The Dow Jones Industrial Average, S&P 500, and the Wilshire 5000 all posted negative returns for the quarter ended June 30, 2008, due in large measure to a chaotic June which saw perhaps the worst performance for the month since the 1930's. Given that backdrop, it would have been hard to imagine that small cap stocks could post gains for the quarter. But they did.

 

The Russell 2000 posted a positive 0.58% total return in the second quarter on the strength of the Russell 2000 Growth's 4.47% return in the period.  The Russell 2000 Value, on the other hand, produced a negative 3.55% return.

 

Of particular note in the second quarter's performance was the very strong gains posted by the energy sector. Indeed, according to Citigroup Global Markets, energy stocks in the Russell 2000 Growth Index gained 44.8% in the second quarter and contributed 362 basis points of the quarter's 447 basis point total return.  The impact of energy stocks on the Russell 2000 was no less impressive, contributing 311 basis points to the second quarter results.

 

Industrial and technology stocks also provided meaningful contributions to the Russell 2000 Growth while the worst contributions were posted (not surprisingly) by financials and consumer discretionary stocks.

As a result of the second quarter's performance, the gap between the Russell 2000 Growth and Russell 2000 Value has shrunk to less than 100 basis points.

 

Our small cap institutional portfolio was significantly underweight the energy sector in the June quarter and was simply unable to keep up with benchmark, gaining just 0.35%. Clearly, had we carried a market weight in energy throughout the quarter, our performance would have been much more respectable. Nevertheless, we continue to believe that energy markets are due for a meaningful correction and thus we continue to avoid the sector for the time being. 

 

 

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In particular, health care and industrials had the largest increases in weights gaining 2.9 and 1.3 percentage points respectively. This was not surprising given the strong performance of those sectors over the past year.

 

Also not surprising were the significant decreases in the weights of the consumer discretionary (down 1.3 percentage points) and financial services (falling 3.1 percentage points) sectors given their poor performance over the last twelve months.

 

Despite these significant shifts, technology, health care and industrials remain the top three sectors and account for approximately 62% of the total weight of the Russell 2000 Growth Index.

 

Here are the new Russell 2000 Growth weights:

 

Consumer Discretionary     12.40%       -1.25%

Consumer Staples               2.54           0.39

Energy                              12.57           0.20

Financials                           4.53          -3.10

Health Care                       21.89           2.93

Industrials                          18.64          1.26

Information Technology       21.90           0.22

Materials                             3.28          -0.68

Telecom Services                 1.45           0.44

Utilities                                0.80           0.18

 

 

 

 

 

Patricia Nichols

Charles Nichols II

Christopher Ely

Roland Gillis

David Smith