2009 Manager Discussion & Analysis

Management Discussion and Analysis for Oak Associates Funds
for Fiscal Year Ended October 31, 2009

White Oak Select Growth Fund

Jim Oelschlager, Chief Investment Officer & Portfolio Manager

The White Oak Select Growth Fund (“The Fund”) gained 31.60% for the year, while the comparative index, the S&P 500 Index, rose 9.80%, and the Lipper Large-Cap Growth Average increased 14.74%.

The market swoon in 2008 correctly foreshadowed the sharp economic slowdown that we have experienced this year. In last year’s commentary we wrote, “While there are certainly issues to be concerned about, our bet is that the system will survive, and that eventually stock prices will reconnect with company fundamentals.” This proved to be accurate, as eventually fears of a systemic collapse abated, and stocks rallied sharply, auguring economic recovery. Massive injections from both the Federal Reserve and the federal government helped to jump-start the economy, and other measures buoyed confidence in the system.

As usual, those that kept their head and stuck to their process were rewarded. Our concentrated style and focus on long-term fundamentals paid off, as we achieved returns besting those of the index and most of our peers. The Fund’s investment in the information technology sector helped boost performance.

Strong performers for the year included Internet commerce giant Amazon.com, which continues to gain market share from competitors and improve operating margins; information technology services company Cognizant, which saw some of its large customers recover from the global financial crisis; and customer relationship management software provider Salesforce.com, whose customizable solutions are gaining popularity.

Laggards included financial companies Legg Mason and Charles Schwab, and biotech bellwether Amgen. Legg Mason, an asset management company, suffered from outflows in its funds. Broker Charles Schwab, which had held up well in the correction, was hurt by fee waivers on its money market funds, a result of rock-bottom short-term interest rates. Amgen lagged as investors lost interest in the more stable areas of the market such as health care.

Looking ahead, there are areas of concern. At some point the Fed will need to start draining liquidity from the system, the increasing role of government could slow economic growth, and the ballooning federal budget deficit will have to be addressed. We are very much aware of these issues as we manage the portfolio. That said, there are quite a few positives. A global synchronized upturn should help drive an acceleration in US GDP growth, with a decline in the unemployment rate to follow. We expect corporate profits to be quite strong, given the combination of productivity gains, leaner expense structures and recovering revenue. And the widespread skepticism about the sustainability of this economic recovery is actually a positive, as it keeps expectations in check.

Past performance is not an indication of future results. Click here for performance information through the last complete quarter. Holdings are subject to change. Current and future holdings are subject to risk. Click here for complete holdings through last complete quarter.

Pin Oak Aggressive Stock Fund

Mark Oelschlager, CFA
Portfolio Manager

The Pin Oak Aggressive Stock Fund (“The Fund”) rose 45.96% for the year ended October 31, 2009, while the comparative index, the S&P 500 Index, gained 9.80% and the Lipper Multi-Cap Growth Average returned 16.30%.

The fear and panic that prevailed in late 2008 continued into 2009, as the market started pricing in the possibility of a depression or the collapse of capitalism. Capital preservation was paramount in people’s minds, and investors gravitated toward the more stable areas of the market, eschewing anything with risk or of a cyclical nature. In last year’s annual report, we wrote, “As we manage through this historically challenging period, we have focused on positioning the portfolio to excel when conditions improve, as they always do eventually. Importantly, the market is forward looking, which means that stocks will turn long before the economy does.” With economically-sensitive companies trading at extreme discounts and loads of fiscal and monetary stimulus in the pipeline, we increased our cyclical exposure, while the natural urge in the market, and the path most chose, was to do the opposite in order to preserve capital. This move, which required us to suppress our natural human emotions, goes a long way toward explaining the Fund’s strong performance for the past year.

