Portfolio Review
The U.S. economy strengthened in 2013, especially during the second half of the year. Current statistics suggest that economic growth continues in 2014 but at a rate diminished by the harsh winter weather in the first quarter. The return (gain plus dividends) from the Standard and Poors 500 Index in 2013 was 32.4% but earnings increased only 7% during the year. The remainder resulted from expansion in the valuation of those earnings through a higher P/E ratio****. The higher valuation of stocks and reduced clarity on earnings caused some investors to reassess expected returns for 2014 and to reduce equity exposure.
Investors questioned the health of the economy as well as the level of earnings in the first quarter causing the yield on the 10 year Treasury bond to decline from 3.0% at the start of 2014 to 2.72% on March 31, 2014. This increased demand for equities with higher dividend yields favored REITs and Utilities; these two industry sectors provided 123 basis points**** of return in the first quarter and were the second and third best performers among the ten industry sectors in the Russell Midcap® Index. The first quarter return for the Westport Fund Class R shares was 1.63%, trailing the Russell Midcap® Index by 190 basis points. The virtual absence of REITs and Utilities from the Westport Fund's portfolio accounted for nearly two thirds of the performance differential in the quarter. The performance of the Westport Fund's Class R shares relative to its benchmark index improved as the first quarter progressed, shifting to an outperformance of 45 basis points in March as investors recognized the risk from unsupported valuation.
The best performing industry sector in the Russell Midcap® Index was Health Care at 73 basis points while the Health Care holdings of the Westport Fund returned 20 basis points less. The best performing industry sector for the Westport Fund was Energy with a return in the quarter of 86 basis points, 64 more than the Energy holdings of the Russell Midcap® Index. The exploration and production company EOG Resources, Inc. (EOG, Financial) was the primary driver for this sector's performance, contributing 63 basis points with a nearly 17% stock price gain for the quarter. The second best positive performance for portfolio holdings was from FEI Company (FEIC, Financial), a manufacturer of electron microscopes that gained 15.3% in the quarter and contributed 31 basis points of return. The greatest disappointment in the quarter was from MasterCard, Inc. (MA, Financial) whose stock price declined 10.6% and negatively impacted performance in the quarter by 37 basis points. This negative performance is attributable to results for the fourth quarter of 2013 coming in below estimates. The company decided to invest additional money in support of new customers which reduced earnings. The outlook for MasterCard, Inc. and Visa Inc. is positive as the volume of business increases when countries move from paper based systems for commerce to electronic ones.
Bed Bath and Beyond, Inc. (BBBY, Financial) was added to the portfolio during the quarter in response to a significant reduction in its stock price when it reported third quarter fiscal 2014 results and gave a disappointing outlook for the remainder of the fiscal year. Nonetheless, this premier provider of domestic merchandise and household furnishings remains a market leader and continues to improve its multi-channel sales (an expansion of internet marketing capabilities). Also during the quarter four holdings were removed from the Westport Fund's portfolio. CA, Inc., a long term holding, was sold after the company realized much of the anticipated benefits from its restructuring. Brown & Brown, Inc. (BRO, Financial), the insurance broker, was sold after it met its price objective and pricing for some insurance lines was viewed as unlikely to increase further, barring calamities that would consume large amounts of industry capital. Albemarle Corp. (ALB, Financial) was sold when it became clear that the markets for a number of its products were unlikely to develop as planned. And finally, Core Laboratories N.V. (CLB, Financial), a unique and highly regarded oil service company, was sold in January with a gain of 87% for the 15 month holding period. It was originally purchased when its share price experienced a sharp decrease after reporting disappointing earnings for the third quarter of 2012.
The Westport Fund Class R share's average annual return has outperformed that of the Russell Midcap® Index by nearly 200 basis points for the 16 and a quarter years since its inception, 11.19% versus 9.36%, respectively. The Fund's average annual return also compares favorably to the 6.35% average annual return for the Lipper Multi Cap Core Index, the category in which Lipper places the Westport Fund. The Westport Fund's focus on the long term and on companies with attributes providing a measure of competitive advantage have been key factors in producing these results.
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..
****Price/earnings ratio (P/E) is the price of a stock divided by its earnings per share.
****Basis Point is a unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument.
Portfolio composition is subject to change at any time and should not be considered a recommendation to purchase or sell a particular security. On March 31, 2014, the following securities comprised these respective percentages of the Westport Fund: EOG Resources, Inc. (5.1%), FEI Company (2.6%), MasterCard, Inc. – Class A shares (4.0%), Visa, Inc. (0.0%), Bed Bath & Beyond, Inc. (0.9%), CA, Inc. (0.0%), Brown & Brown, Inc. (0.0%), Albemarle Corp. (0.0%), Core Laboratories N.V. (0.0%).
