The Cambiar Aggressive Value Fund returned -13.3% in the second quarter of 2010, vs. a return of -11.3% for the Russell 3000.  While trailing the benchmark for the quarter and year-to-date timeframes, the Fund remains ahead of the benchmark over the trailing 1-year.  As mentioned in previous commentaries, the concentrated nature of the Aggressive Value Fund make this strategy more appropriate for investors who have a longer-term timeframe and higher risk tolerance.

 

This August marks the three-year anniversary for the Aggressive Value Fund.  To say that the capital markets have been a rollercoaster during this timeframe would be a significant understatement; that said, the Fund’s attainment of a 3-year track record is another important data point, and we are proud of the Funds’ performance since inception.

 

While disappointed in our inability to do a better job protecting capital in the quarter, one silver lining from the sell-off is that it enabled the Cambiar investment team to buy a number of positions that offer a compelling risk/reward profile.  Many of the Fund’s holdings are now trading at or near all-time trough valuations; this low multiple on low expectations (i.e. P/E, P/B) scenario sets the stage for a material revaluation should these companies deliver on the earnings front and sentiment towards equities improves. 

 

The second quarter provided a good illustration that you can analyze a company from every possible angle, but there is a serendipitous component to investing that cannot be predicted.  The Deepwater Horizon Rig is one such example.  The Fund owned British Petroleum and Anadarko, two companies that are involved in the ongoing oil spill in the Gulf of Mexico.  While Cambiar’s quick response to liquidate both positions protected the Fund from material capital losses, both of these names were negative contributors to performance.  On a brighter note, the Fund’s position in Mariner Energy neutralized the downside from BP and Anadarko; an all-cash offer was made for Mariner by Apache early in 2Q, which prompted Cambiar’s exit from the position.  The Fund’s energy weighting is now lower than is previous quarters; that said, we continue to believe that there is a secular investment opportunity in the sector.  

 

Cambiar’s technology positions comprised another drag on performance in the quarter. While virtually nothing in technology worked during the quarter, an overweight allocation and lackluster stock performance did not help matters.  Similar to other cyclical sectors, technology is correlated to the direction of the economy.  Not surprisingly, these stocks lag when sentiment turns negative toward the outlook for the economic recovery.  While we would agree that the trajectory of the recovery is slowing, the valuations of our tech companies imply zero or negative growth in many cases.  We simply do not concur and are staying the course with many of our positions.

 

As is consistent with the Fund’s pursuit of investments on a global basis, the portfolio held approximately 30% of Fund capital in international positions during the second quarter; most of these holdings were domiciled in Europe.  Although each of these international holdings were chosen for their attractive fundamentals, a secondary theme was to identify situations where such companies had Euro expenses and non-Euro revenues; such a profile should result in above-consensus earnings in the face of a weaker Euro.  While these positions produced a modest performance headwind for the quarter due to currency translation, Cambiar remains constructive on this exposure within the Fund.

After moving sharply higher over the past year, the markets have been in a state of decline since late April.  The catalyst has been a topping in various leading economic indicators, as well as a ratcheting downwards of economic expectations.  The market sell-off has caused treasury yields to plummet in the U.S., with similar appreciation in other risk haven asset classes.  The divergent moves in stocks versus bonds has caused the equity risk premium (ERP) to rise from a seemingly normal level in the early spring back to a level consistent with historically high risk aversion and market stress.  Cambiar calculates the current ERP to be at 4.7%; to put that in perspective, there are few breaches above the 3.5% level over the past 50 years. 

 

Yet while the last notable rise in the ERP was due to the credit crisis, the financial markets today appear to be relatively stable.  It is Cambiar’s opinion that the bigger cause for the today’s elevated ERP is an acute lack of investor confidence. 

 

The paradox for value investors like Cambiar is that such sell-offs present very attractive entry points for longer-term investors.  As such, we remain cautious on the market path from here, but are being opportunistic in those situations when the risk/reward profile is particularly compelling.  As always, we appreciate your continued confidence in Cambiar Investors.