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Greetings:
We hope you will find this fourth 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. |
A Year to Forget
Few safe havens in 2008
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2008 turned out to be one of the most difficult financial markets in more than 75 years thanks in large part to a dismal fourth quarter. We won't spend a lot of time recounting the litany of reasons for the sharp sell-off except to note that the global financial market crisis finally began to impact Main Street during the fourth quarter resulting in sharp reductions in expectations for revenues and profits for companies large and small alike.
We were struck by the consistency of returns across the market cap spectrum last year - they were all bad. The Russell 1000 large-cap benchmark slumped 37.6% for all of 2008 while the Russell 2000 small-cap index eroded 33.8%. Mid-caps, measured by the Russell Midcap, fared the worst in 2008, falling 41.5%.
While small cap stocks out-performed large caps for the full year, the tables were turned in the fourth quarter. Despite a strong rally in December (the Russell 2000 was up 5.8%), small-cap stocks lagged large-caps in the fourth quarter, falling 26.1% versus large-caps' down 22.8%. Value stocks measured by the Russell indexes tended to out perform their growth counterparts for both the quarter and the full year. Our specialty, small cap growth stocks, had a tough quarter, falling 27.5% as measured by the Russell 2000 Growth index. Only micro-caps fared worse.
Not surprisingly, no economic sector in the Russell 2000 Growth index escaped the quarter without some damage. The best performing sectors in the final quarter of 2008 were consumer staples, telecom services, and utilities with returns of -14.0%,-15.6%, -18.6% respectively. Energy, thanks to the collapse of crude oil prices, fared the worst in the fourth quarter, falling a stunning 48.3%. Materials and consumer discretionary posted 30.0% and 30.1% losses respectively. The balance of the sectors in the benchmark posted losses ranging from -22.0% to -28.1%.
Our small cap institutional portfolio was meaningfully underweight the energy and consumer discretionary sectors and significantly overweight consumer staples. These sector exposures coupled with some solid stock picks, helped us extend the portfolio's relative performance advantage in the December quarter. As a result, the portfolio was significantly ahead of its benchmark for the full year.
N.B. We provide our small cap composite performance data to the major databases. Or, if you wish, please contact Hamersley Partners for more complete information on our results.
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| Bear Market is Creating Opportunity |
We are stock pickers. Our portfolios are built from the bottom up, stock by stock. So much of our time every day is spent analyzing individual companies in an effort to gain an understanding of that company's particular circumstances such as competition, growth prospects, management prowess, and financial performance (margins, cash flow, balance sheet, etc) and to make a judgement about the company's future. If, after all that analysis, we are favorably disposed to the company, the decision to add the stock to our portfolio then shifts to valuation.
In our view, valuation can at times be as much art as science. While calculating price-to-earnings or price-to-sales ratios (or all the other valuation measures for that matter) is mechanically very simple, interpreting those ratios and applying them to the decision to buy (or sell) a particular stock can be much more difficult. So we look not just at the absolute level of any particular valuation measure but how it compares to peers, historical trends, expected growth and the level of risk (both operating and balance sheet) of the company being measured. Ultimately, it boils down to a simple question. Is the current valuation at level that offers us an expected rate of return appropriate for the risks we are taking? If the answer is yes, the stock becomes a buy.
How is this difficult bear market creating opportunity? Valuations have fallen to levels not seen in many years. Of course, these low valuations are in large measure the result of a very difficult economy and earnings environment. Nevertheless, we believe there are growing numbers of small cap stocks, companies with a solid business and prospects for future growth, trading at valuations not even dreamed of twelve or eighteen months ago. So, while it may be some time before the bear market ends, we believe now is a great time to take advantage of these opportunities.
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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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