Another important factor in performance was the return of valuation spreads to more normal levels. At the beginning of the fiscal year, valuation spreads were four standard deviations above the mean, indicating stocks were being valued in an unusually wide range. This dispersion in valuations was almost unprecedented, and reflected a high degree of stress in the market. Valuation always plays an important factor in our analysis of stocks, but with stocks trading so disparately, we placed even more emphasis on the factor, since we were being well compensated to do so. As fear in the market subsided and investors began pricing in economic recovery, lowly valued stocks benefited disproportionately, and many of our investments paid off.

The largest contributors to the strong performance were all consumer-oriented companies, and all rose over 100%. E-commerce company Amazon.com continues to grow its sales at an impressive rate by offering a strong value proposition to consumers. Internet travel site Expedia saw a boost in business after eliminating booking fees. HSN made operational progress under its new CEO.

Laggards included media company Gannett, which suffered from a slowdown in advertising; semiconductor equipment maker Applied Materials, which saw demand for its products decline dramatically as capital spending dried up during the downturn; and biotech firm Biogen IDEC, whose sales of its MS drug, Tysabri, were dragged down by increasing incidence of a potentially fatal side effect.

The Fund maintains a tilt toward cyclicals, though not as much as there was a year ago, as the risk-reward is not as overwhelmingly favorable as it was at that time.

Rock Oak Core Growth Fund

Robert Stimpson, CFA
Portfolio Manager

The Rock Oak Core Growth Fund (“The Fund”) rose 24.86% for the fiscal year ending 10/31/2009. The Fund outperformed the benchmark S&P 500 Index and the Lipper Large-Cap Growth Fund peer group, which gained 9.8% and 14.74% respectively. Since inception on December 31, 2004, the Fund has lost 1.05% annually compared to the 1.16% annual drop in the S&P 500.

The fiscal year 2009 saw global equities rebound from the sharp 2008 recession. Although the economy and macroeconomic data remained weak throughout the year, the stock market rose in anticipation of an eventual economic recovery. The sharp gains were driven by the tremendous amount of monetary stimulus globally and by the coordinated effort by global central banks to foster economic growth. The depth of the 2008 correction also positioned the market for a strong resurgence after concerns over another Great Depression contracted valuations. While these fears were ultimately unwarranted, they temporarily drove valuations to extremely attractive levels from which the stock market rebounded. Throughout the year, investors’ distaste for equities slowly transitioned into a renewed appetite for risk. This helped all stocks to some degree, but propelled the Fund, which held highly sought after growth companies with strong earnings prospects.

The Fund’s preference for companies with strong balance sheets and defensible business models contributed to the strong long-term performance. Since the 2008 recession was instigated by problems in the credit and housing markets, companies with strong balance sheets that can operate independently of capital markets were able to avoid credit-related problems. These characteristics were defensive during the recession, but also offensive once confidence grew regarding a sustained global recovery.

A heavy exposure to technology stocks helped the Fund outperform the benchmark. The technology sector was able to weather the recession well, by avoiding credit-related problems and responding quickly to the economic slowdown. The sector also remains one of the best positioned to capitalize on a sustained global recovery. Within the Fund, Cognizant Technology Solutions rose over 101% during the year and was a top holding for the Fund. The company, which had fallen sharply in 2008 on concerns over its exposure to financial institutions, rebounded strongly as the credit crisis eased. Top positions in Amazon.com and Apple also contributed to the Fund’s strong performance.

Going forward, the Rock Oak Fund remains focused on growth investing. As the global economic recovery progresses, companies with exposure to international markets are likely to disproportionately benefit from the significant amounts of monetary stimulus enacted by central banks worldwide. The Fund has gained exposure to this opportunity through US companies with significant growth prospects overseas. The investment outlook remains favorable due to the low interest rate environment, attractive valuations, and economic momentum globally.

River Oak Discovery Fund

Robert Stimpson, CFA
Portfolio Manager

The River Oak Discovery Fund (“The Fund”) rose 39.44% for the fiscal year ending October 31, 2009. The Fund’s performance compares to the benchmark Russell 2000 Growth Index’s gain of 11.34% and Lipper Small-Cap Growth peer group category’s 13.12% rise. Since inception on June 30, 2005, River Oak has returned 2.83% annually. Over the same time period, the Russell 2000 Growth Index lost 0.75% annually and the Lipper Small-Cap category fell 2.01% annually.

