Security selection targeted high free cash flow businesses with improving prospects, management teams focused on creating shareholder value, and valuations worth more than their prices reflected. However, where these businesses were located mattered, with an overweight in emerging markets and underweight in the U.S. proving costly. Further pressure came from a below-average stake in the dividend-paying, mega-cap stocks many investors favored.
Security selection in the energy, financials and materials sectors hindered relative performance the most. In energy, individual detractors included oil and gas producers OGX Petroleo e Gas Participacoes S.A. in Brazil and Canadian firm Americas Petrogas, Inc., which has assets in Latin America. Investors sold OGX following disappointing production levels at its first wells and took profits in Americas Petrogas after steep gains last December. In financials, shares of India-based life insurance and asset management firm Reliance Capital Ltd. fell, as concerns about slower-than-expected local economic growth pressured the sector there. Elsewhere, Canadian gold mining companies San Gold Corp. and IAM GOLD Corp. (both materials) detracted, as gold prices slid. In addition, San Gold's stock sank because of liquidity concerns, while higher-than-expected costs hampered IAMGOLD's share price.
By contrast, security selection in the information technology sector was quite strong. We favored companies developing disruptive technologies that change the way businesses and consumers operate. Shares of online professional network LinkedIn Corporation, which is revolutionizing job searches and recruitment, produced outsized gains, as strong volume growth drove better-than-expected fourth quarter results and the company raised its earnings outlook. In consumer discretionary, the stock of HomeAway, Inc. - which runs a website listing rental properties worldwide - climbed sharply as more investors began to appreciate the growth potential of the business. Timely ownership of Italian commercial broadcaster Mediaset S.p.A. (also consumer discretionary) helped, as we locked in gains when expectations of an improved outlook for advertising pushed the stock higher early in the quarter.
Going forward, the investment themes that most interest us are disruptive technologies; project-based, non-cash flow generating energy and materials stocks; European media companies, which are poised to benefit as the region's economic growth improves; and consumer growth in emerging markets. We expect to maintain an overweight in emerging markets, which we believe offer better long-term earnings growth opportunities than the U.S. We're optimistic stocks in regions of the world that have recently underperformed will rebound as the global economy improves.
