August xx, 1999
Dear Shareholder:
The Daruma Fund rebounded in the second quarter
posting a 13.5% return. The S&P MidCap Index was
up 14.2% and the average mid-cap mutual fund was up
12.5%*. At June 30th, the Fund's net asset value was $11.57.
Value investing showed signs of life, though technology stocks
continued to dominate market returns.
The second quarter witnessed the long-anticipated broadening
of the market. Small- and mid-cap returns exceeded large-cap
returns for only the second time in the past
three years. We don't know whether this phenomenon was just
a teaser, or whether we are finally entering a period of
smaller-cap outperformance. We do know that
valuations of the smaller companies remain extremely attractive.
The dramatic increase in mergers, acquisitions, and leveraged
buy-outs confirms this.
We are paying more attention than ever to balance sheets and to valuation.
We have lightened our technology exposure and increased our healthcare
exposure. The healthcare sector is extremely out of favor at the moment,
which makes for some near-term volatility. However, healthcare stocks
are undervalued and stand to benefit from government funding increases
this fall. We have also added a handful of banks whose earnings we
believe will improve and who have attractive franchises. We expect a
pick-up in banking consolidation to drive returns in the financial
services sector.
Other Fund news: The Fund's annual report will be sent to you as soon as
Ernst & Young completes its audit, which we expect will be by the end of
August. We have a new e-mail address. You can reach us at
[email protected], or call us at 800-435-5076. We like hearing from you.
Sincerely,
Mariko O. Gordon, CFA
President
All performance information is presented on a total return basis and reflects
the reinvestment of distributions. Past performance is no guarantee of
future results. Share prices will fluctuate, so that shares may be worth
more or less their original cost when redeemed. The S&P MidCap is an
unmanaged index of domestic common stocks.
* Lipper Analytical
