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Manager Commentary/Current
Issues |
| Westcore
MIDCO Growth Fund
Westcore Growth
Fund
Westcore Select Fund
Westcore International Frontier Fund
Westcore Blue Chip Fund
Westcore Mid-Cap Value Fund
Westcore
Small-Cap Opportunity Fund
Westcore
Small-Cap Value Fund
Westcore Flexible Income Fund
Westcore Plus Bond Fund
Westcore Colorado Tax-Exempt Fund |
Get
some insights on recent happenings with the market and our Funds
and how that may affect performance. Directly from our Portfolio
Managers, here is complete commentary on the most recent quarter's
happenings.
All commentaries are updated
as of March 31, 2008.
| Westcore
MIDCO Growth Fund |
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See complete
bios on the MIDCO Growth Research Team Members here.
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Amid a poor fundamental backdrop comprised of a
lethal combination of decelerating economic growth,
rising inflation and deteriorating earnings, the equity
market suffered a broad-based decline in the first
quarter where every sector in the Russell Midcap Growth
Index posted a negative return. The Westcore MIDCO
Growth Fund returned -12.10% during the quarter, modestly
trailing the Index return of -10.95%.
There weren't many places to hide, but we did manage
to perform a little better in the consumer discretionary,
energy and technology sectors relative to the benchmark,
mainly due to stock selection. Within the consumer
group, Netflix was a strong performer in the online
video rental space as it continued to grow its market
share at the expense of Blockbuster. Given the consumer
weakness, Crocs, a specialty footwear manufacturer,
detracted meaningfully during the quarter as global
sales continued to weaken.
Energy stocks held up relatively well as oil prices
continued to rise to record levels. We had been trimming
our exposure into this recent strength to a slight
underweight position, but our strong stock selection
helped us outperform in this group. Most of our outperformance
was due to Range Resources.
The technology group was down overall, but our underweight
position and better relative stock selection allowed
us to outperform the benchmark's technology exposure.
The biggest winner in this group was Take-Two Interactive
Software, which is a video game software developer.
Take-Two received an attractive buyout offer from
Electronic Arts which drove the stock higher. We trimmed
our position on the run-up, but we continue to hold
a position in anticipation of attractive growth prospects
for its business.
There were two sectors in the portfolio that were
the primary detractors from our relative performance.
While being modestly underweight both the financials
and industrials groups, our stock selection in each
was weak causing the drag on performance. Our industrials
exposure was weak due to our airline industry exposure.
BE Aerospace, Delta Airlines, Continental Airlines
and Spirit Aerosystems were all down on concerns of
a slowing economy and rising fuel prices.
It is clear the U.S. economy is slowing, but much
speculation and debate remains over whether or not
we'll enter an official recession. The Federal Reserve
has taken unprecedented steps to try and stabilize
the financial system and avoid any more collapses
like Bear Stearns. The global deleveraging process
can be long and painful to work through, and while
the all-clear signal hasn't sounded yet, the equity
market seems to have taken some comfort that the Fed's
solutions are working.
*Percent of portfolio as of 3/31/08.
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| Westcore
Growth Fund |
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Derek
J. Scarth
Co-Portfolio Manager
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Ross
G. Moscatelli, CFA
Lead Portfolio Manager
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Craig
W. Juran, CFA
Co-Portfolio Manager
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Throughout the quarter, volatility within the Russell
1000 Growth Index was record setting, with more than
54% of all trading days in the quarter seeing single-day
gains or losses of more than 1%. During panics, even
the best growth companies suffer as all values decline
under compressing multiples and as growth rates, once
believed to be solid, are questioned. Overall, the Fund
ended the quarter with a negative return of 14.11% versus
a 10.19% decline of the Russell 1000 Growth Index.
Positive attribution via stock selection was difficult
in the first quarter, as no sector within the Russell
1000 Growth Index exhibited positive absolute returns,
placing sector weightings at a premium. Our portfolio
was able to generate positive contribution with materials,
energy, health care and telecommunications; however
the negative contribution of our investments within
consumer discretionary, financials and technology silenced
the positives.
During the quarter, we continued to actively increase
the portfolio's average market-cap in key sectors such
as technology, industrials, healthcare and consumer
staples. In addition, our research led us to several
opportunities in the materials sector and "fire-sale"
situations in consumer discretionary, where our analysis
identified favorable risk/reward for the long term.
Overall, we continue to use market opportunities to
reinforce the highest quality names within our portfolio.
We firmly believe that while many of these same companies
were the first to be sold in the panic, they will also
be the first companies investors will return to as optimism
returns and quality growth once again becomes a focus.
