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Investors continued to overlook stock fundamentals during the quarter, as they have for most of the year. This was largely due to the peripheral noise in the market created by concerns over the stability of both the economy and the financial infrastructure to which both Wall Street and Main Street are hostage. As a result, the Fund's focus on high-quality stocks with above-average and consistent earnings growth did not result in strong relative returns, and the Fund lagged its S&P 1000® benchmark for the quarter. Typically, investors reward companies reporting earnings that meet or exceed expectations, while penalizing those whose earnings fall short of expectations. That was not the case during the third quarter. During the quarter, 80% of the stocks in the Fund announced earnings that met or exceeded expectations, while 20% reported earnings disappointments. In each category, 21% of the stocks experienced price appreciation. This is contrary to the historical norm where positive earnings announcements have been a key driver of positive stock price momentum and disappointing earnings have generally resulted in stock price declines. The Fund's relative performance was also hurt by an overweight in the energy sector and underweights in the consumer discretionary and financials sectors.
The financial sector provided the greatest challenge to the Fund during the quarter, with erratic price movements occurring as each chapter of negative news was announced. The sector cycled through troughs and peaks to end the quarter in positive territory, with the financial sector of the Index showing stronger performance than the Fund's financial holdings. It is important to note, however, that almost 50% of the Fund's holdings in this sector achieved positive returns ranging from 5.4% to 28%. Life and health insurers boosted the Fund's relative performance, while the Fund's holdings of asset managers and custody banks showed relative weakness.
The strong fundamental performance of the stocks held in the portfolio was in stark contrast to the weakness in its price performance. Earnings growth, the number of positive earnings surprises and positive earnings revisions for its holdings were much stronger than for either the broader stock market or the benchmark. Our disciplined investment process continues to result in a Fund with strong fundamentals relative to the benchmark. The Fund's earnings per share (EPS) growth, on a trailing twelve month basis are 18% versus 10% for the S&P 1000 Index, and over the next twelve months are projected at 18% versus 11%. Revenue growth over the past twelve months was 16% versus 11%. Even with the greater strength in its fundamentals, the valuation of the Fund (a Price/Earnings ratio of 15 times earnings over the next twelve months) is equal to that of its benchmark.
The third quarter reporting season is just around the corner. Analysts currently expect earnings to be up by 1.9% for small-cap companies and down by 5.0% for large-cap companies. If the numbers come in close to expectations, it would mark the fifth straight reporting season in which earnings for the small-cap segment of the market were stronger than for the larger-cap segment. As is the case for small-caps companies, mid-cap profits are also expected to rise 1.9%.
Our process involves a continual and rigorous evaluation of the fundamentals for each stock, relative to alternative holdings, with the goal of capturing the best ideas of both our mid-cap and small-cap teams. We believe the current strength of the Fund's fundamentals positions it well for future strong performance.
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Past performance does not guarantee future results.
An investor should consider the Fund's investment objectives, risks, and charges and expenses carefully before sending money. This and other important information about the investment company can be found in the Fund's prospectus. To obtain a prospectus, please click here. Please read the prospectus carefully before investing.
RISKS
Smaller and medium-sized company stocks are more volatile and less liquid than larger more established company securities. This Fund may invest up to 25% of its assets in foreign securities, which involve additional risks due to currency fluctuations, economic and political conditions, and differences in financial reporting standards.
Fund holdings mentioned in the manager commentary are as of 9/30/08. The portfolio holding information provided should not be considered as a recommendation to purchase or sell a particular security. There is no assurance that the securities mentioned remain in the Fund's portfolio or that securities sold have not been repurchased.
The statements and opinions expressed are those of the author(s) and do not necessarily represent the views of Munder Capital Management as a firm or the Munder Funds. While the information and statistical data contained in this material are based on sources believed to be reliable, it is current as of the time made and is subject to change without notice. Further, the information presented is general in nature and is not intended to provide personal investment advice or as an endorsement of any specific investment. The information does not take into account the specific investment objectives, financial situation and particular needs of any specific person who may receive it.
Munder Funds distributed by Funds Distributor, LLC.
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Robert E. Crosby, CFA
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| Senior Portfolio Manager |
| BA in Economics from the University of Missouri |
| MS in Economics and Finance from Murray State University |
| Joined Munder Capital Management in 1993 |
| Years of Experience:15 |
| Focus:Co-manages the Munder Small-Cap Value, Mid-Cap Value, Micro-Cap and Small-Mid Cap funds, as well as separately managed accounts in Munder Capital’s Small-Capitalization Value, Mid-Capitalization Value, Micro-Cap, Mid-Cap/Small-Cap Blend and Real Estate (REIT) disciplines. |
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Tony Y. Dong, CFA
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| Vice Chairman and Senior Portfolio Manager |
| BBA with Distinction from the University of Michigan School of Business Administration |
| MBA in Finance from Wayne State University |
| Joined Munder Capital Management in 1988 |
| Years of Experience:25 |
| Focus:Vice Chairman of Munder Capital Management, a member of Munder Capital Holdings, LLC Board of Directors, and is a member of the firm’s Executive, Operating and Product Policy committees. Responsible for managing Munder Capital’s Mid-Capitalization Core Growth discipline, is lead manager of the Mid-Cap/Small-Cap Blend (SMID) discipline, manager of the Munder Mid-Cap Core Growth Fund and co-manager of the Munder Small-Mid Cap Fund. |
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| Munder Funds distributed by Funds Distributor, LLC. |
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