Equity Performance — 2007

Equity markets posted mixed results in 2007 as domestic equity markets grappled with the effects of asset write-downs in the Financial Services sector as well as recessionary fears which surfaced towards the end of the year. Growth indices outpaced value indices as equity investors exited Financial stocks which have heavy weightings in value indices. Small cap stocks finally experienced the correction we had expected and significantly underperformed large cap stocks.

Eric Fuhrman
Analyst
Equity Investments

While fears of reduced consumer spending, turmoil in the housing market and related sub-prime debt caused significant declines for Consumer Discretionary and Financial Services stocks, six GICS economic sectors posted double digits gains. The Energy, Utilities, Basic Materials, Consumer Staples, Telecommunications, and Industrials sectors all benefited from a broad based re-weighting of equity portfolios.

HGK’s Large Cap Value product returned 7.20% versus returns of (0.17)% for the Russell 1000 Value index and 5.50% for the S&P 500. The product approached $2 billion in assets under management and began managing money for Citigroup Smith Barney’s separately managed accounts platform as a Fiduciary Services manager. This year’s outstanding performance can be attributed to a significant underweighting in the Financial Services sector and accretive security selection in most economic sectors. Stocks that were among the biggest contributors this year were Hess Corp (HES), Freeport McMoran (FCX), Ingersoll Rand (IR), Marathon Oil (MRO), and General Dynamics (GD).

HGK’s Midcap Value product returned (1.80)% versus returns of (1.43)% for the Russell Midcap Value index and 2.83% for the S&P Midcap Value. Performance was aided by both an overweight and excellent security selection in the Energy sector as well as an overweight in Technology. Stocks that contributed to returns this year include Cypress Semiconductor (CY), Hess Corp (HES), National Oilwell Varco (NOV), Charles River Labs (CRL), and Parker Hannifin (PH).

HGK’s Large Cap Core product returned 11.97% versus 5.50% for the S&P 500 and 5.77% for the Russell 1000 indices. Outperformance was a result of an underweighting in the Financial Services sector and security selection in most economic sectors. Stocks that contributed to performance were Garmin (GRMN), Freeport McMoran (FCX), Express Scripts (ESRX), Archer Daniels Midland (ADM), and XTO Energy (XTO).
HGK’s All Cap Value returned 8.85% versus (1.02)% for the Russell 3000 Value index and 5.50% for the S&P 500. The product benefited from an underweighting in the Financial Services sector and careful security selection in Energy, Industrials, and Information Technology. Stocks that contributed to returns this year include National Oilwell Varco (NOV), Cypress Semiconductor (CY), Hess Corp (HES), Biosite (BSTE), and Lifetime Brands (LCUT).

On June 30, 2007 HGK launched a Small Cap Value fund. The product is managed with the same investment philosophy and discipline as HGK’s other value products and invests in companies with market capitalizations between $200 million and $3.7 billion. For the six months ending December 31, 2007, the fund returned (7.13)% versus (13.08)% for the Russell 2000 Value and (10.45)% for the DJ Wilshire Small Cap Value. Stocks that contributed to outperformance include Mantech International (MANT), Flir Systems (FLIR), Whiting Petroleum (WLL), Aeropostale (ARO), and Par Pharmaceutical (PRX). .

Eric Fuhrman
Analyst
Equity Investments