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As of June 30, 2010 The second quarter of 2010 proved to be challenging with most equity indexes suffering double digit declines. Blue Chip Value Fund’s net asset value return was a disappointing -14.83%, compared to its benchmark, the S&P 500 Index which returned -11.42%. Previously, we have written about the length of the low-quality, low share-price “junk” rally that began in March 2009 and the fact that it was getting “long in the tooth” by historical standards. The duration of such rallies has typically been 10 months. During the second quarter, this rally came to an end and the market began to reward companies with better fundamentals. Early in that process the Fund’s performance relative to the benchmark began to improve. However, as economic indicators peaked and the recovery appeared to be slowing, the Fund’s significant exposure to economically sensitive companies led the Fund to underperform. During the second quarter we shifted the portfolio towards less economically sensitive companies. We believe that there will be slow economic recovery and modest job growth through 2011, most likely due to uncertainties in Europe, risks from state and local budget deficits and strained consumer confidence. With these uncertainties in mind, management reduced the Fund’s borrowing under its line of credit by 10% during the first quarter and a further reduction of 20% was made during the second quarter. The entire borrowing was repaid shortly after quarter-end as a part of management’s risk reduction efforts. The line of credit remains open and the Fund may borrow pursuant to the line in the future in accordance with its investment objective and policies. Fund holding Qualcomm Inc. a designer, manufacturer and marketer of digital wireless telecommunications in the communications sector, continued to struggle in the first half of 2010. A large amount of Qualcomm’s cash flow comes from royalty payments that are calculated as a percentage of a phone’s realized price. This company has not grown as fast as projected this year as a result of phone providers selling phones for lower than expected prices to end users. We believe that the diffusion of 3G technology around the globe, which drives higher priced smart phone usage, together with an improving economy over time, should bring help Qualcomm’s business. Dell Inc., a PC and software peripherals provider was among the Fund’s bottom performers in the second quarter. Its stock remained one of the most out-of-favor technology sector stocks in the market. We do not share this view and believe that Dell’s exposure to the current corporate PC upgrade cycle is underappreciated. During the quarter, the stock saw a large downward move soon after the CEO announced that his focus is on growing cash flows rather than on achieving short-term profit margin targets. We applaud this focus and believe that if the company executes on this plan, the market should properly value the stock over time. Qualcomm and Dell contributed to the communications and technology sectors being the Fund’s worst performing sectors relative to the benchmark, the S&P 500 Index for the second quarter. Quanta Services Inc., a provider of specialty contract services to electric power, gas, and telecommunications customers, was the Fund’s top performer within the commercial services sector. It announced quarterly results that were better than the market expected. More importantly, we believe that data indicates new business awards should pick-up, supporting our view that slower spending was only temporary. Campbell Soup Co. was also up for the quarter, helping consumer staples to outperform. Merchandising improvements and increasing demand given the economic environment, continued to drive improving results. Quanta and Campbell Soup contributed to the commercial services and consumer staples being among the Fund’s best performing sectors relative to the benchmark index for the second quarter. As noted above, investors have become increasingly skeptical of the U.S./global recovery as a number of economic indicators have flashed caution signals. Challenges remain, among them car and housing sales have contracted after government stimulus programs expired, job creation remains anemic, and persistently high unemployment rates continue to point to a consumer that cannot be expected to be the engine driving strong GDP growth. While we believe recent slowdown concerns may prove to be a typical correction from both a market and economic standpoint, we are monitoring the situation closely. We continue to believe that over the next year, companies with strong fundamentals should be rewarded by investors. As always, we want to thank our shareholders for their continued support in these volatile market conditions. Sincerely, The Investment Adviser’s Commentary above contains certain forward-looking statements about the factors that may affect the performance of the Fund in the future. These statements are based on Fund management’s predictions and expectations concerning certain future events and their expected impact on the Fund, such as performance of the economy as a whole and of specific industry sectors, changes in the levels of interest rates, the impact of developing world events, and other factors that may influence the future performance of the Fund. Management believes these forward-looking statements to be reasonable, although they are inherently uncertain and difficult to predict. Actual events may cause adjustments in portfolio management strategies from those currently expected to be employed. |
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