Fund performance On a gross-of-fees basis, the Columbia Small Cap Value Fund I underperformed its
primary benchmark, the Russell 2000 Value Index, returning 10.15% compared to the
benchmark’s 11.59%. For up-to-date performance information, please check online at
columbiamanagement.com.
Where has quality gone ?Most investors would prefer to use active managers who invest in high-quality companies.
As part of our philosophy, we believe that a strong balance sheet is one of the attribute sthat defines a high-quality company. Over an extended observation of the small-cap value
market, from 1990 through the first quarter 2012, the shop cumulative performance of stronger balance sheets has provided better net returns over their weaker counterparts. This should
make intuitive sense, as there is a significantly lower probability of bankruptcy for companies with strong balances sheets and low debt relative to cash flows. Having a
strong balance sheet allows a company to redeploy capital to growth opportunities rather than debt reductions. We believe that these attributes persist in the market over the market
cycle and are steadfast in the pursuit of higher returns for our clients. However, recently
we must ask: Where has quality gone?
The Russell 2000 Value Index has posted a 147% return since the bottom of the market in
March 2009. Generally, the initial rebound after a bear market favors companies with
weaker balance sheets. Once the economy has shown even the slightest improvement,
companies with weak balance sheets are assessed not based on a valuation determined
by the probability of their going bankrupt but on one of a going concern. This leads to a