During the second quarter, the Westport Select Cap Fund’s Class R shares rose 2.76%, ahead of the Russell 2000® Index’s gain of 2.05%. For the first six months of 2014, the Westport Select Cap Fund’s Class R shares outperformed the Russell 2000® Index with a return of 4.94%, compared to a return of 3.19% for the Index.
Since inception 16½ years ago, the Westport Select Cap Fund has outperformed the Index by just under 3% points a year, with an annual average return of 10.54% to 7.67%, respectively.
Once again, data provided by Lipper, Inc. provides an interesting overview of the Westport Select Cap Fund’s performance in the first half of 2014. According to Lipper, the average Small-Cap Core fund i returned 3.95% while the average Mid-Cap Growth fund ii, a category used by Morningstar, Inc. in rating the Westport Select Cap Fund was 3.73%. In this context we view the Westport Select Cap Fund’s performance as quite satisfactory.
During the first half of 2014, four stocks contributed 1% or more to performance. The leader was United Rentals, Inc. (URI), which rose 34% and added 201 basis points iii. Already the largest factor in the rental of equipment used in non-residential construction, the company announced the acquisition of National Pump Company. This purchase will expand the company’s position in the fast growing energy sector, and is projected to be highly accretive to earnings.
The second largest contributor to first half performance was Universal Health Services, Inc. (UHS), Class B shares, the fund’s largest position. The operator of acute care and mental health hospitals gained nearly 18% and contributed 182 basis points. First quarter earnings exceeded estimates, reflecting the early positive impact of the Affordable Care Act (also known as “Obamacare.”)
The off-price retailer, Big Lots, Inc. (BIG), added 154 basis points. The company’s shares gained over 41% as new management’s merchandising changes showed early signs of success.
DeVry Education Group, Inc. (DV), our for-profit education stock, rose over 19%, adding 117 basis points. The company’s diversification efforts have cushioned the negative impact of continued declines in student enrollments at the main operating unit, DeVry University.
On the negative side, it is interesting to note that the Fund’s five largest decliners cumulatively impacted performance by a total of 226 basis points, which compares to a cumulative 701 basis points contributed from the five largest gainers. IPG Photonics Corp. (IPGP) fell 11.4 %, costing 81 basis points as investors continue to be concerned about second half demand from China for the company's precision laser products. Precision Castparts Corp. (PCP), the Fund’s second largest position, was off 6%, costing 61 basis points. There are questions regarding the future organic growth rate of the commercial aircraft industry and the company. This comes despite the company’s continuing profit improvement as it integrates recent acquisitions.
The Fund made one new purchase during the quarter, Zebra Technologies Corp (ZBRA), Class A shares (“Zebra”). This company has established a leading position in data collection and product identification and announced the acquisition of a unit of Motorola Solutions, Inc. This deal will expand Zebra’s market position into mobile and network solutions while doubling the company’s size and adding significantly to its earnings per share.
During the quarter the fund trimmed several positions and saw no merger or acquisition activity.
We are often questioned about the Fund’s positioning in terms of market cap. The Fund’s weighted average market cap iiii at time of purchase was $1.463 billion compared to the actual weighted average market cap at June 30, 2014 of $7.888 billion.
Investors should consider the investment objectives, risk, and charges and expenses of The Westport Funds carefully before investing; this and other information about the Funds is in the prospectus, or summary prospectus, which can be obtained by calling 1-888-593-7878 or at our website www.westportfunds.com. Read the prospectus or summary prospectus carefully before you invest.
The views expressed and any forward-looking statements are as of the date of the publication and are those of the portfolio managers and/or the Advisor. Future events or results may vary significantly from those expressed and are subject to change at any time in response to changing circumstances and industry developments.
There are special risks associated with small and mid-capitalization issues such as market illiquidity and greater market volatility than larger capitalization issues.
i Small-Cap Core Funds – Funds that, by portfolio practice, invest at least 75% of their equity assets in companies with market capitalizations (on a three-year weighted basis) below Lipper’s USDE small-cap ceiling. Small-cap core funds have more latitude in the companies in which they invest. These funds typically have average characteristics compared to the S&P SmallCap 600 Index.
ii Mid-Cap Growth Funds - Funds that, by portfolio practice, invest at least 75% of their equity assets in companies with market capitalizations (on a three-year weighted basis) below Lipper’s USDE large-cap floor. Mid-cap growth funds typically have above-average characteristics compared to the S&P MidCap 400 Index.
iii Basis Point is a unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument.
iiii Weighted Average Market Cap is the average market capitalization of all companies in a fund – with each company weighted according to its percent held in the fund.
Portfolio composition is subject to change at any time and should not be considered a recommendation to purchase or sell a particular security. On June 30, 2014, the following securities comprised these respective percentages of the Westport Select Cap Fund: United Rentals, Inc. (8.1%), National Pump Company (0.0%), Universal Health Services, Inc – Class B shares (12.3%), Big Lots, Inc. (5.9%), DeVry Education Group, Inc. (6.3%), IPG Photonics Corp. (6.8%), Precision Castparts Corp. (8.7%), Zebra Technologies Corp., Class A shares (0.9%), Motorola Solutions, Inc. (0.0%).