Westport Fund’s portfolio commentary for the first quarter ended March 31, 2015.
Westport Fund: Portfolio Commentary
Economic growth in the first quarter of 2015 slowed with activity retarded by harsh weather in the Northeast and Midwest, a rapid strengthening of the dollar, especially against the Euro, and a dramatic drop in oil prices. Continued easy monetary policy from the Federal Reserve and further easing by the European Central Bank and the Bank of Japan, supported U.S. equity markets with the Standard & Poors 500 Index (“S&P 500”) returning 0.95%, the Russell Midcap® Index 3.95% and the Russell 2000® Index 4.32% in the first quarter of 2015. The return from the S&P 500 was depressed by the strengthening of the dollar against the currencies of trading partners, which reduces the earnings of many American multinational corporations. The smaller companies that populate the other two indices generally have substantially less international exposure.
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The return on the Westport Fund Class R shares lagged the Russell Midcap® Index’s return by 221 basis points for the first quarter. There were no major problems for individual portfolio holdings with 25 of the Westport Fund’s 35 holdings at quarter end providing a positive return. The largest price decline at 16%, which cost 28 basis points, was recorded by FEI Company (electron microscopes) on a lowered 2015 earnings forecast even though the need to make measurements at the molecular level is growing for a number of scientific applications. The three primary negative contributors to quarterly results were: (1) Precision Castparts Corp. (complex metal components) – the company’s share price declined 13% and subtracted 57 basis points from performance, also on a lowered earnings forecast; (2) the Producer Durables industry sector – its return for the Westport Fund was 90 basis points below the return this sector provided to the Russell Midcap® Index. Nearly all the shortfall is accounted for by the earnings miss by the FEI Company and the pressure from the anticipated effects of slower domestic economic growth and the strengthening of the dollar on the earnings outlook and the shares of the portfolio’s two industrial distributors – W.W. Grainger, Inc. and MSC Industrial Direct Company, Inc. – Class A shares; and (3) the Healthcare industry sector – it added 81 basis points to the Westport Fund’s results but this was 63 basis points less than this sector’s contribution to the Russell Midcap® Index. A number of midcap pharmaceutical related companies in the Russell Midcap® Index were participants in merger activity and restructuring. They were not present among the Westport Fund’s portfolio holdings due to the unattractive valuations. The two largest positive contributors to first quarter 2015 performance were Ross Stores, Inc. (discounted apparel and home goods) at 36 basis points and Charles River Laboratories International, Inc. (services and tools for drug development) at 34 basis points. Three other portfolio holdings each contributed 29 basis points to quarterly performance and two of these sell health care or medical products.
During the quarter three holdings left the portfolio, with takeovers completed for International Rectifier Corp. and PetSmart, Inc. while Trimble Navigation Limited was removed on a valuation basis. During the quarter a position was initiated in Mohawk Industries, Inc. (“Mohawk”). Mohawk has expanded from a manufacturer with a primary focus on carpeting to a company whose current product offerings include rugs, carpets and tiles, along with laminate, wood, stone and vinyl flooring. During the quarter Mohawk announced the acquisition of a European company that manufactures sheet vinyl with a focus on luxury vinyl tiles. This new product is gaining acceptance in both the United States and Europe. Expanded offerings and increased volumes have enabled Mohawk to improve margins over time, directly enhancing its profitability. The latest acquisition should support the trend.
Since inception seventeen and a quarter years ago the Westport Fund Class R shares average annual return of 11.05% has outperformed the Russell Midcap® Index by 145 basis poinst per year and the Lipper Multicap Core Index by 446 basis points per year.
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