Looking forward, we continue to believe the market
volatility will remain at a high level through first-quarter
earnings reports. However, every day we are finding
more and more opportunities for successful long-term
returns. As you have come to expect from us, we continue
to take a balanced approach to the portfolio, looking
for companies that have the opportunity for robust margin
expansion coupled with productivity gains, strong operating
profit growth, international growth opportunities and
healthy balance sheets.
*Percent of portfolio as of 3/31/08.
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| Westcore
Select Fund |
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Will
Chester, CFA
Lead Portfolio Manager
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Amid a poor fundamental backdrop comprised of a lethal
combination of decelerating economic growth, rising
inflation and deteriorating earnings, the equity market
suffered a broad-based decline where every sector in
the Russell Midcap Growth Index posted a negative return.
The Westcore Select Fund posted a return of -8.84% during
the quarter, meaningfully ahead of the Index return
of -10.95%.
There weren't many places to hide, but we did manage
to perform significantly better in the healthcare and
technology sectors relative to the benchmark, mainly
due to better stock selection. Healthcare was our second
largest sector at about 28% of the total portfolio exceeding
the benchmark's weight of 13%. The group was our top
relative contributor this quarter due to strong stock
performance from companies like St. Jude Medical and
Millennium Pharmaceuticals.
The technology group was a major contributor as well
due largely to two video game developers, Take-Two Interactive
Software and THQ, Inc. Both are benefiting from increasing
growth prospects for their businesses, but Take-Two
was especially strong due to an attractive buyout offer
from Electronic Arts. We also owned Electronic Arts
which as the acquirer was weaker on the news. We have
since sold both Take-Two and Electronic Arts. We continue
to hold THQ believing its growth prospects are favorable
given its inventory of video gaming titles.
The primary detractor of performance this quarter
was the consumer discretionary sector. This group continues
to be under pressure due to the slowing economy and
weak housing market. Most of our stocks in the group
did relatively well with the exception of Crocs. Crocs
is a specialty footwear manufacturer and was hit hard
after announcing a slowdown in both its domestic and
international sales. We sold the stock from the portfolio
in favor of investing the proceeds in better opportunities.
In addition, we were able to largely avoid the crisis
in financials by owning only a few asset managers and
not having any exposure to commercial banks.
It is clear the U.S. economy is slowing, but much
speculation and debate remains over whether or not we'll
enter an official recession. The Federal Reserve has
taken unprecedented steps to try and stabilize the financial
system and avoid any more collapses like Bear Stearns.
The global deleveraging process can be long and painful
to work through, and while the all-clear signal hasn't
sounded yet, the equity market seems to have taken some
comfort that the Fed's solutions are working.
*Percent of portfolio as of 3/31/08.
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| Westcore
International Frontier Fund |
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John C. Fenley,
CFA
Lead Portfolio Manager
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International small-cap stocks fell in the first quarter
amid a global downtrend in stock markets. The market
decline should come as no surprise to anyone familiar
with recent financial headlines: rising mortgage defaults,
collapsing credit markets, slowing economic growth,
higher food and energy prices. Any of these factors
alone can stall market appreciation so that all of these
factors playing out at the same time is alarming.
Our consumer services stocks performed well during
the quarter while its index component finished in negative
territory making this industry our best performer. Domino's
Pizza UK and Rightmove, along with our biggest contributor
to performance, Savills, are based in the United Kingdom,
making that our best-performing country. Savills is
a commercial real estate services provider that underperformed
significantly in 2007. We remained disciplined and added
to the position, and it has contributed nicely in 2008.
Distribution services and Singapore were our biggest
detractors to performance from a sector and country
standpoint, respectively. This primarily reflects the
weak performance of KS Energy. KS Energy along with
another Singapore based company, Raffles, were two of
our top three contributors to 2007 performance. Thus,
they have given back a bit of this performance in 2008.
With that said, they are among the names we expect strong
performance from over the next 12 months.
We have witnessed substantial write-offs in the financial
sector and that trend is spilling over into the industrial
sector. Overall, visibility for future earnings growth
has greatly diminished. As a result of the greater uncertainty
and collapsing credit markets, deal activity has come
to a grinding halt. All of this leads to the one glimmer
of hope that keeps us most excited about the portfolio;
valuations are attractive. In one year, our median holding
dropped from trading at 18x expected earnings to 11x.
The portfolio is now cheaper than what we experienced
during the 2001-2002 market correction. We feel that
owning fast growing, cash generative companies, trading
at extremely low valuations is the right formula in
most economic environments and especially during periods
of heightened market volatility.
