April 23, 1999
Dear Shareholder:
The stock market appears to be following
along the same narrow, volatile track that
it has been over the past year as a limited
number of large-cap growth stocks continue
to drive returns while small- and mid-cap
stocks continue to get dumped. The S&P 500
Index posted a 4.98% gain in the first quarter,
while the S&P MidCap index, Russell 2500 Index
and Russell 2000 Index all ended in negative
territory, down 6.4%, 4.7% and 5.4%, respectively.
The Daruma Mid-Cap Value Fund ended the quarter
down 14.1%. Its closing net asset value at March
31st was $10.19.
The divergence between what's "hot" (the "nifty
twenty" large-cap growth stocks and the Internet
stocks) and what's "not" (small and mid-cap value
stocks) has never been so large in history by
almost any measure, be it valuation, technicals
or money flows. Indexing and day trading have
become self-fulfilling prophecies. Investors are
pouring money into large-cap stock index funds at
a phenomenal rate, accounting for eighty-two percent
of the $16 billion in new money going into mutual
funds from January 1st through March 25th. At the
same time, the flows out of the smaller cap funds
have been unprecedented. Too many investors are
chasing yesterday's winners at valuation levels that
have gone through the stratosphere.
For value investors in particular, this market has
been a curse. As investors (including many portfolio
managers under pressure to deliver returns) continue
to bid up the shares of the few "hot" stocks, value
investing has taken a beating. Some question whether
value investing is dead. We don't. We believe that
eventually wisdom will prevail over speculative excess.
In our experience those patient investors who have done
their homework, choosing companies based on solid
fundamentals and trading at reasonable prices will
be handsomely rewarded.
When that will happen we can't predict. We don't
want to underestimate the power of human emotions
to cause valuations to overshoot on both the upside
and the downside. Even if the economy continues to
do well any number of events in this volatile market
(global unrest, political instability, currency
devaluations, etc.) can trigger a fall. If the
market darlings suddenly correct, smaller stocks
will not be immune. However, they should be better
situated for the inevitable rebound given their sound
fundamentals and relatively cheap prices.
As fellow Daruma Fund shareholders we realize how
frustrating it can be to watch the Fund go down while
witnessing the Dow crossing 10,000 and the S&P 500
Index delivering 5% returns. We are determined,
however, to stay the course and do what we do
best-finding the 35 best stocks that meet our
bottom-up value investment philosophy.
We thank you for your patience.
Sincerely,
/s/
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 than their
original cost when redeemed. The S&P MidCap, the
S&P 500, the Russell 2500 and the Russell 2000 are
unmanaged indices of domestic common stocks.
