Portfolio Review
During the second quarter, equity markets fell due to continued concerns about the credit crisis, the U.S. housing market and a potential recession. The broad equity market, as defined by our benchmark, The Russell 3000 Index, was down about 1.7% in the quarter. Housing prices in the U.S., which started to decline last year, continued their decline through the second quarter of this year. Problems in the sub-prime real estate market, which surfaced in the third quarter of last year, have grown at a meaningful rate. Global financial firms have now written off close to $300 billion due to the housing meltdown and the losses are still growing. The persistent rise in commodity prices, ranging from energy to steel to food crops such as corn, is increasingly defining the economy and equity markets in 2008. A powerful stock market rally from the March lows was reversed as energy prices appear to have crossed a threshold that the consensus believes the global economy cannot handle. Not surprisingly, the best performing sector in the Russell 3000 in the quarter was energy, which was helped by the price of crude oil reaching alltime highs. The worst performing sector was financial services, which was negatively impacted by the housing market and credit problems. Our investment focus has been on businesses that can handle the rise in input costs via their pricing power, and we will carefully maintain exposure to the energy and industrial companies that we believe can directly benefit from the rise in prices.

We feel strongly that the recent market weakness, though disconcerting, presents patient investors with many extraordinary opportunities to own quality stocks at attractive valuation levels that are levered to strong long-term demand trends,. While the Fed’s actions to lower interest rates and support the mortgage market serve as confirmation that the risk of slowing US growth outweighs the perceived risk of inflation, we believe that these actions also signal a critical commitment to stabilizing the US capital markets. As the impact of these and prior policy actions filter through the system, we think investors will begin to look toward a period of better growth. Meanwhile, unemployment remains modest, wage growth is contained, international corporate and consumer spending trends remain positive and corporate earnings, outside of financial and consumer discretionary companies, are performing well. Taken together, the backdrop of what we believe is a temporary decline in stock prices and a favorable monetary policy is advantageous to the Rorer investment process. We believe our emphasis on high quality companies, trading at low relative valuations, will help us to continue outperforming the market in the years ahead.