The U.S. equity market indices recorded low single digit returns in the second quarter of 2013 as investors experienced higher levels of volatility during May and June. Both bond and stock prices declined and the U.S. ten-year Treasury Bond yield reached its highest level since 2011 during the last weeks of the period. The quarter ended with the Dow Jones Industrial Average*, the S&P 500® Index*, and the Nasdaq Composite Index* returning 2.91%, 2.92%, and 4.52% respectively. The increase in market volatility and interest rates was due to the comments by members of the Federal Open Market Committee (FOMC) during June that seemed to suggest that the central bank might scale back the pace of its bond purchases sooner than was expected. However, more recent comments indicate that any reduction in monetary stimulus efforts would require economic strength, improved unemployment and low inflation consistent with the scenario laid out by Chairman Bernanke in his news conference on June 19, 2013. In reaction the yield on the 10 year Treasury rose from 1.62% on May 2, 2013 to 2.49% on June 28, 2013.
During the second quarter the Westport Select Cap Fund –Class R shares rose 2.74%, slightly trailing the Russell 2000® Index's gain of 3.08%. For the first six months, the Westport Select Cap Fund's R shares outperformed the Index with an increase of 16.19%, compared to a rise of 15.86% for the Russell 2000® Index. Since inception 15½ years ago the Westport Select Cap Fund has outperformed by just over 3% points a year, 9.72% to 6.71% both compounded annually. Data provided by Lipper, Inc., provides an interesting over-view of the Select Cap Fund's first half performance. In this context, we believe the Westport Select Cap Fund's performance was quite satisfactory. By far the biggest contributor to first half performance was the Westport Select Cap Fund's largest holding, Universal Health Services, Inc., Class B shares. This operator of acute care and mental health hospitals gained over 38% and contributed 393 basis points to performance. Once again investors focused on the company as a prime beneficiary of the 2014 implementation of the Affordable Care Act, known by most commentators as "Obamacare." The second largest contributor to first half performance was Willis Group Holdings plc, the international insurance broker. The shares rose over 21% and added 204 basis points to performance. The company's business turnaround continues and could be accelerated by actions expected to be announced this quarter by the new CEO. Making the third largest contribution for the half was Precision Castparts Corp., the components supplier to the aerospace industry. After being essentially flat in the first quarter, the stock rose over 19% in the second quarter, adding 177 basis points to performance. As we had anticipated, the shares rose as problems with Boeing's 787 were resolved. Two other positions contributed over 1% point to first half performance - FEI Company, a manufacturer of precision microscopes, rose nearly 32%, adding 173 basis points, and DeVry, Inc., our remaining for-profit education company, was up over 30% and contributed 139 basis points. On the negative side, most decliners had insignificant impacts. The only detractors from performance of note were IPG Photonics Corp., a leader in the manufacture of high power fiber lasers, and Forest Oil Corp., an independent oil & natural gas producer, which lowered performance by 55 and 50 basis points respectively. While there was no new merger and acquisition activity during the half, the previously announced acquisition of Plains Exploration & Production Company by Freeport-McMoRan Copper & Gold, Inc. was completed. The Fund received cash in exchange for its shares which resulted in a large long-term capital gain (proceeds of $49.01 per share versus our average cost of $18.34). During the second quarter portfolio changes included the elimination of the General Communication, Inc. –Class A position. Continue Reading »