The broader market continued to see strength in Q309 as the Q2 earnings reporting season broadly bore out better-than-expected reports against a continued backdrop of economy-related fear. The cost reductions implemented in many sectors during the downturn proved to have yielded much better leverage in many cases than anticipated. The consequent prospect for rapid earnings growth with virtually any return to top-line health led valuations significantly higher.

This leverage feature of Q209 earnings was exhibited in the Healthcare sector as well, and was a positive counterpoint to the continued uncertainties around the healthcare reform debate in Washington DC. However, most investors saw the events of August and September as confirmation that the industry had likely dodged the most threatening aspects of reform. This was evidenced, for instance, in solid performances from the large pharmaceutical sector.

The largest single feature of the outperformance of the Allianz RCM Wellness Fund in Q309 was its holding in Human Genome Systems. Human Genome was a high volatility but high fundamental conviction name in the Fund for some time. There was a great rise in the stock following positive clinical data for Benlysta, a first-in-class drug for Lupus.

Secondarily, the Fund’s non-healthcare Wellness-oriented names were standouts in the quarter as consumer behaviors began to thaw and the market rewarded companies well-positioned for a rebound in spending. Perhaps no single consumer-related stock more embodies the Wellness strategy than Lululemon, the Canadian retailer of yoga and fitness apparel. LULU rose in the quarter – well in excess of the general retail/apparel sector – in large part based on extremely robust sales results relative to other retailers. In addition, the Fund had good performance from Adidas and Whole Foods, both of whose performance was well in excess of the overall consumer discretionary sector. In Q309, the Fund maintained a non-healthcare weighting in the vicinity of 15%. While our stock selection was strong with in consumer discretionary, the Fund’s underweight to the sector detracted.

In the traditional healthcare sector, other core positions performed well. In particular, a strong performance from McKesson was driven by particularly strong Q209 results and a growing appreciation of its healthcare IT (HCIT) division. HCIT has seen a surge in market interest and though a small portion of its revenues, it comprises a meaningful and growing portion of the company’s operating profit. Alcon continued to be a positive contributor as its results strengthened and expectations grew for the impending consolidation with Novartis per its deal with majority-holder Nestle. Rounding out some of the other top contributors, Shire PLC. saw resumed growth in core franchises and benefitted to some degree by the atmosphere of consolidation around the specialty pharmaceutical segment.

On the negative side, several larger-cap stalwarts lagged on a relative basis as the market generally preferred smaller, less-favored and more cyclical issues with St. Jude Medical,Teva Pharmaceuticals, Gilead Sciences and Baxter International all detracting from relative performance in the quarter. In addition, the Fund’s underweighting in large European pharmaceuticals was a negative as this sector was revalued from its lows. Relative lack of exposure in Novartis, Roche and Sanofi-Aventis was the primary factor here.