William Potter
Managing Director
AG Asset Management's Mid Cap Growth Portfolio returned 5.1% on a net of fee basis in the second quarter, ahead of the Russell Mid Cap Growth Benchmark which returned just under 4.7%. Relative performance was particularly strong in the second half of the quarter; the portfolio outperformed the benchmark by just under 300 basis points in the month of June, albeit in a down market.
Security selection has been effective; newly established positions provided meaningful contributions to the recent outperformance. During the quarter we made several substitutions, wherein we harvested gains in stocks whose market caps had become large relative to the benchmark, replacing them with well-researched, new ideas. In terms of sectors, industrials, energy, and materials provided the best relative outperformance. The weakest relative performance was from healthcare and information technology in which a few of our holdings were impacted by company-specific issues, and we have exited or reduced a number of positions that triggered our sell disciplines.
As we enter the third quarter, we remain concerned about the financial crisis, inflation, and possible demand-destruction. We believe the consumer will remain cautious and financial institutions will continue to be tight with regard to lending. However, we believe that the global trends in energy and commodities will continue, spurring economic activity in infrastructure and alternative energy. Therefore, we are underweight consumer stocks and financial stocks. These underweights are offset by our overweights in energy, materials and technology. Our industrial weight is in line, but our stock picks in that sector are mostly tied to the infrastructure “super-cycle” referred to in previous communications. Regardless of these small sector weight variances, our expected risk and return come very largely from our stock-picking, and we are encouraged by our new idea pipeline.
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