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3Q08 Quarterly Review
Performance Recap
Equity markets held their own in July and August before succumbing in September to fears over the credit crisis amid extreme volume and volatility. Even as oil prices tumbled, investors ran for cover as financial institutions failed and the federal government battled over the financial bailout package. Along style and capitalization lines for the quarter, Value outperformed Growth while smaller-caps fared better than larger-caps. The Russell Value indices benefitted from their heavier allocations to the Financial Services sector, which saw a third quarter "bounce". Given the advantage of bias toward small-cap stocks in general and Financials in particular, the Russell 2000 Value Index posted the only positive return among the six Russell benchmarks. The Russell Growth indices suffered relative to Value during the quarter (see table above) due to smaller allocations to Financials and larger allocations to falling Energy stocks. Active managers struggled again during the third quarter, with only 15.6% of small-cap growth managers having outperformed their benchmarks during the period. Mid-cap growth managers fared better than smallcap growth managers, with just over half (52.4%) beating their benchmark index ( Source: Merrill Lynch).
Russell Index Performance (%)
| 3Q08 | Growth | Value |
|---|---|---|
| Russell 2000 | -6.99 | 4.96 |
| Russell Mid Cap | -17.75 | -7.52 |
| Russell 1000 | -12.33 | -6.11 |
Companies in the lower ranges of the Vestek "All Shares" universe for P/E, Earnings Growth and Beta fared best in the third quarter, an environment decidedly unfavorable to WSA's growth investment specialty. The difficulties faced by active managers during the quarter are especially reflected in the outperformance of companies in the lowest Growth quintile. Among capitalization segments, investors favored companies in the $500 million to $1 billion capitalization range. Please see the table below for details.
| P/E Sector | 3Q08 | Cap Sector $b | 3Q08 | Growth Sector | 3Q08 | Beta Sector | 3Q08 |
|---|---|---|---|---|---|---|---|
| 0.0-8.0 | -6.63 | Above 5.0 | -9.19 | 0.0-8.0 | -0.37 | 0.0 - 0.9 | -1.98 |
| 8.0-12.0 | -7.88 | 1.0-5.0 | -8.15 | 8.0-12.0 | -4.91 | 0.9 - 1.1 | -6.89 |
| 12.0-16.0 | -4.87 | 0.5-1.0 | 21.32 | 12.0-16.0 | -11.88 | 1.1 - 1.3 | -8.37 |
| Above 16.0 | -9.33 | 0.1-0.5 | -2.38 | 16.0-20.0 | -7.49 | 1.3 - 1.5 | -15.82 |
| N/A | -12.11 | 0.0-0.1 | -18.19 | Above 20.0 | -23.46 | Above 1.5 | -19.63 |
Capitalization-weighted performance; Vestek All Shares as of 09/30/08 Source: Thomson Vestek
Earnings data favor smaller-cap, growth stocks. Forecasted 3rd quarter earnings growth among small and mid-cap companies (+1.9%) remain superior to those displayed by large-caps (-5.0%). Final results at or near this forecast would signal the 5th consecutive quarter of small-cap earnings dominance. Among styles within the small and midcap segments, earnings data continue to favor Growth over Value (see table at right). Additionally, previously attractive valuations for Growth shares are now even more attractive. Valuations are especially compelling in Technology and Healthcare companies which generally have strong balance sheets, ample cash reserves, and a resistance to the credit crisis. Favorable earnings and valuation characteristics have smaller-cap, Growth investments poised to lead the performance race.
