Portfolio Commentary

Quarterly Investment Update for Q4 2007

The strong start to the fourth quarter abruptly changed as the market began to exhibit signs of volatility. It became evident that sub-prime mortgages continue to be a concern for companies and investors alike. This was particularly troubling as these sub-prime woes adversely impacted some of the nation’s largest financial institutions. Compounding this was a weakening dollar and record high oil prices. 

As a result, the growth-oriented investment strategies offered by Driehaus Capital Management LLC (the “Firm”) achieved positive relative returns during the fourth quarter of 2007 – as all investment strategies outperformed their comparative investment indices.

Below we discuss the U.S. and International equity market environments and our domestic and international growth investment strategies.

U.S. Market Environment

The economic environment during the period ending December 31, 2007, continued to provide attractive growth investment opportunities. Most equity markets began the year in positive territory, faltered in February, finished the third quarter strong, and struggled in the fourth quarter. Large-cap stocks led the way in capturing strong performance relative to mid and smaller capitalization stocks.  In addition, growth-related stocks continued to outperform their value constituents across all market capitalizations during the period.  Investors finally saw growth-related stocks break out of a seven-year period of underperformance relative to value stocks.  We remain optimistic about the potential for growth stocks to deliver attractive returns to our clients.

International Market Environment 

The strong start to the fourth quarter 2007 abruptly changed as international markets saw weaker results in November and December. Increased concerns about a housing slowdown in the United States and its potential affect on other areas of the domestic economy rippled through most international markets. As the quarter progressed, international markets began to recover after the U.S. Federal Reserve Bank hinted about the possibility of a rate cut, which then came to fruition in mid-December. Despite strong returns in the first three quarters of 2007, China was one of the worst performing countries during the fourth quarter.  China experienced significant cash inflows early in the year, but the pace slowed in November.  Emerging market economies ended the fourth quarter in positive territory and continued to enjoy a bull run that has lasted five years.  In spite of bad news from credit markets, investors have continued to invest money into emerging markets during the fourth quarter. 

A decline in business spending caused the Japanese economy to continue to struggle during the quarter. The economic data has been volatile in recent quarters, with Japan still experiencing sluggish reform in corporate governance standards, an expected weak environment for domestic demand, unclear macroeconomic policy and higher company valuations relative to other markets in the short to mid-term.

NOTES

Sources: Driehaus Capital Management LLC, FactSet, Morgan Stanley Capital International and Standard & Poor’s Global Industry Classification Standard, Russell Indices, and the Wall Street Journal.