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Greetings:
We hope you will find this third quarter review informative. If you would like additional information on the topics covered in this newsletter please contact us at info@nicholsassetmgmt.com or give us a call at (617) 338-6725.
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Thank you. |
| No Place To Hide
Russell 2000 and 2000 Growth Indexes fall in market sell-off
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The downward slide of the Dow Jones Industrial Average, S&P 500, and the Wilshire 5000 accelerated in the third quarter ended September 30, 2008. The reasons for the sharp decline have been well documented in the press so we won't dwell on them. However, we do note that the historic nature of today's financial crisis and the unprecedented steps taken by governments around the globe will take some time to restore confidence in our economy and financial markets. Thus, it may take some time for investors to adjust to the changed environment before the stock market mounts a sustained advance.
Small cap stocks were certainly not immune to the selling pressure. Even so, the Russell 2000 fell just 1.11% in the third quarter, significantly out-performing large cap stocks. (The S&P 500 posted a 8.37% drop, for example.) Interestingly, the Russell 2000 Value index actually posted a positive return of 4.96% thanks to a rebound in financial stocks. Our policy benchmark, Russell 2000 Growth Index, declined 6.99% in the quarter.
There were a few safe havens in the third quarter. Health care, consumer staples and financial services each posted gains. However as the market eroded, even those safe havens began to give up their gains. In the month of September, there was no place to hide in the Russell 2000 Growth as all sectors posted losses. Energy, for example, was down 22.4% in September alone and as a result, the sector fell 34.8% for the quarter thus giving back most of the second quarter's spectacular gains. The technology and industrial sectors also posted double digit declines of 12.9% and 14.7% respectively in September, resulting in considerable quarterly losses.
Our small cap institutional portfolio was significantly underweight the energy and industrial sectors and overweight technology, health care and and consumer staples. Those sector exposures coupled with some fortuitous stock picks, helped September's relative performance bounce back nicely from the June quarter's shortfall. The portfolio fell just 1.06%, significantly better than the Russell 2000 Growth, our policy benchmark. As a result, the portfolio is comfortably ahead of the benchmark for the full year.
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| Managing In A Crisis
Historic market volatility requires caution and common sense
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Successfully managing investment portfolios in the midst of a financial crisis requires some measure of caution, common sense, historical perspective and creativity, in our view. So, what are we doing to manage our small cap growth portfolio in the midst of a historic financial crisis?
First, and perhaps most importantly, we have not altered our basic approach to portfolio construction - maintaining a balance of emerging, stable and opportunistic small cap growth stocks. By using this balanced approach we believe we have been able to absorb some of the wild swings in the market and take advantage of opportunities when they appear.
Second, we have been careful not to "over manage" the portfolio. Trading costs in such a volatile market have soared and the opportunity to make mistakes has been greatly magnified. So, we have kept our portfolio turnover under control (latest twelve months was 121%) and have temporarily suspended our stop-loss selling rule given the abnormally high market volatility.
Third, when we establish new positions, we are doing so slowly, By averaging into a full position, we can use the wild swings in the market to hopefully reduce the overall cost of the investment and improve subsequent returns.
Finally, while today's financial crisis is like none we have ever experienced in our careers, managing small cap growth portfolios during the Crash of '87, the collapse of Long Term Capital, and a couple of wars, has helped us put the current market situation in perspective.
History tells us that we will eventually recover from the current financial crisis. In the meantime, we believe that significant opportunities to profit in common stocks are being created. And, now is the time for investors to begin taking advantage of some of those values.
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| Q3 Profile Available
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| Our firm profile, prepared by Hamersley Partners, is now updated for third quarter results. We have posted it to our website and you can download it directly by clicking here. |
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We are providing all pertinent information regarding our small cap growth portfolio to the major consultant databases. In addition, use the quick link above to view our latest presentation material. Or if you wish, contact our marketing firm, Hamersley Partners, who will be happy to provide more information.
As always, we appreciate your interest and look forward to keeping you up-to-date on our progress.
Sincerely,
Nichols Asset Management, LLC |
| Important Disclosures
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| The contents of this email have been prepared from public and private data sources believed to be reliable. Nevertheless, we make no representations or warranties as to its accuracy or completeness. All information contained herein is subject to change without notice. Any reference to specific securities or investment strategies is for illustrative purposes only and not a recommendation to buy or sell. Opinions expressed in this communication are those of the author, a partner(s) of Nichols Asset Management and should not be solely relied upon when making investment decisions. Remember that all investment decisions should be made only after carefully considering all risks associated with the investment and your individual circumstances. Past performance is not an indicator of future results. Additional information on our small cap growth portfolio is available upon request from Nichols Asset Management, LLC.
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Nichols
Asset Management, LLC |
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75 Federal Street
Suite 1310
Boston, MA 02110
617~338~6725
Nichols Asset Management's small cap team blends, sophisticated quantitative tools, fundamental analysis and our many years of experience to build and manage a portfolio of small cap growth stocks for institutional investors.
By striking a balance between rapidly growing emerging growth companies, more consistent stable growth companies and opportunistic (contrarian) stocks, we hope to take advantage of shifting market environments.
This disciplined, team approach of evaluating individual securities and managing portfolios has been honed over many years. Our experiences in bull and bear markets, bubbles and crashes has taught us that successful investment strategies require knowledge, hard work, common sense and patience.
Patricia Nichols
Charles Nichols II
Christopher Ely
Roland Gillis
David Smith
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| For additional information contact:
Peter Pavlina
Hamersley Partners
420 Boylston Street
Boston, MA 02116
(617) 247-8800
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