Earnings Growth (%) 3rd Quarter 2008 (forecast)
| GICS Sectors | Small Cap | Mid Cap |
|---|---|---|
| Consumer Discretionary | 2.7 | -2.1 |
| Consumer Staples | 4.4 | -6.1 |
| Energy | 58.5 | 63 |
| Financials | -34.7 | -21.5 |
| Healthcare | 18.6 | 11.8 |
| Industrials | 0.1 | -1.8 |
| Information Technology | -12.6 | -6.7 |
| Materials | 21.0 | 37.2 |
| Utilities | 13.3 | -4.8 |
| Universe | 1.9 | 1.9 |
| Growth Segment | 2.7 | 6.6 |
| Value Segment | -6.2 | 0.4 |
Review and Outlook — Third Quarter, 2008
A continuous barrage of terrible news hit investors during the third quarter: Failing Investment Banks; Fannie & Freddie's Government Takeover; Inflation Fears; Hurricane Ike; the AIG Bailout; Hedge Fund Implosions; Rising Home Foreclosures; Money Market Funds "Breaking the Buck"; and Weakened Economic Measures reminded many of episodes - like the 1998 fall of LTCM when uncertainty and fear gripped the market. Investors temporarily ignored company fundamentals during this crisis of confidence. Instead, deleveraging and demand destruction became the primary drivers for stock market action as funds (hedge and otherwise) liquidated positions to pay down debts and make good on investor redemptions. In an eerie comparison to 1998, the Credit Markets froze and the VIX index, a measure of investor uncertainty, spiked dramatically to its highest level of the year (see charts below).
This generation's investors are quite possibly experiencing their worst-ever financial crisis. They are also witnessing enormous monetary, fiscal and political policy responses designed to return some semblance of stability to the U.S. financial system: Billions in Central Bank Auctions; Short Selling Bans; and a $700-plus Billion Government Bailout Bill. This Bailout Bill, passed in early October, is designed to remove "troubled assets" from the balance sheets of banks in order to restore transparency and investor confidence. Indeed, all of these developments have crushed investor confidence and thereby drastically reduced investor risk appetites. But as confidence returns, history tells us that investors will have in place one of the most rewarding settings for growth equity portfolios one where growth becomes increasingly scarce and a premium is paid for companies which are expanding at a more rapid pace than the overall economy.
Overall earnings growth did not improve much in the third quarter although profits have held up within the small-to-mid capitalization and growth sub-segments much better than for the larger capitalization and value segments. In the small caps, profits are up slightly year over year for growth stocks (+2.7%), while they have fallen (-6.2%) for value stocks. For the mid caps, year over year profits for growth stocks rose (+6.6%), but profits were basically flat for the mid cap value stocks (+0.4%). Overall, earnings for larger capitalization stocks declined considerably more (-5.0%) than the lesser cap segments. As was the case last quarter, thanks to the housing bust and enormous financial sector write-downs, earnings declines across the small and mid caps were mostly concentrated in the Financial sector (-62% and -35%, respectively, source: Merrill Lynch). However, profit growth figures for sectors other than Finance were fairly strong, averaging +13.3% for small caps and +11.3% for mid caps!
| Strong Earnings Growth in WSA Portfolios | |
|---|---|
| Forecasted Long-Term EPS Growth Rates* (I/strong/E/S Means) |
|
| WSA Mid Cap Growth | 19.0% |
| vs. Russell Midcap Growth Index | 16.4% |
| WSA Small/Mid Cap Growth | 21.0% |
| vs. 50|50 Blend* | 18% |
| WSA Small/Micro Cap Growth | 22% |
| vs. Russell 2000 Growth Index | 19.6% |
| WSA Micro Cap Growth | 25% |
| vs. Russell 2000 Growth Index | 19.6% |
Source: Russell/Mellon Analytical Svcs and Thomson Baseline as of 09/30/08
It is now consensus thought that analyst earnings expectations for the remainder of 2008 and beyond must be cut considerably. Companies in our portfolios should continue to see strong forecasted long-term earnings growth rates versus comparable benchmarks (see table at right). In an environment where overall earnings growth rates are declining, companies that exhibit strong and highly predictable rates of growth eventually command premium valuations. Historically, during economically slow periods, investors begin to recognize the attractiveness of true growth stocks. Now, investors have an opportunity to own these stocks at favorable valuations.
