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The following letter is in response to a letter published last week.
Dear Editor:
Last week Henry Schwarzberg questioned whether the S&P 500 is an appropriate benchmark for our mutual fund. In his words, “The fund's market capitalization, price to book, and holdings clearly constitute a materially different sub-set of the same broad market and the fund needs to be measured against an appropriate index that reflects that.”
Mr. Schwarzberg makes an assumption that the stocks we currently hold reflect the universe of stocks from which we can choose. While our fund can invest in all market caps, all style boxes and even non-U.S. holdings, we are not required to make investments in every sub-set of our universe. The fact that our current holdings are different from those of the S&P 500 is not because they are outside of our universe, but because our process has steered us elsewhere at this time. At some point, large-caps will have another day in the sun and our process will migrate our portfolio there.
Over the last six and a half years, Lipper has categorized our fund as multi-cap core, mid-cap growth, small-cap value, small-cap core, and currently mid-cap growth. The chart from Brent Bentrim’s returns based style analysis, which was published three weeks ago, confirms that our fund’s style mix has changed a lot over time. Because our fund’s mix of sectors and styles changes, it is doubtful that any single index or blend of indexes will have a high R-square with our fund over the long-term.
The ability to change the fund’s style and sector mix is key because the market is always changing. As styles and sectors move from undervalued to overvalued, investors need to adapt. Fund’s that must stay in a box, even when it is overvalued, are destined to disappoint their shareholders.
We draw from a large talent pool to recruit skilled investors to take advantage of the new opportunities that arise when the market changes. Measuring our fund against a series of specific benchmarks, depending on our actual holdings, does not attribute any value to our process of choosing to be in the right sectors and styles at the right time.
Our fund is geared to an investor whose primary criterion is beating a broad-based market index, and the S&P 500 is as good a benchmark of the broad market as any.
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