Sammy Oh
Managing Director
The AG Asset Management Small Cap Growth portfolio was up 2.4% in the second quarter of 2008 as compared to the gain of 4.5% in the Russell 2000 Growth Index. Year to date the portfolio declined (13.0%) versus (8.9%) for the benchmark. Our SMid Cap Growth portfolio gained 4.09% during the second quarter of 2008 as compared to the gain of 3.6% in the Russell 2500 Growth Index. Year to date the SMid Growth portfolio has declined (12.1%) versus (7.9%) for its benchmark.
Our portfolios performed remarkably well during April and May versus their benchmarks, but then surrendered much of their gains during June, when the Russell 2000 suffered its worst monthly performance since the inception of that index. The reversal was precipitated primarily by the continued ascent in crude oil prices and the growing concern that both U.S. and global economic activity are slowing, due to the strain of elevated energy, food and commodity prices.
In both portfolios, materials and processing was the best performing sector. An alternative energy play whose stock price nearly doubled after reporting profitability significantly ahead of schedule, was the largest positive contributor to performance. We eliminated the position as the stock price appreciated above our price target. A recent IPO benefiting from the increased global demand for agricultural fertilizers was also a strong performer during the quarter. The company produces and markets potash, one of the most important nutrients for agriculture. Our favorable view on the grain markets combined with potash’s unique properties makes the company a compelling investment.
Other sectors of the portfolios that performed well relative to the indices were technology, transportation and consumer discretionary. We continue to maintain our overweight position in technology as valuations remain very compelling.
Although energy was a strongly positive contributor to absolute performance in both portfolios for the quarter, on a relative basis our positions did not perform as well as the overall group. We lagged the sector primarily due to our lack of holdings in the coal producers or in several of the exploration companies that appreciated sharply. Although we’ve previously invested in coal producers, recent valuations coupled with environmental concerns caused us to prefer other energy segments.
For the most part, our portfolios have avoided the well publicized turmoil in the financial services sector. In Healthcare, our portfolios have remained underweighted due to valuations that do not fully discount the significant risks resident within the sector.
During times of market turmoil, it is not unusual for small cap stocks to underperform due to their less liquid nature. Conversely, this market segment typically outperforms during more constructive market environments. We remain confident that once investor confidence returns, our portfolios will outperform the small cap space and the market as a whole.
Disclosure Statement
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