Wall Street Associates' current portfolio structure reflects an emphasis on several long-term themes expected to benefit from the unfolding market environment. One of our most dominant relative overweight exposures continues to be in the energy sector, with particular emphasis on oil & gas drilling, service, exploration, production, infrastructure building, and associated technologies. While recently impacted by intense political scrutiny (the hunt for speculators), deleveraging, and near-term slackening demand, we believe these groups are tied to a secular infrastructure boom in the developed and emerging nations. Although episodes of short-run softness cyclical declines can and will occur, our view is that in the long-run, demand for energy/commodities will be strong. Putting cyclical declines aside, the energy sector still faces a dilemma of having massive amounts of capital available for investment but a very limited number of politically secure exploration or development prospects. Such conditions are historically supportive of Merger & Acquisitions activity. We therefore continue to focus on investing in energy companies at industry chokepoints e.g., onshore and offshore drilling operators, equipment suppliers, power transmission and distribution companies, and engineering & construction firms with strong backlog growth rates. All of these areas are where the barriers to entry are highest, the fundamentals are most powerful, and the earnings visibility extends well into the next decade regardless of the point in the oil price cycle. While near-term risks exist, the long term fundamental outlook is very good. Our energy sector positions should continue to have strong growth prospects and are expected to be important contributors to long-term performance.
.Many of the same short-and long-term factors that drive the energy markets have also impacted Materials and Processing stocks. While short-run cyclical declines have negatively impacted the performance of these issues, we still see a strong secular infrastructure and commodities cycle ahead resulting directly from the emerging markets industrialization effort. This long-term cycle will eventually create an extremely profitable opportunity for engineering and construction companies leveraged toward energy/power/transportation infrastructure, engineering components, water projects, and manufacturers of pipeline and dredging machinery. These companies are experiencing strong revenue and earnings growth with large and growing backlogs in areas where demand continues to outstrip supply. We continue to hold Materials and Processing positions in anticipation of what we see as a rewarding time for these stocks.
We also believe healthcare companies will become important contributors to long-term performance and maintain an overweight target for our portfolios versus comparable benchmarks in this sector. There's a clear fundamental positive case for healthcare companies as many are experiencing high relative profitability, attractive valuations and improving profit margins. Demographic trends, revenue increases, and increased budgets are all positive factors for healthcare technology, equipment, services and pharmaceutical companies. The medical technology, equipment, device and diagnostics companies we find most attractive are in the midst of ramping product cycles and are experiencing robust earnings growth as a result of their "razor/razor-blade" operating models. Biotechnology companies should continue to see above-average prospects as they experience a greater share of new drug approvals. All of these companies should face strong Merger & Acquisition interest. However, they also face intense political scrutiny. So while these groups should see a long-term improvement in revenues, earnings, and margins, regardless of the economy's pace, political headwinds are strong.
Many factors continue to negatively impact household budgets, making stock selection extremely challenging and important within the Consumer Discretionary sector. As this is a difficult time for consumer-related stocks, we remain very cautious and continue to maintain a slightly below-benchmark target weighting versus comparable benchmarks in this sector. On the one hand, there is anxiety over the extent to which the current financial crisis will continue to erode consumer confidence and spending. High debt levels, low savings rates and a softening employment picture add to this
anxiety. On the other hand, early cyclical stocks consumer discretionary and transports historically sense and react to the inevitable economic recoveries which follow weak periods with a much greater lead time than other equities. We believe consumer spending will slow but not completely cave in so long as labor markets hold up. And should the case be that commodity prices remain at lower levels, history tells us that early cyclical stocks will lead the performance race. We therefore favor higher-end niche retailers with the strongest fundamentals and growth prospects. The companies most attractive to us are those with rapidly expanding consumer products and high unit growth
rates, as well as Internet-based versions of traditional industries like online education providers, advertising, retail and digital media which allow businesses to enhance productivity and to lower costs.