In fiscal year 2009, stocks anticipated the eventual economic recovery from the 2008 recession. Small-cap stocks, in particular, benefited from the reversal of high levels of risk aversion that developed during the credit crisis. As an asset class, small-cap growth stocks are seen as having greater risk than larger companies. They therefore succumbed to the volatile market and unfolding financial crisis. The economic recession appeared so severe in early 2009 that selling pressure drove stocks to deeply undervalued levels. As these problems abated in 2009, all stocks benefited from a more rational valuation assessment and the markets rallied. Significant monetary action by the Federal Reserve also helped propel small-cap companies, as they tend to prosper in a low interest-rate environment.

Strong performance from the technology sector helped the Fund outperform its benchmark small-cap growth index. The Fund was overweight technology stocks due to their strong balance sheets and our anticipation of an eventual economic recovery. The tech sector, which does not rely on capital markets to finance operations, was able to avoid problems from the credit-crisis and responded quickly to the poor economic backdrop. The Fund’s exposure to financial stocks also enhanced to the fiscal-year performance. While the troubled sector weighed on the index’s performance, the Fund’s financial holdings outperformed the benchmark. Approximately, 70% of the Fund’s outperformance was achieved through stock selection.

The top-performing holding for the Fund was MercadoLibre, a Latin American e-commerce company, which rose 161%. Despite the global recession, MercadoLibre’s exposure to the healthy Brazilian economy and the expanding internet penetration through South America propelled the stock. Elsewhere in the portfolio, EnerNOC, Inc. rocketed 335%. The company, which provides demand response technology for the utility industry, is introducing intelligent equipment to manage energy usage for commercial customers. Enernoc had fallen sharply in 2008 but its shares rebounded strongly this fiscal year.

The global economic recovery, which rallied stocks in 2009, is still developing. Although the economic data has remained weak for much of the year, the stock market typically recovers before the macroeconomic indicators turn positive. The strength in international markets, as well as the decisive action by central banks worldwide, has increased the likelihood of a sustained recovery. This bodes well for small-cap investors as psychology and risk aversion have been detrimental to the sector’s performance, despite its long-term track record as one of the best performing asset classes.

Red Oak Technology Select Fund

Mark Oelschlager, CFA
Portfolio Manager

The Red Oak Technology Fund (“The Fund”) returned 43.09% for the year ended October 31, 2009, while the comparative index, the NASDAQ 100 Index, which includes holdings within sectors beyond just technology, gained 25.81%, and the Lipper Science and Technology Average rose 29.15%.

In last year’s report we talked about how attractive technology stocks looked, and investors who held their positions in the sector were well rewarded over the past year as the market started looking ahead to sunnier economic times. Given the cyclical nature of the sector, tech stocks reacted very well during the market rally, and the more economically-sensitive areas within the sector benefited the most.

Top performers in the Fund included e-commerce leader Amazon.com, which is gradually becoming the Wal-Mart of the Internet due to its price leadership; disk drive maker Seagate, who should benefit from a PC upgrade cycle; and online travel site Expedia, which saw a boost in business after eliminating booking fees.

Poor performers included semiconductor equipment provider Applied Materials, which saw demand for its products decline dramatically as capital spending dried up during the downturn; telecommunications company Sprint Nextel, who was unable to stem the tide of subscriber losses; and semiconductor designer Sigma Designs, which is expected by some to lose market share.