*Percent of portfolio as of 3/31/08.
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| Westcore
Blue Chip Fund |
See
complete
bios on the Value Research Team Members here.
Attractive valuation and the defensive characteristics
of strong cash flow regained favor in the market, leading
the Fund to strong relative performance. This performance
was evident in healthcare, our consumer cyclical holdings
and in communications. While financials were among the
weaker segments, our positioning limited the overall
damage.
In healthcare, Zimmer Holdings was our best performer.
After a weaker third quarter report, Zimmer reported
a strong result in January and gave guidance that was
in line with our expectations and above what the market
had come to expect.
While the consumer is at risk in light of a weaker
economy and housing troubles, our holding of TJX Cos.
again proved its ability to do well even in this environment,
with earnings and cash flows up nicely. In addition,
our holdings of Starwood Hotels and Resorts performed
well as business and higher end leisure travel continue
to hold up well.
The communications sector was down 15% and among the
weakest in the S&P 500. However, Qualcomm (up 4%
in the quarter) continued to execute on the wireless
telecom market opportunity, generating strong cash flows
that led to a dividend increase and announced plans
to buy back 3% of the outstanding shares.
Our performance in financials was held back by developments
in our small remaining holding of MBIA Inc. Although
MBIA had raised capital that appeared to meet the rating
agencies hurdles, revised rating agency guidelines suggested
that uncertainty had increased again and we sold the
position. Our holding of INVESCO suffered from perceptions
of weaker equity markets. We continue to believe that
the free cash flow and improving franchise holds great
value for the portfolio over time.
As we progress through the year, we continue to believe
that the financial markets will find their footing as
credit concerns are quantified and liquidity risk subsides.
While we may be in a modest recession, the balance sheets
and cash flow generation of our portfolio companies
suggests very good upside as the financial markets stabilize.
We remain optimistic about our portfolio of large-cap
stocks that we believe are attractively valued based
on the intrinsic value of the free cash flow we expect
they will produce.
*Percent of portfolio as of 3/31/08.
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| Westcore
Mid-Cap Value Fund |
See
complete
bios on the Value Research Team Members here.
The first quarter continued the themes from the fourth
quarter as negative news tied to subprime lending, declining
home values, and rising commodity prices weighed on
investors. While we are disappointed to report that
we underperformed the Russell Midcap Value Index for
the quarter, our focus is on delivering superior long-term
risk-adjusted returns for our investors, and we believe
that the current environment is providing us with some
great opportunities to purchase stocks at significant
discounts to our estimate of their intrinsic value.
The three sectors that had the most positive impact
on performance results relative to the Russell Midcap
Value Index were consumer cyclical, energy, and commercial
services. TJX, a top consumer cyclical contributor during
the quarter, is well positioned in a slowing consumer
spending environment due to its off-price strategy.
Energy holding Range Resources was our best performing
stock in the first quarter as investors are beginning
to recognize the size and quality of its unbooked reserves
in multiple shale fields. While there was no stellar
performer within the commercial services sector, Waste
Connections was a key contributor. Waste Connections
reported solid quarterly results despite the negative
effects of a brief strike and higher fuel costs.
The three sectors that provided the greatest headwind
in the first quarter were REITs, capital goods and medical/healthcare.
General Cable has been a stellar capital goods performer
for quite some time, but had a soft quarter due to concerns
of an economic downturn. Mentor Corp., which develops,
manufactures, and markets aesthetic medical products,
had a soft quarter due to concerns that the consumer
slowdown was broadening into the more affluent segment
of the consumer market. We had mixed results in the
REIT sector with a top-ten performer, Camden Property
Trust, and a bottom-ten performer, Maguire Properties.
Maguire's stock price has been on a rollercoaster ride
this quarter as it announced it was exploring strategic
alternatives and later indicated this effort was being
halted. We are watching this situation closely.
The volatility in the markets over the past few months
has provided a difficult environment for investors.
However, the market volatility has created attractive
opportunities to add to existing holdings and to add
several new names to the portfolio. One measure we track
is the weighted average discount to our estimate of
intrinsic value for the portfolio. The current discount
is the highest we have seen over the past five years.
We believe this highlights our optimism for mid-cap
stocks. As in the past, this market downturn will pass,
and we believe the portfolio is well positioned as we
look ahead.
*Percent of portfolio as of 3/31/08.
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| Westcore
Small-Cap Opportunity Fund |
See
complete
bios on the Value Research Team Members here.