Technology continues to see a strong and diverse thematic influence within its sub-industry groups, yet capital expenditures are expected to decelerate as the economy slows. We've thereby built software and hardwarerelated positions expected to benefit from outsourcing, security, data storage, business redundancy, disaster preparedness and digitization trends. Software as a Service ("SAAS") companies have found an explosive growth niche by focusing on underpenetrated "vertical" markets Customer Relationship Management, Website Analytics, Travel & Entertainment Booking, Online Education Content Management, Payroll and Workforce Management with the added benefit that provides these companies with a visible recurring revenue stream that is typically in the 20% to 50% growth range. Data Storage and Archiving solutions providers are also experiencing rapid growth. The need for data storage - much of which is required by law and regulatory bodies to be archived - continues to expand with the vast amounts of information being created daily. Portfolios also hold companies that are currently experiencing the benefit of a major shift in marketing spending from offline to online: consumers currently spend up to 20% of their media usage time on the Internet, while Internet-related advertising equates to less than 10% of advertising budgets. We believe companies which provide online marketing services, innovative marketing communications, brand advertising consulting, and website hosting services will benefit as the industry's market-share shifts. Valuation measures for these technology groups are now extremely attractive, and we continue to target an overweight position versus comparable benchmarks in this sector. The view here is that expectations for technology groups remain low and selected companies are likely to exceed analysts' forecasts.
Conditions worsened for Financial-related stocks. Investors took a "sell first and ask questions later" approach to finance stocks, with good reason: Liquidity Concerns; Credit Exposure Concerns; Counterparty Concerns; Anemic Bank-to-Bank Lending; and Frozen Credit Markets. Up to now, this crisis has been viewed as a U.S.-centric problem caused by the use of heavy (30:1) leverage on "toxic" (Mortgage Backed) assets by large American investment banks. The rest of the world has looked on in horror and disbelief shocked and quick to blame the whole fiasco on the U.S.'s brand of greedy capitalism. But now we find that Germany's Deutsche Bank has had a leverage ratio of 50:1 and is in debt to the tune of 2 Trillion Euros, an amount equal to about 80% Germany's GDP. And Barclays, with a leverage ratio of 60:1, has liabilities of 1.3 Billion pounds, an amount equal to the UK's GDP. The recently nationalized Fortis bank, leveraged 33:1, has liabilities equal to 3 times the GDP of its home country of Belgium. Sharp words of blame aimed at American ears dulled a bit as the quarter drew to an end and Germany put together its biggest-ever bank bailout amounting to 35 Billion Euros and the Irish government announced they are going to stand behind 100% of bank deposits in that nation. There have also been concerns over the FDIC's Insurance Fund being depleted. The most recent FDIC list of "problem lenders" increased to 117 from 90 and while only about 10 lenders have failed so far this year, the FDIC's loss coverage ratio fell to a 15-year low as non-performing loans continued to grow. Individuals thereby became concerned over the capital adequacy of the FDIC in the event that bank failures grow to include a large bank. Now, the recent boost in coverage to $250,000 from $100,000 further increases the FDIC's burden. Our view is that even after passage of the Bailout Bill by congress, there will be little cause for enthusiasm within the finance sector. Because our portfolios have not held many financial-related stocks, we have avoided direct financial-related exposure to the current crisis. The situation continues to develop. The future for financials will likely be one where access to credit is impaired, more costly and much more restrictive.
We have experienced large declines across all major equity indices due to extreme stresses to the credit markets and to our financial system. Many major institutions have been seized by the government and sold. The extent of the global credit problems is still being discovered. However, the passage of a massive Bailout Bill and coordinated monetary policy interventions should relieve some of the near-term stress, bring back investor confidence and return some stability to the financial system. By most technical definitions of a recession, the US still isnt in one. The simplest definition is two straight quarters of GDP contraction. But the U.S. unemployment rate, at 6.1%, has risen 1.7 points since early last year and looks to go higher. However, much of the recent economic upheaval is being reflected in the stock market, policy makers have intervened, and we no longer must wait for sufficient evidence of investor panic. While we expect more volatility ahead as we transition through this crisis, forty years of investment management experience has taught me to stay the course, as, sooner or later, company fundamentals will again become the primary driver for stock market action and a great scenario for small and mid cap growth stocks will unfold. Our portfolios remain actively and optimistically positioned.
William Jeffery III, President, CIO
Review and Outlook — Second Quarter, 2008
Micro Cap
Overview: The Micro Cap Growth strategy seeks to maximize long-term capital appreciation by investing primarily in U.S. companies with market capitalizations below $400 million (float adjusted) at the time of purchase.
