During the quarter, a surge in buyout activity and a flurry of IPO’s helped propel U.S. equity markets to record highs (topping March 2000). With these new heights came increased volatility as inflation fears and turbulence in the mortgage markets caused a leap in long-term interest rates from 4.6% at the beginning of the quarter to 5.0% by the end of the period.
Financial stocks lagged and caused value stocks to underperform growth stocks. The impact of higher interest rates also put pressure on consumer stocks and led to a sell off in REITs. In this market environment, shares of homebuilders retraced earlier gains as investors expect the industry downturn to deepen and the recovery to be delayed. Currently, the largest homebuilders’ price to equity book value is about 1.0x which represents a 70% discount to the market – a relative valuation only observed twice over the last 20 years. We continue to maintain our exposure to the group as they offer an attractive value based on their long term normal earnings power. In other cyclical sectors such as energy, materials and industrials, returns led the benchmarks as high commodity prices appear to have had a modest impact on global economic expansion. Although we have been noticeably underweight energy over the last couple of years, our security selection within the sector benefited the Fund during the quarter. We continue to seek opportunities within the energy sector that are attractively valued.
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Financial stocks lagged and caused value stocks to underperform growth stocks. The impact of higher interest rates also put pressure on consumer stocks and led to a sell off in REITs. In this market environment, shares of homebuilders retraced earlier gains as investors expect the industry downturn to deepen and the recovery to be delayed. Currently, the largest homebuilders’ price to equity book value is about 1.0x which represents a 70% discount to the market – a relative valuation only observed twice over the last 20 years. We continue to maintain our exposure to the group as they offer an attractive value based on their long term normal earnings power. In other cyclical sectors such as energy, materials and industrials, returns led the benchmarks as high commodity prices appear to have had a modest impact on global economic expansion. Although we have been noticeably underweight energy over the last couple of years, our security selection within the sector benefited the Fund during the quarter. We continue to seek opportunities within the energy sector that are attractively valued.
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