The first quarter continued the themes from the fourth
quarter as negative news tied to subprime lending, declining
home values, and rising commodity prices weighed on
investors. While we are disappointed to report that
we underperformed the Russell 2000 Index for the quarter,
our focus is on delivering superior long-term risk-adjusted
returns for our investors, and we believe that the current
environment is providing us with some great opportunities
to purchase stocks at significant discounts to their
intrinsic value.
The three sectors that provided the greatest contribution
to performance relative to the Russell 2000 Index were
consumer cyclical, technology and commercial services.
Bucking the negative trend in stocks tied closely to
discretionary consumer spending, Wolverine World Wide
produced strong, positive returns for the quarter. We
remain positive on the stock due to the strong international
growth opportunities for Merrell and its other brands.
Technology was one of the hardest hit sectors in the
first quarter, and the Russell 2000 Index technology
return was decidedly negative. Our outperformance in
the technology sector was driven by stock selection.
While there was no single holding that stood out, collectively
our technology positions held up in value much better
than those of the Russell 2000 Index. The main contributor
to performance in the commercial services sector was
Waste Connections, an environmental waste collection
company. Waste Connections reported solid quarterly
results despite the negative effects of a brief strike
and higher fuel costs.
Portfolio results were dampened by the negative contribution
from the interest rate sensitive, transportation and
consumer staples sectors. Transportation results were
largely tied to disappointing quarterly results from
Ultrapetrol Limited, a provider of river and ocean-going
vessels used to transport dry bulk goods and service
oil rig platforms. Weak quarterly results are attributed
to lower volumes and higher prices in its river business
segments. Consumer staple holding Casey's General Stores,
a small market operator of convenience stores, weak
quarterly results were largely the result of higher-than-expected
costs associated with severe weather conditions in the
Midwest.
The volatility in the markets over the past few months
has provided a difficult environment for investors.
However, the market volatility has created attractive
opportunities to add to existing holdings and to add
several new names to the portfolio. One measure we track
is the weighted average discount to intrinsic value
for the portfolio. The current discount is among the
highest we have seen over the past five years. We believe
this highlights our optimism for small-cap stocks.
Percent of portfolio as of 3/31/08.
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| Westcore
Small-Cap Value Fund |
See
complete
bios on the Value Research Team Members here.
- The first quarter continued the themes from the
fourth quarter as negative news tied to subprime lending,
declining home values, and rising commodity prices
weighed on investors. While we are disappointed to
report that we underperformed the Russell 2000 Value
Index for the quarter, our focus is on delivering
superior long-term risk-adjusted returns for our investors,
and we believe that the current environment is providing
us with some great opportunities to purchase stocks
at significant discounts to our estimate of our estimate
of their intrinsic value.
- The three sectors that provided the most significant
contribution to performance in the first quarter were
communications, commercial services, and utilities.
Our outperformance within communications came from
a combination of stock picking and the fact that we
were underweight the Index's worst performing sector
for the quarter. Strong stock selection also drove
our outperformance within commercial services. Collectively,
our positions in Ennis Inc. and CDI Corp. outperformed
the overall commercial services sector performance
of the Russell 2000 Value Index. Within the utility
sector, South Jersey Industries was the standout performer
as the stock held up much better than the sector as
a whole.
- The sector with the greatest negative contribution
to performance was consumer cyclical. Our biggest
disappointment was Tempur-Pedic International. While
we expected a slowdown in its business, we also believed
the attractive valuation and significant long-term
growth opportunities provided a margin of safety.
The REIT sector rebounded to some degree in the first
quarter and posted only a small negative return. Our
holding in Associated Estates Realty was a top ten
performer during the first quarter, up over 23%. However,
this bright spot was not enough to overcome the negative
impact from Maguire Properties. Consumer staples was
the next challenging sector for us in the quarter.
Casey's General Stores' weaker results were largely
the result of higher-than-expected costs associated
with severe weather conditions in the Midwest.
- The volatility in the markets over the past few
months has provided a difficult environment for investors.
However, the market volatility has created attractive
opportunities to add to existing holdings and to add
several new names to the portfolio. One measure we
track is the weighted average discount to our estimate
of intrinsic value for the portfolio. The current
discount is among the highest we have seen over the
past five years. We believe this highlights our optimism
for small-cap stocks. As in the past, this market
downturn will pass, and we believe the portfolio is
well positioned as we look ahead.
Percent of portfolio as of 3/31/08.
