The equity markets saw a moderate rise in volatility in the second quarter after it approached historical lows earlier in the year. This can be attributed to an increase in uncertainty surrounding the markets. While many company-specific fundamentals have continued to improve modestly, the macro-economic variables across the globe have been mixed. In the United States we have seen GDP growth in the first quarter revised down, the purchasing manager’s index has declined on a month-to-month basis and interest rates have moved higher. The European Union continues to struggle with recession, high levels of debt and austerity. In China and the emerging economies there has been a deceleration in GDP growth. In addition, uncertainty has been magnified by the actions and words of many of the world’s central banks. The United States experienced an equity market correction coupled with a spike in interest after the Federal Reserve Chairman made comments about “slowing down” their purchases in the bond markets. After Chairman Bernanke’s comments rippled through the markets, the Federal Reserve has been quick to respond that any withdrawal of stimulus will very likely be a long way off. Japan, with a newly elected government, experienced an aggressive move to increase liquidity with a stated goal of doubling their monetary base in two years. All of these factors are likely to contribute to an increase in volatility, but they also will present opportunities to long-term investors.
The Russell 2000® Growth Index continued to rise in the second quarter, posting a return of 3.7%, and has advanced 17.4% so far this year. The equity market volatility was apparent with strong returns in May offset by slightly negative returns in both April and June. Historically, small-cap stocks outperform when interest rates are rising and that trend continued as they outperformed both their large-cap and mid-cap brethren for the quarter ending June 30, 2013. The factors that exhibited the most strength in the quarter included stocks with smaller market capitalization, higher price-earnings-ratio and higher beta. According to Morningstar®, the average small-cap growth manager has found it difficult to outperform the benchmark for the quarter or year with returns of 3.5% and 16.0%, respectively.
The Hood River Small-Cap Growth strategy appreciated 4.5%, net of fees, outperforming the Russell 2000® Growth Index and the average small-cap growth manager for the quarter. Despite the factors driving the small-cap markets, our stock selection was strong enough to overcome these modest headwinds. Strong stock selection within the consumer discretionary and financials sector generated excess return while stock selection within healthcare detracted from results in the quarter. So far this year, our small-cap growth portfolio has gained 18.0% net of fees, outpacing both the Russell 2000® Growth Index and our peer group by approximately 200 basis points. Over the last twelve months, the Hood River Small-Cap Growth strategy has outperformed the index by more than 800 basis points, net of fees. All of the excess return has been generated by our stock selection, most notably in consumer discretionary, healthcare and financials.
Given the current environment, we remain confident that our strategy of owning growing businesses that have solid balance sheets, expanding margins, accelerating returns on capital, superior management and competitive positions will continue to guide us in identifying superior stocks. Higher interest rates and a strengthening U.S. economy in the second half of the year coupled with an increased flow of assets into equities should allow small-cap growth investors a better return profile than most other areas of the equity markets for the rest of the year.
Hood River Capital Management LLC (“Hood River”) is an investment adviser registered with the SEC. Performance presentations compliant with the requirements of GIPS standards can be obtained by calling 877-725-4432. On 01/01/13, Brian Smoluch, Robert Marvin and David Swank formed Hood River to manage a small-cap growth strategy. On 05/31/13, all of the assets under their management at Roxbury transitioned to Hood River through a sub-advisory arrangement. Information provided for the period from June 2002 through March 2013 represents the performance of portfolios managed by Mr. Smoluch, Mr. Marvin and Mr. Swank while employed by Roxbury. Hood River claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. Hood River has been independently verified for the periods 6/30/02 through 6/30/13. The Small-Cap Growth composite has been examined for the periods 6/30/02 through 6/30/13. The verification and performance examination reports are available upon request. . For the entire period presented, Mr. Smoluch, Mr. Marvin and Mr. Swank have been substantially responsible for the all the investment decisions of the small-cap growth strategy. Performance prior to 04/01/13 meets GIPS® portability requirements.
The Small-Cap Growth composite was created in 2002 with an inception date of 06/30/02. All returns are based in U.S. dollars and are computed using a time-weighted total rate of return. The composite is defined to include all fully discretionary, fee paying, taxable and tax-exempt portfolios with a minimum portfolio value of $500,000 managed in accordance with Hood River’s Small-Cap Growth strategy and that paid for execution on a transaction basis. Any account crossing over the composite’s minimum threshold due to contributions shall be included in the composite at the end of the month it increased in value. Any account which drops below 65% of the composite’s minimum threshold because of considerable cash withdrawals and not due to manager performance will be removed from the composite at the end of the month it declines in market value. One non-fee paying portfolio is included in the composite for the following period: 0.2% of the composite assets year end 12/31/03. The benchmark is the Russell 2000® Growth Index, defined as an unmanaged, capitalization weighted index of those Russell 2,000 companies with higher price-to-book ratios and higher forecasted growth values. Index returns include dividends and/or interest income and do not reflect fees or expenses. In addition, unlike the composite, which periodically maintains a cash position, the Russell 2000® Growth Index is fully invested. Investors cannot directly invest in an index. Net performance is net of any applicable performance fees and net of transaction costs and actual management fees, but before any custodial fees. All returns are calculated net of withholding taxes on dividends and interest. Actual results may differ from composite results depending upon the size of the portfolio, investment objectives and restrictions, the amount of transaction and related costs, the inception date of the portfolio and other factors. Policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request.
A complete list of portfolio holdings and specific securities transactions for the investment strategy during the preceding 12 months, the top contributors and underperformers calculation methodology, and a list of every holding’s contribution to the overall performance during the period is available upon request. Past performance is no guarantee of future results. Not FDIC insured, no bank guarantee, may lose value.