The Thomas White American Opportunities Fund primarily invests in equity securities of mid-size U.S. companies. The Fund may also invest in equity securities of smaller and larger size U.S. companies.
Fund Manager Commentary
June 30, 2011
U.S. equity indices barely managed to make positive returns during the second quarter of 2011, amid renewed concerns over the worsening European debt crisis and stagnating growth in the domestic as well as the global economy. Though equities came under pressure in May and the early part of June, prices recovered towards the end of the review period after better than expected domestic economic data, and the last minute deal to prevent a Greek sovereign debt default. Survey results suggesting a recovery in U.S. manufacturing activity for the month of June and the modest increase in U.S. home prices in April after nine months of contraction also contributed to the late-quarter rally.
The Thomas White American Opportunities Fund returned +1.04% for the quarter ended June 30, 2011, compared to the Fund’s primary benchmark, the Russell Midcap Index, which returned +0.41%. The Fund’s secondary benchmark, the S&P 500 Index, returned +0.09% for the same period. For the trailing 1-year period, the Fund returned +34.08% against +38.47% for the primary benchmark and +30.69% for the secondary benchmark.
Investor sentiment remained subdued for most of the quarter as various data signalled a slowdown in the U.S. economic recovery. The political stalemate over increasing the federal government’s borrowing limit and addressing the nation’s long-term fiscal challenges, in addition to the end of the Federal Reserve’s bond-buying program, worsened the uncertainties. Job additions slowed and the unemployment rate rose during the first two months of the second quarter as the job market seemed to lose ground after showing some improvement during the previous quarter. Not surprisingly, consumer confidence weakened during the second quarter, despite lower gasoline prices after the unexpected release of over 60 million barrels from strategic reserves.
Further, concerns about a global slowdown in demand for capital goods and industrial materials affected the outlook for domestic manufacturers. Many American companies with a global footprint have benefited immensely from the spectacular growth in developing economies such as China. In fact, the modest pickup in employment recorded in late 2010 and in the beginning of this year was attributed to manufacturing sector expansion that catered to increased global demand. Moderating export demand growth impacted capacity expansion and hiring by the manufacturing sector.
Performance data is based upon past performance, which is no guarantee of future results. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than the performance data quoted. Please call 1-800-811-0535 to obtain performance data as of the most recent month-end. The Fund imposes a 2% redemption fee on share held less than 60 days. Performance data does not reflect the redemption fee. If reflected, total returns would be lower. Please click here for standardized performance.
Portfolio Review
The Fund had a solid start to the second quarter relative to its primary and secondary benchmarks, outperforming these indexes in June when investor confidence was weighed down by renewed concerns about economic growth. Healthcare and consumer staples found favor among investors who are increasingly anxious about the uncertain economic outlook, while the consumer retail sector benefited from sustained top line growth for domestic retailers, especially in the value segment.
Specialty pharmaceutical company Watson Pharmaceuticals, Inc. (+22.7%) and provider of health plans Humana, Inc. (+15.2%) were the leading performers in the Fund’s portfolio during the review period, owing to the stable earnings outlook for the healthcare sector in the current economic atmosphere, despite the continuing uncertainties over healthcare reforms. Retailers Macy’s, Inc. (+20.5%) and Ross stores, Inc. (+12.7%) gained value due to their robust sales performance, helped by aggressive promotional efforts. Having won contracts regularly and raising its revenue guidance for the year during the review period, defense equipment and services provider L-3 Communications Holdings, Inc. (+11.7%) continued its recent performance. Facilities maintenance firm W.W. Grainger, Inc. (+11.6%) advanced owing to its consistent revenue growth. Soft drink company Dr Pepper Snapple Group Inc. (+12.8%) also gave double-digit returns.
Oil refiner Valero Energy Corp. (-14.3%), which had gained substantially in the first quarter, and oil explorer and producer Murphy Oil Corporation (-10.6%), corrected as oil prices moderated. Manufacturer of recreation vehicles and commercial buses Thor Industries, Inc. (-13.6%) lost value as the outlook for industries dependant on discretionary purchases weakened due to renewed labor market uncertainties. Steel makers Steel Dynamics, Inc. (-13.4%) and Schnitzer Steel Industries, Inc. (-11.4%) underperformed owing to the moderation in manufacturing and industrial activity across the globe. Specialty provider of insurance and reinsurance Endurance Specialty Holdings Ltd. (-15.9%) and owner and manager of partnership prisons and detention centers Corrections Corporation of America (-11.3%) also underperformed.
U.S. Domestic Outlook
Concerns about a slowing recovery notwithstanding, there are several signs that may encourage investors. Given the resilience of the U.S. economy over the past several quarters, we believe it is unlikely that the economy will slip back into a recession, unless the external economic environment worsens dramatically. Between the end of the recession in June 2009 and the first quarter of this year, the U.S. economy has expanded at a pace close to its long-term average. While it is likely that growth will remain below potential this year as well as in 2012, the pace of expansion is expected to increase beginning in the first half of 2011. In its most recent report, the International Monetary Fund has forecasted U.S. economic growth rates of 2.5% and 2.7% for the current year and 2012, respectively. Further, the modest recovery in U.S. manufacturing surveys for the month of June suggest that the activity slowdown due to global supply chain disruptions in the aftermath of the Japanese tsunami disaster may be easing.
However, in our opinion the current pace of economic activity remains inadequate to support a sustainable labor market recovery. Unless job additions gather speed during the second half, wage growth will likely remain restricted and crimp consumer sentiment, despite cheaper gasoline. Slower income growth is likely to further delay the recovery in the housing sector, which continues to be buffeted by the large inventory of unsold homes and the prospect of rising foreclosures. The Federal Reserve has not yet given any indications that it will reintroduce quantitative easing measures, though proceeds from maturing bonds in the Fed’s portfolio will be reinvested.
The political gridlock over increasing the federal government’s borrowing limit and reducing the fiscal deficit has attracted the most attention recently. Rating agencies have warned that failure to increase the limit before August will amount to a technical default and may invite a credit rating downgrade, which could result in extensive losses for bond investors and erode market confidence. However, it is widely expected that an agreement will be reached before the deadline and the limit will be increased. On the positive side, this intense debate may consolidate the political resolve to address the long-term fiscal challenges facing the country and encourage both sides to arrive at a broader agreement on limiting entitlements and reforming the tax code.
We thank you for your commitment to the Thomas White American Opportunities Fund.
Fund holdings and sector allocations are subject to change at any time and are not recommendations to buy or sell any security. Please click here for fund holdings.
Opinions expressed are subject to change at any time, are not guaranteed and should not be considered investment advice.
Mutual fund investing involves risk. Principal loss is possible. Investing in international markets may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. Investments in smaller companies involved additional risks such as limited liquidity and greater volatility.