3Q08: The Micro Cap Growth composite underperformed the Russell 2000 Growth Index in the third quarter. Underperformance was driven mainly by stock selection in Energy, Technology, and Producer Durables shares. Relative performance was also hurt by an overweight position in the Producer Durables sector. On a relative basis, the portfolio benefited from stock selection and an overweight position in Healthcare stocks.
| 3Q08 | YTD | 1 Year | 3 Years | 5 Years | 10 Years | |
|---|---|---|---|---|---|---|
| Micro Cap Composite Gross of fees (%) | -10.96 | -24.86 | -27.08 | -0.84 | 7.28 | 11.36 |
| Micro Cap Composite Net of fees (%) | -11.18 | -25.41 | -27.77 | -1.70 | 6.37 | 10.44 |
| Russell 2000 Growth Index (%) | -6.99 | -15.29 | -17.07 | 1.45 | 6.64 | 4.67 |
As of 09/30/08; See Additional Disclosure / Performance for periods greater than 1 year are annualized / Capacity Available
Small Micro-Cap
Overview: The Small-Micro Cap Growth strategy seeks to maximize long-term capital appreciation by investing primarily in U.S. companies with market capitalizations below $1.5 billion (float adjusted) at the time of purchase, including benchmark constituents above $1.5b.
3Q08: The Small-Micro Cap Growth composite underperformed the Russell 2000 Growth Index in the third quarter. An overweight position and stock selection in Energy shares were the primary sources of Inderperformance. Stock selection in Technology and Producer Durables stocks also hurt relative performance. Stock selection in Healthcare stocks, along with stock selection and an underweight position in Consumer Discretionary shares, provided the largest positive impact
| 3Q08 | YTD | 1 Year | 3 Years | 5 Years | 10 Years | |
|---|---|---|---|---|---|---|
| Small-Micro Cap Composite Gross of fees (%) | -12.83 | -20.20 | -24.30 | -0.01 | 5.93 | 6.64 |
| Small-Micro Cap Composite Net of fees (%) | -13.05 | -20.75 | -24.99 | -0.83 | 5.07 | 5.77 |
| Russell 2000 Growth Index | -6.99 | -15.29 | -17.07 | 1.45 | 6.64 | 4.67 |
As of 09/30/08; See Additional Disclosure / Performance for periods greater than 1 year are annualized / Capacity Available
Small-Mid Cap
Overview: The Small-Mid Cap Growth strategy seeks to maximize long-term capital appreciation by investing primarily in U.S. companies with market capitalizations below $10 billion (gross) at the time of purchase, including benchmark constituents above $10b.
3Q08: The Small-Mid Cap Growth composite underperformed its custom style benchmark, the *50|50 Blend, in the third quarter. An overweight position in the Energy sector, along with stock selection in Technology shares, provided the greatest negative impact. On the positive side, relative performance was helped most by stock selection and an overweight position in Healthcare issues. Relative performance was also helped by an underweight position in the Consumer Discretionary sector.
| 3Q08 | YTD | 1 Year | 3 Years | 5 Years | 10 Years | |
|---|---|---|---|---|---|---|
| Small-Mid Cap Composite Gross of fees (%) | -17.18 | -27.80 | -30.38 | -1.741 | 3.35 | N/A |
| Small-Mid Cap Composite Net of fees (%) | -17.30 | -28.09 | -30.76 | -2.39 | 2.72 | N/A |
| 50|50 Blend* | -12.46 | -19.35 | -20.84 | 0.41 | 6.64 | N/A |
* The 50/50 Blend benchmark equals a 50/50 blend of the Russell Midcap Growth Index & the Russell 2000 Growth Index As of 09/30/08; See Additional Disclosure / Performance for periods greater than 1 year are annualized / Capacity Available
Mid Cap
Overview: The Mid Cap Growth strategy seeks to maximize long-term capital appreciation by investing primarily in U.S. companies with market capitalizations between $1.5 and $10 billion (gross) at the time of purchase, including benchmark constituents above $10b.
