Mid Cap Growth Commentary

June 30, 2010

Market News

The correction in the Euro impacted mid cap names with exposure to Europe.  The second quarter was an inflection point for quality.  Perceived low quality stocks have outperformed since the 2009 market bottom, but in May there was a reversal and recognized high quality stocks began to outperform. Given the market environment, it ties in well to have increased confidence in quality and mid cap names.  The U.S. job market trends of key leading indicators of productivity, average workweek, and temp hires remain intact.

Detractors & Contributors

The Driehaus Mid Cap Growth Composite (the “Strategy”) underperformed its benchmark, the Russell Midcap Growth Index (the “Index”), by 167 basis points for the quarter.

At quarter end, the Strategy’s two largest underweights versus the Index were in the Financials sector, which contributed to return and Industrials sector, which detracted from return. As a result of accelerating sales and increased earnings growth rates, the Strategy’s two largest overweights versus the Index were in the Consumer Discretionary and Health Care sectors. The overweight allocation and stock selection in the Consumer Discretionary sector detracted from the Strategy’s return; however, the overweight allocation and stock selection in the Health Care sector contributed to return.

The top contributor to return over the quarter included holdings in the Health Care sector. Detracting from return over the quarter were holdings in the Industrials and Consumer Staples sectors. 

At the end of the quarter, The Strategy reduced exposure to the Telecommunications sector and slightly increased exposure to the Materials and Energy sectors.  Consumer Discretionary and Information Technology names are the highest weighted sectors in the Strategy.

Portfolio Positioning and Outlook

Currently and going forward, we may reduce our overweight Consumer Discretionary position or shift assets toward more stable names within the sector.  Consumer Discretionary names for “high ticket” items that require financing will need to be compelling from a bottom-up aspect in order for us to continue to own the security. That being said, we are still finding attractive Consumer Discretionary growth names. Although we realize that areas of the Information Technology sector are not immune to changes in economic growth, we remain positive on enterprise upgrade spending within the sector (for example, corporate cash levels and accelerating IT hiring trends.)

In addition, we believe that there are many good names in the Health Care sector from a bottom-up aspect. Finally, we are generally looking to reduce our exposure to companies with high leverage.

NOTES

Sources: Driehaus Capital Management LLC, FactSet, Morgan Stanley Capital International and Standard & Poor’s Global Industry Classification Standard, Russell Investments

The performance numbers represent a composite of mid cap growth 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 Russell Midcap Growth Index measures the performance of those Russell Midcap companies with higher price-to-book ratios and higher forecasted growth values.  The performance data includes reinvested dividends. The performance data includes reinvested dividends. The Russell Midcap Index measures the performance of the 800 smallest companies in the Russell 1000 Index, which represent approximately 30% of the total market capitalization of the Russell 1000 Index.