The Fund’s Investor shares declined 0.70% for the quarter, outperforming the S&P 500 Index return by six basis points. Security selection was the primary driver of outperformance, as strong selection in the information technology, real estate, and consumer staples sectors offset weaker selection in financials and industrials. Sector allocation also contributed positively to relative results overall, primarily due to a significant underweight to the energy sector. The Fund maintains this underweight largely due to its exclusion of oil and gas exploration and production companies†.
The top three contributors to relative performance this quarter were all from the information technology sector. The largest of these was global payments company Mastercard, which gained almost 16% after reporting strong year-over-year sales growth for the fourth quarter. The company’s recent acquisition of VocaLink, a payment-technology provider, has improved its competitive advantage by providing it with a fast infrastructure that would have otherwise taken time some time to build out.
Intel rose almost 14% for the quarter after the computer-components manufacturer reported record fourth-quarter results. Revenue, operating cash flow, operating income, and net income all broadly beat estimates. The company shift away from its PC business to focus on its data-centric business, which accounted for about half of fourth-quarter revenue, signals an inflection point for its growth outlook. Management raised its 2018 guidance, expecting both revenue and earnings to exceed prior consensus estimates.
Lam Research Corporation, which supplies water fabrication equipment (WFE) and services to the semiconductor industry, also had a solid quarter, gaining more than 11%. The company reported strong results for the fourth quarter, beating consensus estimates and its own guidance for the seventh consecutive quarter. Lam has seen continued success in the WFE market and continues to expand its market share, and management expects revenue growth to remain strong in 2018.
Other top contributors for the quarter included CBRE, a commercial real estate services firm that rose almost 9% after reporting fourth-quarter results that exceeded estimates and issuing better-than-expected guidance for 2018, and Estée Lauder, which manufacturers skin care, makeup, fragrance and hair care products. Estée Lauder, which gained more than 17% for the quarter, has seen sales growth accelerate in recent quarters, and reported that the acceleration continued through the holiday season, driven by a successful e-commerce strategy and rising demand in Asia.
The largest detractor from the quarter’s relative results was Unum Group, which provides financial protection benefits in the US and UK. The stock dropped almost 13% for the quarter amid a more uncertain earnings outlook, as the company is faced with across-the-board tailwinds and the US and the potential for elevated claims in the UK, as Brexit continues to cloud the nation’s employment picture. Unum’s fourth-quarter results were fairly mixed, led by strong domestic sales growth, in-line earnings, and higher expenses.
Prudential Financial was another significant detractor within the financials sector, declining more than 9% for the quarter. The insurance and financial services group reported mixed results for the fourth quarter, with strong revenues and margins in its annuity and asset management business, but weak underwriting margins in its life, group insurance, and international businesses.
Pharmacy retailer Walgreens Boots Alliance also dropped more than 9% for the quarter, after Amazon.com, Berkshire Hathaway**, and JPMorgan Chase** announced a joint not-for-profit venture to lower health care costs for their U.S. employees, sparking worries that the collaboration could disrupt sales for traditional drugstore and pharmacy retailers.
Non-benchmark holding Domtar, which produces, paper, pulp and personal care products, was another significant detractor, declining more than 13% for the quarter. The stock dropped after the company reported disappointing preliminary results for the fourth quarter, with a sharp loss attributable to a large impairment of goodwill related to its struggling personal care segment.