Westport Select Cap Fund Fourth Quarter Commentary
Portfolio Review During the fourth quarter the Westport Select Cap Fund’s R shares rose 9.40%, ahead of the Russell 2000 (INDEXRUSSELL:RUT)’s gain of 8.72%. For the year, the Select Cap Fund’s R shares modestly trailed the Index with an increase of 37.22% compared to a return of 38.82% for the Russell 2000® Index. Since inception 16 years ago, the Select Cap Fund R shares have outperformed by just under 3 percentage points a year, 10.55% to 7.70%, both compounded annually. Obviously, 2013 was a remarkable year for small cap stocks. Only one other time in the past sixteen years has the Russell 2000® Index gained more than 30% and that was in 2003, but that year’s gain followed a prior year loss of over 20%. By contrast, 2013’s rise came after a more than 16% gain in 2012.
In this environment the Westport Select Cap Fund performed well. None of the year-end portfolio holdings declined in value. In fact, the largest negative impact (0.51 basis points***) came from Forest Oil Corporation (NYSE:FST), a position that was eliminated earlier in the year.
Westport Select Cap Fun’s largest positions
Perhaps most rewarding to us was the excellent performance of our largest positions, each of which we have discussed in considerable detail in previous portfolio reviews. Universal Health Services, Inc. (NYSE:UHS), Class B shares, the Fund’s largest position, rose over 68% for the year and accounted for nearly 7 percentage points of performance. The Fund’s second largest holding, Precision Castparts Corp. (NYSE:PCP), was up over 42% adding 418 basis points to the year’s return. And Willis Group Holdings PLC (NYSE:WSH), the third largest position, rose 33.6%, contributing 340 basis points. On a combined basis these three holdings represented 31% of the Fund’s assets but accounted for 39% of the year’s gains.
Westport Select Cap Fun’s added positions
In addition, other holdings gained more than the Index and added in excess of 1 percentage point to the performance. United Rentals, Inc., the country’s largest equipment rental company, was up 71%, contributing 306 basis points; FEI Company (NASDAQ:FEIC), a manufacturer of electronic microscopes, rose 61%, adding 355 basis points. PTC Inc (NASDAQ:PTC), a leader in software used in product life cycle management, gained 57%, adding 141 basis points, and DeVry Education Group Inc (NYSE:DV), our remaining for-profit education company, rose 50% and added 235 basis points.
Westport Select Cap Fund’s sold out positions
During the year we made a number of portfolio changes. In addition to Forest Oil Corp., positions in Carter’s, Inc. (NYSE:CRI), John Wiley & Sons Inc (NYSE:JW.A), Class A shares, and General Communication, Inc. (NASDAQ:GNCMA), Class A shares were eliminated and Saks, Inc. was sold due to the company’s acquisition by Hudson’s Bay Co (TSE:HBC) (the $16 takeover price compared to our cost of approximately $4.25 per share). One new position, Radian Group, Inc., was established. One of the largest private mortgage insurance companies, Radian Group Inc (NYSE:RDN) should benefit from a recovery in the housing industry and from the Federal Housing Administration’s gradual pull-back from the mortgage insurance market.
At this point I would like to circle back to a subject we are perhaps most often asked about, and that is why do we continue to hold such a concentrated position (nearly 32%) in our three largest holdings? First of all, it is important to note that over the past two years we have actually reduced our holdings in all three stocks. Fortunately for our shareholders long – term price appreciation, particularly in Universal Health Services, Inc. and Precision Castparts Corp., has been exceptionally strong (in the case of Universal Health Services, Inc., which was purchased in 1999 and 2000 at an average cost per share of $9.41 and ha d increased to a price per share of $81.26 at the end of 2013, and Precision Castparts Corp. which was bought in 2000 at an average cost per share of $9.82 and ha d increased to a price per share of $269.30 at the end of 2013). In our view these two companies remain in the ” sweet spot ” of two compelling long-term investment opportunities. In the case of Universal Health Services, Inc., the company is likely to be one of the prime beneficiaries of expanding health care insurance coverage dictated by the Affordable Care Act*** (“Obama care”). Unique to Universal Health Services, Inc. is its position in mental health services which accounts for three-quarters of its earnings before deductions for interest expense, taxes, depreciation and amortization. Precision Castparts Corp. is a prime component supplier to the commercial aircraft manufacturers. Indicative of the attractiveness of this business was The Boeing Company’s recent announcement that its year-end backlog was 5,080 planes compared to the 648 jets delivered in 2013. By the same token, Airbus’ (a subsidiary of Airbus Group NV) backlog at the end of November was 5,400 versus the 562 planes delivered in the first eleven months of the year.
In our opinion, the potential for rewards of the over-weighting of these positions outweighs the risks of this non-traditional portfolio strategy.
Investors should consider the investment objectives, risk, and charges and expenses of The Westport Funds carefully before investing; this and other information abo ut the Funds is in the prospectus, or summary prospectus, which can be obtained by calling 1-888-593-7878 or at our website www.westportfunds.com. Read the prospectus or summary prospectus carefully before you invest.
The views expressed and any forward – looking statements are as of the date of the publication and are those of the portfolio managers and/or the Advisor. Future events or results m ay vary significantly from those expressed and are subject to change at any time in response to changing circumstances and industry developments.
There are special risks associated with small and mid-capitalization issues such as market illiquidity and gre ater market volatility than larger capitalization issues.***
Basis Point is a unit that is equal to 1/100 th of 1% and is used to denote the change in a financial instrument.***
Obamacare or the Patient Protection and Affordable Care Act (PPACA) or the Affordable Care Act.
Portfolio composition is subject to change at any time and should not be considered a recommendation to purchase or sell a particular security. On December 31, 2013, the following securities comprised these respective percentages of the Westport Select Cap Fund: Forest Oil Corp. (0.0%), Universal Health Services, Inc – Class B shares (11.8%), Precision Castparts Corp. (10.3%), Willis Group Holdings plc (9.7%), United Rentals, Inc. (6.0%), FEI Company (7.2%), PTC Inc. (3.5%), DeVry Educatio n Group Inc., (6.0%), Carters, Inc., (0.0%), John Wiley & Sons, In c., – Class A shares (0.0% ), General Communication, In c., – Class A shares (0.0%), Saks, Inc. (0.0% ), Hudson’s Bay Company (0.0% ), Radian Group, Inc., (1.5%), Boeing Comp any (0.0%), and Airbus Group NV (0.0%)