During the first quarter the Westport Select Cap Fund’s Class R shares declined 0.38%, trailing by 470 basis pointsi the Russell 2000® Index’s gain of 4.32%. Since inception seventeen and a quarter years ago, the Westport Select Cap Fund R shares have outperformed by 251 basis points a year, 10.20% to 7.69%, both compounded annually.
In the first quarter the over-all market struggled to make any meaningful headway. Small cap stocks actually outperformed the rest of the market as the Russell 2000® Index’s gain was more than three percentage points ahead of the Standard & Poors 500 Index’s (“S&P 500”) 0.95% increase. Within the Russell 2000® Index, growth significantly outperformed value rising 6.63% to 1.98%. Just under one-half of the appreciation in the small growth stock category was accounted for by Health Care which got an important boost from bio-tech stocks.
The under-performance of the Westport Select Cap Fund during the quarter was essentially attributable to three stocks, DeVry Education Group, Inc. (DV) (“DeVry Education”), United Rentals, Inc. (URI) (“United Rentals”) and Precision Castparts Corp. (PCP) (“Precision Casparts”) which cumulatively had 408 basis points negative impact. Both DeVry Education and United Rentals had risen more than 30% last year so some profit taking might have been expected. However, DeVry Education (DV), a for-profit education company, reported disappointing new student results for the December quarter even as it beat earnings estimates. Future earnings will be negatively impacted without improvement in new student starts.
United Rentals (URI) has evolved in the market’s view into an “energy” company. Despite management’s strong argument that its results will be minimally impacted by weakness in crude oil prices, investors have decided that energy is more important than the apparent improvement in the company’s principal business, non-residential construction. First quarter results, to be announced later this month, will give a good indication of which side of this argument is correct.
Precision Castparts (PCP) has experienced weakness in demand from one of its important jet engine customers and softness in its less important energy-related businesses. As a result, management was forced to withdraw its long-standing estimate of $16.00 per share earnings for fiscal 2016. On its earnings call for fiscal 2015, ended March 31, management is expected to lay out revised forecasts for the new year as well as long-term goals.
On the positive side, three issues made meaningful contributions. IPG Photonics Corp. (IPGP), a producer of precision laser products, was up over 23%, adding 183 basis points. The company’s results exceeded expectations as fears of slowing demand in China were proven to be incorrect.
Big Lots, Inc. (BIG), the off price retailer, continues its turn-around under new management, Earnings were reported in line with management’s projections and strong cash flow led to another large share repurchase program. The shares rose 20% in the quarter and added 110 basis points to performance.
Universal Health Services, Inc., Class B shares (UHS), the fund’s largest position, was up nearly 6%, contributing 79 basis points. The company continues to benefit from the Affordable Care Actii (“Obamacare“) as it reported strong fourth quarter results and forecast continued above average growth for 2015.
During the quarter, the fund added to its position in Express, Inc. (EXPR) and trimmed several other holdings.
There was no merger or acquisition activity in the quarter.
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