3Q08: The Mid Cap Growth composite underperformed the Russell Midcap Growth Index in the third quarter. An overweight position in the Energy sector and stock selection in Materials amp; Processing shares hurt relative performance. Stock selection and an overweight position in the Healthcare sector, along with an underweight position in Consumer Discretionary issues, contributed positively to relative performance.
| 3Q08 | YTD | 1 Year | 3 Years | 5 Years | 10 Years | |
|---|---|---|---|---|---|---|
| Mid Cap Composite Gross of fees (%) | -19.83 | -22.99 | -23.67 | 0.51 | 7.46 | 1195 |
| Mid Cap Composite Net of fees (%) | -19.97 | -23.32 | -24.10 | 0.04 | 6.94 | 9.10 |
| Russell Midcap Growth Index | -17.75 | -23.35 | -24.65 | -.075 | 6.53 | 5.51 |
As of 09/30/08; See Additional Disclosure / Performance for periods greater than 1 year are annualized / Capacity Available
DISCLOSURE
Wall Street Associates claims compliance with the Global Investment Performance Standards (GIPS.) WSA maintains a complete list and description of composites, and GIPS compliant full disclosure presentations, which are available upon request.
Wall Street Associates ("The Firm", "WSA") is a registered investment advisor, established in 1987. WSA is defined as an independent investment advisory firm that is not affiliated with any parent organization. The Firm is defined as all actual, institutional and sub-advisory (mutual fund) accounts managed by WSA. WSA invests primarily in U.S. Micro to Mid Cap growth securities for U.S. institutional clients.
Micro Cap Growth Composite ("The Composite") was created in June of 1990. The Composite includes all actual fee paying institutional and sub advisory (mutual fund) accounts with comparable investment objectives and risks, managed by WSA for at least one full month. The Composite invests primarily in domestic growth equities with a market capitalization of less than $400mm (float adjusted) at purchase. It is measured against the Russell 2000 Growth Index for comparison purposes. The Russell 2000 Growth Index returns, which do not reflect the deduction of advisory fees, have been provided for comparison purposes only and have not been examined by independent accountants. Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index. Russell 2000 Growth Index measures the performance of those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values. The Micro Cap Growth Composite's results have been prepared in compliance with Global Investment Performance Standards only for the period January 1, 1993 through March 31, 2008. The full period is not in compliance. Prior to January 1, 1993, the Micro Cap Growth Composite was an equal weighted composite. Management fee schedule: 1.00% on the first $25mm, 0.75% thereafter.
Small-Micro Cap Composite ("The Composite") was created in March of 1992. The Composite includes all actual fee paying institutional and sub advisory (mutual fund) accounts with comparable investment objectives and risks, managed by WSA for at least one full month. The Composite invests primarily in domestic growth equities with a market capitalization of less than $1.5b (float adjusted) at purchase, including benchmark constituents above $1.5b. It is measured against the Russell 2000 Growth Index for comparison purposes. The Russell 2000 Growth Index returns, which do not reflect the deduction of advisory fees, have been provided for comparison purposes only and have not been examined by independent accountants. Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index. Russell 2000 Growth Index measures the performance of those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values. The Small-Micro Cap Composite's results have been prepared in compliance with Global Investment Performance Standards for the period January 1, 1993 through March 31, 2008. Management fee schedule: 1.00% on the first $25mm, 0.75% thereafter.
