as did high dividend-yielding and perceived safe sectors, including utilities (+10.31%) and consumer staples (+9.41%). Sectors that lagged during the quarter were consumer discretionary (-1.44%) and producer durables (+1.54%).
The Fund outperformed the Russell 2000 Index for the quarter, with a return of 4.14% (Class A NAV) compared with 3.79%. Year to date, the Fund (Class A NAV) also outpaced the Index, 7.04% (Class A NAV) versus 2.22%. The most prominent gains in the quarter came from the consumer discretionary and producer durables sectors, while returns lagged in the technology and health care sectors.
The companies that contributed the most to performance during the quarter were Primerica, which is an insurance and financial services company, and Shutterstock, operator of a global marketplace for licensed imagery and music.
- Shares of Primerica had been under pressure for the past year due to concern regarding how the Department of Labor’s fiduciary standard proposal would impact the retirement investment account industry. The final language of the proposal was less onerous than feared so the impact on Primerica’s investment products business should be limited. This positive outcome coupled with strong quarterly results in Primerica’s insurance business drove the share price higher.
Shutterstock’s stock has been under pressure since the end of 2014 after Adobe announced it was entering the online stock photo business via its acquisition of Fotolia. Recent results, including the first quarter of 2016, have shown no erosion in Shutterstock’s competitive position or business results. As Shutterstock continues to report strong quarterly results, investor concerns regarding Adobe are abating and the share price is increasing.
The companies that contributed the least to performance during the quarter were Autohome, which operates a Chinese auto website, and Computer Programs & Systems, a provider of IT solutions to hospitals and post-acute care facilities.
PURCHASES AND SALES
The Fund made no new purchases or sales during the quarter.
We believe the domestic economy will grow at a modest rate in the range of 1.5% to 2.5%, and corporate earnings will grow in the mid-single digit range. Our confidence is growing that oil has finally hit bottom because domestic shale producers and major international oil companies have announced dramatic reductions in capital spending on the order of 40% to 70%. These supply reductions, combined with natural depletion rates, will ultimately reduce excess supply. Importantly, stability in the price of oil and the U.S. dollar will help stabilize reported profits for companies in the S&P 500, which have been sliding downward over the last two years due to the impact of weak oil and a strong U.S. dollar. This stability is needed in order for equity markets to generate returns in line with earnings growth.
As we have experienced thus far this year, it is likely to continue to be a volatile year for financial markets. Repercussions from the U.K.’s Brexit vote to leave the European Union and our own presidential elections are likely to cause continued market volatility. However, we will remain steadfast in our high-quality focus as we have always done through good and bad times over the last three decades.