Following a very strong 2013, the first quarter of 2014 has
seen much more subdued equity market returns. Where
2013 had several major U.S. stock market indexes generate
total returns in excess of 30% with low levels of volatility,
2014 has produced negligible changes for many of
those indices.
Given that we have recently celebrated the fifth anniversary
of the bull market for stocks that began on March 6, 2009,
we are not surprised to see the market become more
challenging. There are very few bull markets that endure
for five years and fewer still that have lasted for six years.
The trend towards a more selective market has continued
to play out in 2014 as the importance of stock picking in
generating competitive returns has made itself increasingly
evident. Following a strong year, it is not surprising to see
the stock market go through a period of digestion.
It is hard to gauge the strength of the broad U.S. economy
during the quarter because the unusually cold weather
had an atypical impact on so much of the country. We
believe that the economy remains in a slow growth mode,
domestically as well as overseas.
We saw several large merger and acquisition (M&A)[[Merger and acquisition (M&A) is a general term used to refer to the consolidation of companies. A merger is a combination of two companies to form a new company,
while an acquisition is the purchase of one company by another in which no new company is formed.]]
transactions last year, and the trend has continued in the
first quarter. Looking ahead, we continue to expect the M&A
environment to be robust as companies starved for growth
seek to find it through accretive acquisitions. Although
interest rates remain at historically low levels, cues from
the Federal Reserve (Fed)[[The Federal Reserve Board (“Fed”) is responsible for the formulation of U.S. policies designed to promote economic growth, full employment, stable prices, and a sustainable
pattern of international trade and payments.]]
about a rising rate environment
may be helping to pull forward deals.
As we noted at the end of last year, we remain very
high active share[[Active share reflects the percent of a portfolio that differs from the index.]]
managers. Because of our bottom-up,
fundamental-driven stock selection process, our portfolios
tend to look very different than the benchmark index.
Our goal is, as it always has been, to invest where we find
earnings and cash flow growth, good management teams
and solid balance sheets.
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