Small-Mid Cap Composite ("The Composite") was created in November of 1998. The Composite includes all actual fee paying institutional and sub advisory (mutual fund) accounts with comparable investment objectives and risks, managed by WSA for at least one full month. The Composite invests primarily in domestic growth equities with a market capitalization of less than $10b (gross) at purchase, including benchmark constituents above $10b. It is measured against a 50/50 blend of the Russell 2000 Growth Index and the Russell Midcap Index for comparison purposes. The Russell 2000 Growth/Russell Midcap Growth 50/50 Index returns, which do not reflect the deduction of advisory fees, have been provided for comparison purposes only and have not been examined by independent accountants. Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index. Russell 2000 Growth Index measures the performance of those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values. Russell Midcap Index measures the performance of the 800 smallest companies in the Russell 1000 Index, which represent approximately 25% of the total market capitalization of the Russell 1000 Index. Russell Midcap Growth Index measures the performance of those Russell Midcap companies with higher price-to-book ratios and higher forecasted growth values. The stocks are also members of the Russell 1000 Growth index. In order to more accurately reflect investment strategy since composite inception, the Custom Benchmark replaced the Russell 2500 Growth Index on January 1, 2005. The Small-Mid Cap Composite's results have been prepared in compliance with Global Investment Performance Standards for the period January 1, 1999 through March 31, 2008. Management fee schedule: 1.00% on the first $25mm, 0.75% thereafter.
Mid Cap Growth Composite ("The Composite") was created in September of 1992. The Composite includes all actual fee paying institutional and sub advisory (mutual fund) accounts with comparable investment objectives and risks, managed by WSA for at least one full month. The Composite invests primarily in domestic growth equities with a market capitalization from $1.5b to $10b (gross) at purchase, including benchmark constituents above $10b. It is measured against the Russell Midcap Growth Index for comparison purposes. The Russell Midcap Growth Index returns, which do not reflect the deduction of advisory fees, have been provided for comparison purposes only and have not been examined by independent accountants. Russell Midcap Index measures the performance of the 800 smallest companies in the Russell 1000 Index, which represent approximately 25% of the total market capitalization of the Russell 1000 Index. Russell Midcap Growth Index measures the performance of those Russell Midcap companies with higher price-to-book ratios and higher forecasted growth values. The stocks are also members of the Russell 1000 Growth index. The Mid Cap Growth Composite's results have been prepared in compliance with Global Investment Performance Standards for the period January 1, 1993 through March 31, 2008. Prior to April 1995, non-fee-paying clients represented 100% of the Mid Cap Growth Composite; therefore the net returns for those periods reflect what a fee-paying client would have paid, based on actual assets managed. Management fee schedule: 0.80% on the first $50mm, 0.70% on the next $50mm, 0.60% thereafter.
The US Dollar is the currency used to express performance. Results are based on fully discretionary, tax-exempt accounts under management, including those accounts no longer with the firm. Performance information reflects total return and includes dividends and other earnings. There is no minimum account size for this composite. Past performance is not indicative of future results.
Returns were calculated on a total return basis. Returns include all dividends and interest, other income, realized and unrealized gains or losses, and are net of all brokerage commissions, execution costs and without provision for federal or state income taxes. Securities transactions are accounted for on trade date, with dividends and other earnings accounted for on a cash basis. Cash and equivalents are included in performance returns. Monthly returns of The Composite combine individual accounts' return (calculated on a time-weighted rate of return basis which is revalued daily) by asset-weighting each accounts asset value as of the beginning of the month. Annual returns are calculated by geometrically linking the monthly returns. Additional information regarding the firm's policies and procedures for calculating and reporting performance results is available on request. Gross returns do not give effect to investment advisory fees, which would reduce such returns. Net of fee performance was calculated using the weighted average fee rate of the previous quarters actual fees, as provided in Part II of the firm's ADV. For the partial quarter prior to the first complete quarter (if provided), the base management fee rate was utilized to calculate net performance. Actual investment advisory fees incurred by clients may vary due to various conditions including account size. The annual composite dispersion presented is an asset-weighted standard deviation calculated for the accounts in the composite the entire year.
Performance numbers have not been audited or verified by an independent third party.
From time to time, WSA may invest some client accounts in shares of companies through initial public offerings ("IPOs"). IPOs have the potential to produce substantial gains. There is no assurance that any client account will have continued access to profitable IPOs and as account assets grow, the impact of an IPO investment in that account may decline. Investors should not rely on these past gains as an indication of future performance. No leverage or derivatives are used in the Micro Cap Growth, Small-Micro Cap Growth, Small-Mid Cap Growth, or Mid Cap Growth strategy. Disclosures are the representation of management.