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Although the Portfolio produced a strong absolute gain for the
first quarter, some headwinds held back its relative results. First,
value stocks substantially outperformed growth stocks this
quarter, which did not benefit this growth-oriented strategy.
Second, low-quality stocks performed far better than high-quality
ones. We spent the last 12 months raising the average quality
level of the Portfolio’s holdings because we believe those stocks
offer significant long-term value, but that position certainly hurt
relative performance in the first quarter.
The Portfolio’s overweight to the Information Technology sector
was a drag on performance during the quarter. Otherwise, stock
selection accounted for most of the relative underperformance
for the period. Solid contributions in the Financials, Health Care,
and Materials sectors could not overcome drags from the two
Consumer sectors and, in particular, Energy. On the positive side
of the ledger, the Portfolio benefited most from strong returns by
Cameron International, IntercontinentalExchange, Gilead Sciences,
B/E Aerospace, and Texas Instruments. Stronger-than-expected
orders or financial results were a common thread among these
stocks. Additionally, Intercontinental Exchange’s 32% return for the
quarter was helped along by improved synergy from its acquisition
of NYSE Euronext.
These and other successes were not enough to generate positive
stock selection for the quarter. While numerous holdings lagged
the benchmark, there were no big detractors in the quarter, and
only five individual holdings actually declined. Apple was the
worst performer in absolute terms, although it was not a top
relative performance detractor. The company has been dealing
with a product transition but in our view has suffered more from
improved competitiveness from Samsung than from its own
choices. We believe that Apple’s valuation has become compelling
enough to create a substantial opportunity for outperformance in
coming quarters.
Other detractors included Suncor Energy and Edwards
Lifesciences. Suncor has been a major disappointment. Although
its valuation looks very low compared with other Energy stocks,
its management execution has been spotty. Meanwhile, Edwards
is early in the launch cycle of a catheter-delivered heart valve and
sales growth was a bit slower than expected. That should improve
in the months ahead.
The Portfolio’s negative stock selection in the two Consumer
sectors was mostly about not owning any media stocks in
Consumer Discretionary or food stocks in Consumer Staples
(where the leveraged buyout of H.J. Heinz drove all food stocks
higher). Within the Energy sector, the Portfolio did not include
refiners, which soared 30% to 50% for the period. In all three
of these cases, we didn’t see either the quality or growth
characteristics necessary for inclusion in the Portfolio’s universe.
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