International Discovery Commentary

December 31, 2009

The Driehaus International Discovery Composite (the “Strategy”) outperformed its benchmark, the MSCI All Country World Index ex-USA Growth (the “Benchmark”), by 82 basis points this quarter. The Strategy also outperformed the MSCI All Country World Index ex- USA (the “Index”) by 236 basis points during that same time frame.

At quarter end, the Strategy’s two largest underweightings versus the Benchmark were in the Financials and Consumer Staples sectors. The Strategy’s underweight allocation and stock selection in the Financials sector contributed to return; however, the underweight allocation to the Consumer Staples sector detracted from performance. As a result of accelerating sales and increased earnings growth rates, the Strategy’s two largest overweightings versus the Benchmark were in the Information Technology and Energy sectors. The Strategy’s overweight allocation to the Information Technology sector and stock selection in both sectors contributed to return. The Information Technology sector was the biggest contributor to return, while the Health Care sector was the largest detractor from Strategy return.

From a country perspective, the Strategy’s two largest overweightings versus the Benchmark were in China and Ireland, and the two largest underweightings were in Switzerland and Spain. Within China, stock selection and the overweight allocation contributed to return; however, stock selection within Ireland modestly detracted from return. The Strategy remains overweight in China and Ireland due to their strong earnings growth outlook. The underweight allocation to both Switzerland and Spain contributed to return; however, stock selection in Spain detracted from return.

Holdings in the United Kingdom and Hong Kong detracted most from the Strategy’s return. Stock-specific news within the Consumer Discretionary sector in both the United Kingdom and Hong Kong constrained returns.

Positions in Japan and Brazil were the top contributors to return during the quarter. Within Japan, the Strategy benefitted from holdings in the Information Technology sector. Additionally, holdings in the Energy sector contributed to returns in Brazil. 

Driehaus Capital Management LLC (the “Adviser”) continues to have a bias toward the emerging markets region. Exposure to the region continues to be heavily weighted towards Asia (China and India) and to a lesser extent, Latin America (Brazil). Within China, the focus has shifted from cyclical related stocks to consumer related stocks (retailers), in addition to coal producers. Themes in Brazil focus predominately on energy and consumption related companies.

Within developed markets, the Adviser continued to be substantially underweight in the United Kingdom versus the Benchmark. This was mostly a function of success finding better growth stocks within Western Europe (particularly Germany and Ireland) and Australia.  Within Germany, the Strategy had success investing in engineering and construction companies with substantial operations in Australia and to a lesser extent, the United States.  In addition, the Adviser moved from a substantial underweight in Japan to an overweight position. The Adviser took advantage of a short-term rally in the Japanese Yen to build up exposure in Japanese export companies, which experienced pressure as the Yen increased in value relative to the U.S. Dollar. These stocks benefitted as the rally subsided and the value of Yen declined. Moving into the new year, the Adviser is actively reducing this exposure.

The Adviser continues to believe many of the themes of 2009 will be the driving factors as we head into the new year. Those include:  select technology (mostly software, hardware, semi-conductors and internet/consumer services providers); domestic consumption companies in the emerging markets (consumer goods, real estate, education services, etc.); trade down/recession beneficiaries in developed markets, and stimulus/infrastructure spending beneficiaries globally (such as railroad equipment suppliers in Europe, China, and the United States); energy (energy services and alternative energy) and various commodities (coal, copper, and gold).  The Adviser continues to be encouraged by a transitioning to a “stock-pickers” market and believes this will continue to intensify as we move through 2010.

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.

The performance numbers represent a composite of international discovery accounts managed by Driehaus Capital Management LLC.  These numbers are estimated for the period as all underlying accounts have not yet been reconciled. All rates of return include reinvested dividends and other earnings and are net of fees and brokerage commissions. The performance data shown above represents past performance and does not guarantee future results. Current performance may be lower or higher than the performance data quoted.

The Morgan Stanley Capital International All Country World ex USA Growth Index (MSCI All Country World ex USA Growth Index) is a subset of the Morgan Stanley Capital International All Country World ex USA Index (MSCI All Country World ex USA Index) and is composed only of the MSCI All Country World ex USA Index stocks which are categorized as growth stocks.

The MSCI All Country World ex USA Index is a market capitalization-weighted index designed to measure equity market performance in 47 global developed and emerging markets, excluding the U.S.

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