May 9, 2000
Dear Shareholder:
On March 31st, the Daruma Mid-Cap Value Fund closed at $11.90. Up 9.48% in
the first quarter, the Fund pulled ahead of the Russell MidCap Value Index,
which was up 1.01% and the Russell 2000 Value Index, up 3.82%.
Finally worried about higher interest rates, first-quarter earnings reports,
and extended valuation levels, anxious investors dumped high-price
technology stocks and moved into the blue chips at the end of the first
quarter. In the process, individual investors have been hard hit by margin
calls. While the most speculative stocks, often widely held by individuals,
have had a sharp correction, the large-cap tech stock bellwethers have held
up reasonably well.
Small- and mid-cap stocks continued to outflank large caps. The huge gap
between the performance of growth and value is starting to narrow and may
reverse itself. Although the Russell 2000 Growth Index was up 9.29% versus
3.83% for the Value Index for the quarter, Growth dropped 10.5% while Value
gained 47 basis points in March. This is the first time in six months that
value outpaced growth and is another indication that momentum in the
technology sector is beginning to wane.
Our biggest winner in the first quarter was Datatec (DATC). The news that
Cisco Systems formally endorsed the use of the company's e-deploy software
to Cisco's channel partners drove the shares of this deployment company up
over 100% in the quarter. Datatec's e-deploy software enables much more
rapid and accurate deployment of network devices than traditional deployment
meethods. In addition to Cisco, both Hewlett Packard and Cabletron announced
they would also be using e-deploy in their deployment efforts. These
high-profile endorsements along with strong, continued growth in the
company's backlog are bullish for the stock.
Policy Management Systems (PMS) was our biggest loser. The stock of this
insurance industry enterprise software company got crushed when it
preannounced lousy fourth-quarter results. Policy Management's recent
quarterly sales results have been erratic, hampered by the Y2K lockdown on
new enterprise software installations and by overall weakness in the
insurance industry. Rather than suffer through continued unpredictable
quarterly results as a public company while its business model evolves,
the board has decided to accept an offer from a leading Wall Street
buyout firm. Since then, a higher all-cash bid by EDS has emerged.
Our largest holding is Dentsply, the global manufacturer of dental
consumables and equipment based in York, PA. As we expected, revenue
growth accelerated in both its North American and German markets.
Many of its new products are being well received in the marketplace,
and manufacturing process improvements are boosting margins. Cash flows
continue to accelerate.
Sincerely,
Mariko O. Gordon, CFA
President & Chief Investment Officer
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 Russell MidCap
Value, the Russell 2000 Value and the Russell 2000 Growth are unmanaged
indices of domestic common stocks.
