Small cap stocks rebounded strongly in the fourth quarter, posting their seventh best quarter ever after producing their second worst quarter in the prior quarter. Strong corporate profits, better than expected domestic economic data and hopes that Europe is closer to resolving its issues led to the powerful rally. Cyclical industries, such as industrials and consumer discretionary, were the leading sectors, while more stable areas, such as consumer staples and utilities, lagged.
The Munder Veracity Small Cap Value Fund was well positioned for the rally and it significantly outperformed its benchmark, the Russell 2000® Value Index. Stock selection in the energy, industrials and financials sectors was the biggest contributor to relative strength, while stock selection in health care was the largest detractor. A higher beta compared to the Fund’s benchmark also helped relative performance.
In energy, the Fund had a number of holdings that benefited from a rise in oil prices and renewed mergers and acquisition activity. Complete Production Services, Inc. (0.7% of the Fund), an oil services company, accepted an acquisition bid for a sizeable premium. A pair of our energy exploration firms, Kodiak Oil & Gas Corp. (1.2%) and Petroleum Development Corp. (0.9%), each advanced by approximately 80%, highlighting the value of their energy assets. Within industrials, The Greenbrier Companies, Inc. (1.0%) was up over 100% as the manufacturer of rail cars continued to see strong demand and looks to capture increased market share. Wabash National Corp. (0.7%), a maker of truck trailers, rose sharply as order trends remain healthy as operators continue to replace their aging fleet.
In financials, it was the Fund’s bank and real estate investment trust (REIT) holdings that posted some of the best absolute returns. Solid earnings, low expectations and very attractive valuations propelled the performance of many of the Fund’s banks, led by Susquehanna Bancshares, Inc. (1.1%) and FirstMerit Corp. (1.3%). In REITs, subsiding economic fears helped the Fund’s more cyclical hotel REITs, DiamondRock Hospitality Co. (1.1%) and Sunstone Hotel Investors, Inc. (0.9%).
Performance in the health care sector detracted from relative strength during the quarter as Medicis Pharmaceutical Corp. (1.0%) announced a change in sales strategy for a key drug that could increase volumes, but at the cost of reduced pricing. Invacare Corp. (0.4%), a maker of home and long-term care medical products, fell as it was forced to suspend manufacturing at a facility until it could make the plant compliant with FDA standards.
For 2011 as a whole, stock selection in the industrials, energy and financials sectors keyed the Fund’s outperformance. In contrast, stock selection in consumer discretionary and information technology hurt performance. Sector weightings were a neutral, with the positive impact of an overweight in health care, the second best performing sector of the Russell 2000® Value Index for the year, offset by an underweight in utilities, the best performing sector.
Two of the Fund’s largest contributors to relative performance for the year were domestically focused industrials, Old Dominion Freight Line, Inc. (1.1%) and Dycom Industries, Inc. (1.1%). Dycom benefited from healthy demand for its construction and maintenance services from telecom, cable and utility customers. Better than expected trucking volumes and pricing helped fundamentals at Old Dominion. Kodiak Oil & Gas Corp. and Complete Production Services, Inc. were the Fund’s two best energy stocks. Investors gravitated to shares of Kodiak for its growth opportunity and attractive assets, while Complete Production Services was acquired.
In financials, RLI Corp. (1.1%) and World Acceptance Corp. (1.0%) led the way. Improved rate pricing and solid sales momentum helped RLI, an insurance company. World Acceptance is a small loan consumer finance company that has benefited from an improved regulatory outlook and strong operating results as consumers seek alternatives to meet their short-term financing needs.
OfficeMax, Inc., an office products company, and Avid Technology, Inc., a digital software company, were the largest detractors within the consumer discretionary and information technology sectors, respectively. OfficeMax struggled with tepid employment growth and secular challenges that include market share losses in technology sales (Apple’s increased share), disintermediation by the Internet (Amazon) and lower sales of high margin paper and printer accessories. Avid Technology has suffered from a challenging demand environment for its products. Both stocks have been eliminated from the Fund.
The Fund’s positioning toward larger market cap stocks relative to its Russell 2000® Value benchmark was beneficial, as this segment of the market outperformed the smallest market cap companies. A higher beta hurt the Fund’s relative performance, as investors rotated toward the safety of more stable companies during the summer as fears regarding the economic and financial environment escalated.
Mutual Funds |
Investment Professionals |
Retirement Services |