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| Westcore
Flexible Income Fund |
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Mark McKissick, CFA
Lead Portfolio Manager
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The first quarter of 2008 was one of the more newsworthy
in the last thirty years-unfortunately, most of the
news was negative for the economy. The Federal Government
reacted by taking unprecedented and extraordinary steps
to intervene in the markets. The Fed opened itself to
lending to primary dealers in addition to commercial
banks. They also established new lending programs in
an attempt to alleviate the severe illiquidity in the
credit markets. The Treasury Department also stepped
in with a massive plan directed at overhauling and restructuring
the regulatory process of the United States financial
system.
While the federal government has effectively stabilized
the markets through this extremely volatile period,
it is not clear that the underlying problems themselves
have been addressed. The asset deflation in the housing
sector appears to have further to go. At the same
time, we are facing the collapse of a pervasive credit
bubble due to weak underlying quality and reduced
debt-servicing capability. We believe this combination
will continue to exert downward pressure on the economy
as a whole. Finally, with oil prices over $100/barrel,
gold near $1,000/ounce, and a weakening U.S. dollar,
inflation may be a concern in the not too distant
future.
We have let the cash balance of the Fund increase
as overall market risk re-prices the high-yield market
downward, but we also have been selectively reinvesting
cash and repositioning the Fund as we see opportunities
to buy attractive securities. We continue to see securities
we find promising in the energy, utility, global technology
and cost competitive consumer staple industries. As
with all episodes like the market is currently experiencing,
many solid long-term investments are categorically discounted
to attractive long-term values as less patient, objective-constrained,
market participants choose to sell securities at what
we believe is the most inopportune time.
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Mark McKissick, CFA
Lead Portfolio Manager
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The first quarter of 2008 was one of the more newsworthy
in the last thirty years-unfortunately, most of the
news was negative for the economy. The Federal Government
reacted by taking unprecedented and extraordinary steps
to intervene in the markets. The Fed opened itself to
lending to primary dealers in addition to commercial
banks. They also established new lending programs in
an attempt to alleviate the severe illiquidity in the
credit markets. The Treasury Department also stepped
in with a massive plan directed at overhauling and restructuring
the regulatory process of the United States financial
system.
While the federal government has effectively stabilized
the markets through this extremely volatile period,
it is not clear that the underlying problems themselves
have been addressed. The asset deflation in the housing
sector appears to have further to go. At the same time,
we are facing the collapse of a pervasive credit bubble
due to weak underlying quality and reduced debt-servicing
capability. We believe this combination will continue
to exert downward pressure on the economy as a whole.
Finally, with oil prices over $100/barrel, gold near
$1,000/ounce, and a weakening U.S. dollar, inflation
may be a concern in the not too distant future.
We are selectively reinvesting cash and repositioning
the Fund as we see opportunities to buy attractive securities.
We continue to see securities we find promising in the
energy, utility, global technology and cost competitive
consumer staple industries. As with all episodes like
the market is currently experiencing, many solid long-term
investments are categorically discounted to attractive
long-term values as less patient, objective-constrained,
market participants choose to sell securities at what
we believe is the most inopportune time.
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| Westcore
Colorado Tax-Exempt Fund |
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Thomas
B. Stevens, CFA
Lead Portfolio Manager
Kenneth A. Harris,
CFA
Co-Portfolio Manager
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The Lehman Brothers 10-Year Municipal Bond Index returned
0.31% for the quarter and 3.84% for the last twelve
months. The Fund returned -0.14% for the quarter and
1.99% for the last twelve months. The Lehman Index of
Colorado-only bonds returned -1.38% for the quarter
and 1.16% over the past twelve months. Note: The Fund
returns are net of fees and reflect a single-state mandate.
Aggressive monetary easing by the Federal Reserve
did not alleviate concerns in the municipal market regarding
capital insufficiencies at the major monoline insurers
that provide third-party insurance protection to many
municipal issuers.
Another element dragging down municipal prices was
the failure of the municipal auction-rate securities
market to function normally. Liquidity providers did
not have adequate capital reserves to accept bonds that
were tendered to them.
"AAA" municipal bond yields average approximately
120% of the U.S. Treasury yield. Historically, the average
ranges between 80-90%, Opportunities are plentiful,
but with nagging credit and technical problems, this
attractive yield ratio may remain for an extended period.
The U.S. Supreme Court is expected to render a decision
in April regarding the Kentucky vs. Davis case. This
is a case which will determine whether an in-state resident
can be taxed on municipal interest income received from
out-of-state municipal securities.
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This information should not
be construed as investment advice. Investors must consider their
own situation before making an investment decision.
An investor should consider
investment objectives, risks, charges and expenses of the
Fund(s) carefully before investing. Click here for a prospectus,
which contains this and other important information. Please
read the prospectus carefully before investing.
Westcore Funds are
distributed by ALPS Distributors, Inc.
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