The Driehaus Global Growth Composite (the “Strategy”) underperformed its benchmark, the MSCI All Country World Growth Index (the “Index”), by 166 basis points during the quarter.
At quarter end, the Strategy’s two largest underweightings versus the Index were in the Consumer Staples and Telecommunication Services sectors. The Strategy’s underweight allocation to the Telecommunication Services sector and stock selection in the Consumer Staples contributed to return. Conversely, the Strategy’s underweight allocation to the Consumer Staples sector and stock selection in the Telecommunication Services sector detracted from return. As a result of accelerating sales and increased earnings growth rates, the Strategy’s two largest overweightings versus the Index were in the Industrials and Materials sectors. A combination of the Strategy’s overweight allocation and stock selection in the Materials sector contributed to return; however, the overweight allocation to the Industrials sector detracted from return. The Industrials 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 were in China and the United States, and the largest underweightings were in Switzerland and the United Kingdom versus the Index. A combination of the Strategy’s overweight allocation and stock selection in China contributed to return; however, stock selection in the United States detracted from return. The Strategy remains overweight in the two countries due to their strong earnings growth outlook. A combination of the underweight allocation and stock selection in the United Kingdom detracted from return. The underweight allocation to Switzerland, however, did contribute to the Strategy’s return. The Strategy remains underweight in Switzerland and the United Kingdom.
Positions in the Brazil and Japan 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.
Holdings in the United States and Germany were the largest detractors from return during the quarter. Stock-specific news within the Financials sector in the United States and within the Industrials sector in Germany constrained returns.
Driehaus Capital Management LLC (the “Adviser”) continues to have a bias toward the emerging markets region, although the Strategy has been transitioning some of these assets back into the developed market. 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 the United States inventories in Information Technology remain low. If this continues to persist, it may provide better margins for the semi-conductor and technology areas relative to past cycles. Combine this with any demand/sell-through rebound or any pent up demand from the low levels of spending during the recent recession and it might prove beneficial to the sector.
Within non-U.S. developed markets, the Adviser continued to be substantially underweight in the United Kingdom versus the Index. This was mostly a function of success finding better growth stocks within Western Europe (particularly Germany and Ireland). 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 versus the Index. 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.
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 global 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 Morgan Stanley Capital International All Country World Growth Index (MSCI AC World Growth Index) is a subset of the MSCI All Country World Index (MSCI ACWI) and includes only the MSCI ACWI stocks which are categorized as growth stocks. The MSCI ACWI is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. As of June 2007 the MSCI ACWI consisted of 48 country indices comprising 23 developed and 25 emerging market country indices.
Copyright MSCI 2010. All Rights Reserved. Without prior written permission of MSCI, this information and any other MSCI intellectual property may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used to create any financial instruments or products or any indices. This information is provided on an “as is” basis, and the user of this information assumes the entire risk of any use made of this information. Neither MSCI, each of its affiliates nor any third party involved in or related to the computing, compiling or creating of any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages relating to any use of this information.
For additional disclosure on the Composite, please click here.
