Despite the market volatility stemming from an expected pullback in Federal Reserve quantitative easing (QE) and, late in the quarter, a looming government shutdown, stocks posted positive returns in the third quarter. In particular, strong results in July and late-September, after the Feds surprise announcement that it wasnt ready to taper QE, more than offset weak performance in August.
The Large Cap Value Fund posted a total return of 3.93% for the quarter, compared with 3.94% for the Funds benchmark, the Russell 1000® Value Index. Sector allocations, particularly having no exposure to the utilities sector, contributed favorably to the Funds performance. Overall, stock selection was a slight detractor. Negative contributions from the information technology, consumer discretionary and healthcare sectors offset positive contributions from the financials, telecommunications services and industrials sectors.
While the current macroeconomic situation looks similar to the end of last year, a key difference is the market is trading at a higher price-to-earnings ratio versus 2012. Although this may make it more difficult to find value names, we expect buying opportunities to materialize as the federal budget battle continues and the Fed moves closer to curtailing its QE program. Tapering QE may create short-term volatility, but longer-term implications are positive. Less government stimulus would suggest the U.S. economy is strong enough to function on its own.
Despite lingering uncertainties, we believe the market is entering a sweet spot for active management, with the market offering more normalized growth and return expectations compared to the volatile climate of 2011-2012.
If you are a value-oriented investor seeking long-term capital appreciation with the relatively lower risks of large, dividend-paying stocks, this Fund may be ideal for you. With its emphasis on relatively low-priced, high-yielding stocks, it can work in tandem with a growth-oriented fund to create a well-balanced, diversified stock portfolio.
- Focus on valuation and dividend yield, which is designed to contribute positively to total return and provide a cushion against market volatility.
- Select stocks based on valuation levels, financial strength and earnings growth potential, identifying a catalyst for potential appreciation, such as a new product line or corporate restructuring.
- Maintain a strict sell discipline — systematically sell stocks that we believe have achieved their true value.