Depressed stock valuations combined with hopes that the economic decline was abating spurred investor confidence throughout the quarter.  This renewed optimism coupled with record cash balances parked in money-market funds provided plenty of dry powder to fuel a market rally.  All major stock indexes posted double-digit gains.

Although all market sectors rose in the period, financial service stocks skyrocketed after an averted collapse of the banking system.  A declining dollar and Chinese stockpiling triggered rebounds in the energy and commodities-related companies.  Industrial, technology and consumer discretionary stocks advanced in anticipation of stronger economic growth to come later this year or early next year.  In addition, the strongest performing holdings within each sector were dominated by smaller, low quality, low P/E and low price stocks.  Roxbury’s All-Cap Fund appreciated 14% during the quarter, slightly behind the Russell 3000® Index.  The Fund is up approximately 2% for the year, versus the Russell 3000® which is up 4%.    

The environment today is challenging.  The global recession continues, but the pace of decline is slowing.  There are reasons to believe that a recovery is coming based on stimulus spending, easier comparisons, and the draw-down of excess inventories.  But the strength of the subsequent rebound is in question, and likely the U.S. will be experiencing another jobless recovery, at least for the near term.

We believe slower growth environments ultimately play well into Roxbury’s quality focus.  During tough times, it’s the stronger companies that continue to garner market share.  Focused managements, low-cost production, technology advantages, regulatory requirements/restrictions, and other competitive barriers are critical to success.  Companies that exercised financial discipline over the past few years are in a position today to acquire distressed competitors or assets at bargain prices, repurchase their own shares at a discount, or otherwise deploy capital at attractive returns.

The recent bull rally has helped suppress the earlier panic by investors, and has calmed many of the general public’s fears.  Consumer and business confidence have been improving, but remain at low levels.  Valuations still look attractive for the long-term investor, but the recent rally has reduced the number of bargains that were available just three months ago.

Historically, stocks have tended to anticipate recoveries before they take hold.  Given the fragile state of affairs, another market correction is possible, especially if the anticipated recovery is delayed.  As always, we encourage investors to take a long-term view, especially given the opportunities we see today from a bottom-up, fundamental perspective.

Very truly yours,

Jeffrey Sexton, Portfolio Manager