Equity Performance — 2005

Equity markets showed resilience in the face of a rising Fed funds rate and increasing energy and commodities prices to post modest gains in 2005. Medium and long term interest rates did not rise in tandem with short rates, creating an inversion in the yield curve at year end. Prevailing low interest rates helped keep companies’ discount rates low, in turn boosting the value of equities. Momentum in December decelerated following a strong November rally.

Eric Fuhrman
Analyst
Equity Investments

For the second consecutive year, Energy stocks considerably outpaced the broad market as the price of crude oil reached an all time high of $70/barrel at the end of the summer and closed the year above $60. Stocks in the Healthcare, Basic Materials, and Utilities sectors also performed well as investors capitalized on commodity prices while shifting away from stocks reliant on an overextended consumer base. Consistent with both near and long term trends, value stocks outperformed growth stocks and small and mid capitalization stocks outperformed larger stocks.
HGK’s Large Cap Value product returned 10.98% versus returns of 7.05% for the Russell 1000 Value index and 4.91% for the S&P 500. This outstanding performance is most greatly attributed to sector weightings as the product had its biggest relative overweighting in Energy and Healthcare, the two best-performing sectors of the market. Security selection and timely trading also contributed to out-performance. Stocks that were among the biggest contributors this year were Phelps Dodge (PD), Burlington Resources (BR), Marathon Oil (MRO), Amerada Hess (AHC), and Norfolk Southern (NSC).

HGK’s Midcap Value product returned 8.76% versus returns of 12.65% for the Russell Midcap Value index and 11.60% for the S&P Midcap Value. This was the third time in the last four years that midcap value was the top-performing segment of all Russell U.S. equity indices. Decisions to be overweight in Energy and Basic Materials were good but diminished by security selection. We remain committed to other key sector decisions, such as an overweight in Information Technology and an underweight in Utilities. Stocks that contributed to returns this year include Reebok (RBK), Transocean (RIG), Men’s Warehouse (MW), Allergan (AGN) and Everest Reinsurance (RE). The product outperformed in the second half of 2005 with returns of 7.57% for the Russell Midcap Value and 7.18% for the S&P Midcap Value indices.

HGK’s Large Cap Core product returned 5.31% versus 4.93% for the S&P 500 and 6.27% for the Russell 1000 indices. Performance benefited from decisions to overweight the Healthcare sector and underweight the Financial Services Sector. Stocks that contributed to performance were Georgia Pacific (GP) which was tendered for a 42% gain, Freeport-McMoran Copper & Gold (FCX), Hewlett Packard (HPQ), Coventry Healthcare (CVH), and Marathon Oil (MRO).

HGK’s younger product, All Cap Value, had an excellent year in 2005 returning 10.76% versus 6.85% for Russell 3000 Value index and 4.91% for the S&P 500. For the past two years the product has had annualized returns of 12.16% versus 11.78% for Russell 3000 Value and 7.86% for the S&P 500. The All Cap Value product consists of stocks from the Large Cap Value and Midcap Value products as well as several small capitalization stocks. The capitalization range is similar to the Russell 3000 Value with about 80% large cap stocks.

Eric Fuhrman
Analyst
Equity Investments