During the third quarter the Westport Select Cap Fund’s Class R shares declined 13.37%, underperforming by 145 basis pointsi the Russell 2000® Index’s loss of 11.92%. For the first three quarters the Westport Select Cap Fund Class R shares trailed the performance of the Russell 2000® Index with a loss of 11.85% compared to the Index’s decline of 7.73%. Since inception seventeen and three quarter years ago, the Westport Select Cap Fund R shares have outperformed the Index by 242 basis points a year, 9.14% to 6.72%, both compounded annually.
If stock market investors were previously complacent as many strategists had warned, that situation changed dramatically in the third quarter as stocks suffered broad-based declines. Not only were small caps hit hard as evidenced by the Russell 2000® Index’s decline but large caps also suffered steep declines with the Standard & Poors 500 Index (“S&P 500”) down 6.44%. This was the largest decline for the large cap index since the third quarter of 2011. The key driver to the weakness in stock prices was concern about world-wide growth, particularly in China, and its ultimate impact on the United States economy. Geopolitical events, especially in Syria, added to investor concerns.
The Westport Select Cap Fund’s decline was broad-based with eighteen stocks down and only four up. The biggest negative contributor was United Rentals, Inc. (URI, Financial) (“United Rentals”) which fell over 31% and impacted the fund by -238 basis points. The company continued to be effected by the fallout from the decline in the energy market and some industry over-supply. On the positive side, the company’s largest market non-residential construction is at record levels. The second most significant negative contributor was the fund’s largest holding, Universal Health Services, Inc. (UHS, Financial), Class B shares, (“Universal Health Services”) which fell over 12% and cost 208 basis points. This stock got caught up in the general weakness in health care issues even as the fundamentals continue to improve. During the quarter, management significantly raised earnings estimates for this year. Despite the third quarter decline, the stock is up 12.2% for the year to date. Three other positions contributed more than one percentage point to negative performance: PTC Inc., (130 basis points); Zebra Technologies Corp., Class A Shares (“Zebra Technologies”)(126 basis points); and Willis Group Holdings plc (“Willis Group”) (105 basis points). Of the three only Zebra Technologies announced negative results which are believed to be short term in nature.
On the positive side, Precision Castparts Corp., one of our longest term and most successful investments, announced it would be acquired by Warren Buffet’s Berkshire Hathaway Inc. for $235 cash per share (our cost is $9.77) with closing expected in the first quarter of 2016. This position added 66 basis points to the quarter’s performance.
The only other positive contributor of note was Big Lots, Inc. (BIG, Financial) (“Big Lots”), the off-price retailer, which added 46 basis points. Management raised 2015 earnings estimates and gave further evidence that its turn-around program was working.
Turning to the first nine months, all of the fund’s under-performance can be attributed to two positons, United Rentals which cost 350 basis points, and DeVry Education Group, Inc. (DV, Financial) (“DeVry”) which subtracted 315 basis points. As noted earlier, United Rental’s shares have been impacted by cutbacks in oil and gas production, which have had a modest impact on earnings but an outsized impact on this stock’s earnings multiple. DeVry, the for-profit education company, has provided analysts with its five year business plan. If achieved, this stock has significant appreciation potential.
Two positions made worthwhile positive contributions. Universal Health Services, despite its third quarter decline, was up 12.2% and added 159 basis points. Big Lots, reflecting management’s positive earnings outlook, was up 19.7%, contributing 103 basis points to performance.
During the quarter we added to the fund’s position in Checkpoint Systems, Inc., eliminated QLogic Corp. and trimmed several other holdings.
In addition to the take-over of Precision Castparts Corp. the fund had one other merger and acquisition activity – the announced merger of equals, of Willis Group and Towers Watson & Co. (“Towers”). The combination of these two companies is expected to bring together Willis Group’s strong brokerage business with Towers’ skills in consulting and health care exchanges.
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 capitalization issues such as market illiquidity and greater market volatility than larger capitalization issues.
i Basis Point is a unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument.
