Logan Growth - Market Update – August 2007

The equity and fixed income markets’ recent volatility in reaction to the sub-prime meltdown has prompted us to loudly and regularly dole out the following words of advice to all who will listen:

“Don’t panic!”

Could the sub-prime debacle turn into a 1987-style crash? Not likely. Historic data provided by InvesTech shows that in the months immediately prior to the 1987 crash, short and long term rates had spiked 200 to 300 basis points thereby creating an extremely hostile interest rate environment for equities. With the Fed being accommodative, that is certainly not the case today. To be sure, conditions in the lending and real estate business are serious and should not be ignored. They should, however, be kept in perspective with the bigger picture. Furthermore, this pullback and volatility was not a surprise to us.  As we wrote in our 2Q07 report:

“Looking at our technical indicators, we’re overdue for an interim correction, but the longer term trend remains bullish for now. Thus, we look for short-term cyclical corrections, rather than longer-term secular ones. Also, volatility is on the rise – a trader’s paradise, but it creates a real test to the staying power of longer term investors.”

We still believe this assessment to be accurate. As we entered the month of August – which has been notoriously volatile in recent years, we were seeing negative divergences and conditions which indicated that an intermediate correction of 7% - 10% was possible. However, given our belief that this pull-back would be a temporary correction – and not a major trend change – we’ve kept to our discipline of focusing on the companies that will be able to deliver superior long-term future earning growth. The higher end of that potential pull-back range has been briefly touched by at least one of the major indices and the start of the bottoming process has begun.

It is important to remember that the current base-building will last well into September and the quality of this bottoming process will reveal a lot as to the health of this aging bull. It is too soon to tell, but given the added benefit of the Fed’s surprise discount rate cut, we believe that the stage is now potentially set for a meaningful rally into year-end.

Some quick comments on why we remain bullish for the near-term:

• The NYSE high-low indicator recently hit low levels seen only 34 times in the past eleven years. The market has been higher three months later 33 out of those 34 times with the average gain being almost 11%. The one time the market was lower, it was off a mere 1.8%.

• Various technical indicators of the market’s health are still in solidly bullish territory. Furthermore, even before the Fed’s recent cut, interest rates had pulled back from levels that have historically signaled danger for the equity market.

• Although the PPI was up 0.6%, the core rate of inflation was up only 0.1%. With the PCE within the Fed’s acceptable range, the Fed had room to ease up on the discount rate without being overly concerned about sparking new inflation. The odds now favor further cuts by the Fed at one of their Fall meetings. Such cuts do not remove the possibility of a recession, but it pushes the timeframe out and reduces the potential severity.

• The market is showing classic signs of being emotionally oversold. The negative divergences have resolved into oversold readings and it’s almost a case of the “nowhere to go but up,” at least in the near-term.

• Our forward looking earnings work continues to indicate that Logan’s names, as a group, are poised to deliver better than average earnings growth.

• Over the past few quarters, style analysis data has started to confirm our projection that relative performance between Growth & Value, Large Cap & Small Cap, and even Domestic Markets & Emerging Markets are all starting to reverse their multi-year trends and are now swinging back in favor of Domestic Large Cap Growth. A case can also be made that money which has chased real estate for so long is now flowing back into the relatively safe and liquid of high quality US equities.

Most importantly, even with the current market volatility, the Logan Capital Growth portfolios are outperforming their benchmark Russell 1000 Growth index. Both portfolios are meaningfully outperforming on a year-to-date basis and both have increased their relative lead over the index during July and August.

If you have any questions about Logan Capital’s outlook or our investment process,
please feel free to contact us at 215-569-1100

Logan Growth Composite contains fully discretionary large cap growth equity commission accounts.  For comparison purposes the composite is measured against the Russell 1000 Growth and the S&P 500 indices.  The minimum account size for this composite is $100 thousand; prior to March 31, 2003 the minimum account size was $300 thousand.

Logan Capital Management, Inc. has prepared and presented this report in compliance with the Global Investment Performance Standards (GIPS®). 

Logan Capital Management, Inc. is a privately owned registered investment adviser.  The firm maintains a complete list and description of composites, which is available upon request.

Results are based on fully discretionary accounts under management, including those accounts no longer with the firm.  Past performance is not indicative of future results. 

The U.S. Dollar is the currency used to express performance.  Returns are presented gross and net of management fees and include the reinvestment of all income.  Net of fee performance was calculated using actual management fees.  The annual composite dispersion presented is an asset-weighted standard deviation calculated for the accounts in the composite the entire year.  Additional information regarding the policies for calculating and reporting returns is available upon request.
The investment management fee schedule is as follows: 100 basis points on the first $5 million, 75 basis points on the next $20 million and 50 basis points on the $25 million thereafter.  The investment advisory fees charged for accounts whose market value exceeds $25 million are negotiable.  Actual investment advisory fees incurred by clients may vary.

The Logan Growth Commission Composite was created October 1, 2003.  *Effective August 1, 2000, Logan Capital Management, Inc. acquired the investment advisory accounts of Berwind Investment Management, L.P., and no material change in personnel responsible for the investment management process occurred.  

Logan Capital Management, Inc.’s compliance with the GIPS standards has been verified for the period April 1, 1994 through June 30, 2006 by Ashland Partners & Company LLP.  A copy of the verification report is available upon request.

Logan Large Cap Growth Composite contains fully discretionary large cap growth equity commission accounts.  For comparison purposes the composite is measured against the Russell 1000 Growth index.  The minimum account size for this composite is $1 million.

Logan Capital Management, Inc. has prepared and presented this report in compliance with the Global Investment Performance Standards (GIPS®). 

Logan Capital Management, Inc. is a privately owned registered investment adviser.  The firm maintains a complete list and description of composites, which is available upon request.

Results are based on fully discretionary accounts under management, including those accounts no longer with the firm.  Past performance is not indicative of future results. 

The U.S. Dollar is the currency used to express performance.  Returns are presented gross and net of management fees and include the reinvestment of all income.  Net of fee performance was calculated using actual management fees.  The annual composite dispersion presented is an asset-weighted standard deviation calculated for the accounts in the composite the entire year.  Additional information regarding the policies for calculating and reporting returns is available upon request.

The investment management fee schedule is as follows: 80 basis points on the first $25 million, 70 basis points on the next $25 million, 50 basis points on the next $25 million and 45 basis points on the $25 million thereafter.  The investment advisory fees charged for accounts whose market value exceeds $100 million are negotiable.  Actual investment advisory fees incurred by clients may vary.

The Logan Large Cap Growth Commission Composite was created October 1, 2003.  *Effective August 1, 2000, Logan Capital Management, Inc. acquired the investment advisory accounts of Berwind Investment Management, L.P., and no material change in personnel responsible for the investment management process occurred. 

Logan Capital Management, Inc.’s compliance with the GIPS standards has been verified for the period April 1, 1994 through June 30, 2006 by Ashland Partners & Company LLP.  A copy of the verification report is available upon request.