Economic growth as measured by gross domestic product contracted at the surprising rate of 2.9% in 1Q 2014 after a strong second half of 2013. Harsh winter weather and a revision to the estimated impact from the implementation of the Affordable Care Act (also known as “Obamacare”) account for much of the weakness. Recent economic statistics, especially employment, indicate a strong rebound. The economically weak first quarter and emphatic support for continuing near zero short term interest rates by the new Federal Reserve Chairwoman Janet Yellen saw the yield on the 10-year Treasury bond decline from 3.0% at year-end 2013 to 2.5% at June 30, 2014.
Faced with declining rates on fixed income securities, investors sought equities with relatively high dividend yields – utilities and REITs. These two industry sectors provided returns of 19.2% and 17.3%, respectively, in the first half, the two highest among the ten industry sectors that comprise the Russell Midcap® Index and contributed 233 basis points i of the Index’s 867 basis point return. The Westport Fund Class R shares returned 486 basis points in the first half of 2014 with virtually no utilities or REITs among its portfolio holdings. The remaining shortfall of 148 basis points occurred in the final two weeks of the second quarter and was the result of investor concerns about the trajectory of future financial performance for some of the Westport Fund’s larger portfolio holdings. For example, FMC Corp (FMC). produced a negative 38 basis point return when it made an earnings preannouncement that a combination of compressed North American planting schedules and a severe drought in Brazil would reduce its sales of agricultural chemicals in the second quarter. The cancellation of a large order for Airbus A-350 aircraft by the United Arab Emirates caused investors to question the bright outlook for commercial aircraft production. Precision Castparts Corp. (PCP), a major supplier of aerospace components, saw its shares decline, decreasing portfolio return by 32 basis points in this period. These events appear transitory and should not have a long term impact on valuation. Continue Reading »