Throughout the downturn, company managements within the sector cut costs aggressively, which has helped to keep free cash flow margins at surprisingly high levels. These cuts should help drive robust earnings growth as revenue continues to recover. Drivers of demand growth for purveyors of technology products are numerous, and include the increasing importance of technology in the consumer’s life, the need for corporations to be more productive to remain competitive, and the significant exposure to international markets. In addition, the cyclical upswing should provide support for business, especially given the tremendous pent-up demand. The Fund is currently invested in a wide range of industries within technology, such as semiconductors, software, services, storage, e-commerce, and networking equipment. Our turnover remains low and our time horizon long, which we believe gives us an advantage versus our peers, so many of whom seem inclined to try to outsmart each other over interpretation of the most recent data point.

Black Oak Emerging Technology Fund

Robert Stimpson, CFA
Portfolio Manager

The Black Oak Emerging Technology Fund (“The Fund”) gained 34.36% during the fiscal year ending October 31, 2009. The performance lagged that of the Lipper Science and Technology Fund peer group’s rise of 37.04%. The Nasdaq Composite Index rose 20.09% during the same period.

The technology sector was one of the best performing segments over the last year due to its strong cash generation abilities and operational flexibility. As the 2008 recession developed, the tech sector responded quickly to the deteriorating economic conditions by reducing inventory, overhead and other costs. This positioned the sector’s earnings for strong operating leverage once sales growth reappeared. Additionally, since technology companies typically do not rely on capital markets to finance operations, the group avoided problems related to the credit markets.

The Black Oak Fund performed well this year as bleak economic conditions reversed and investors once again embraced emerging technology companies. As the credit crisis and global economic slowdown abated, the high levels of risk aversion gradually dissolved. Given the Fund’s focus on small technology companies in emerging fields, it had suffered disproportionately when investors shunned higher-risk strategies. However, the unwinding of the elevated levels of risk aversion favored the high-growth companies which the Fund owns.

The Fund’s best performing stock this year was MercadoLibre, a Latin American e-commerce company, which rose 161%. Central banks worldwide have acted aggressively to restart global growth. This highly simulative and loose monetary approach is likely to benefit those companies with a large exposure to international sales. As the leading e-commerce company in South America, MercadoLibre is a pure play on the region’s economic growth and its share responded accordingly. Cognizant Technology Solutions, a top holding for the Fund, also propelled returns. The IT-service company’s value proposition of helping clients save money by outsourcing is even more powerful in a recession.

Going forward, the Fund will continue to seek emerging technology companies with solid earnings prospects that are trading at attractive valuations. The Fund’s exposure to companies with strong growth opportunities internationally may increase as the significant stimulus enacted globally fuels adoption of technology products. The renewed appetite for risk also bodes well for the Fund and the type of companies it seeks. Given the cyclical nature of technology stocks, the group remains attractive as the nascent global synchronized recovery progresses.

Live Oak Health Sciences Fund

Mark Oelschlager, CFA
Portfolio Manager

The Live Oak Health Sciences Fund (“The Fund”) rose 16.03% for the year ended October 31, 2009, while the comparative index, the S&P 500 Health Care Index, gained 6.82%, and the Lipper Health & Biotechnology Average returned 8.16%.

The last year saw the US and international economies in recession, a global financial crisis that threatened to bring commerce to a standstill and a committed response by authorities that seems to have stabilized the system and restarted the economy. As it usually does in times of stress, the healthcare sector held up better than the broader market, even as it dealt with its own issues, but also lagged the broader market in the ensuing rally.

President Obama unveiled his healthcare agenda and worked with Congress on developing a plan of reform for the sector. After the Congressional Budget Office gave its assessment of what the President’s plan would cost, and the American public voiced its own concern, politicians returned to the drawing board to craft a less ambitious plan. These developments helped healthcare stocks rally, as it became clear that the worst case scenario – from the market’s perspective – was not going to play out.

Throughout the year, we tried to take advantage of the volatility caused by these developments. In addition, we managed the portfolio to benefit from the compression in valuation spreads that we expected. As risk aversion in the market subsided and spreads narrowed to more normal levels, the Fund benefited.

Strong performers were concentrated in the pharmaceutical area, on both the product and distribution side. A healthier generics market contributed to strong gains in Par Pharmaceutical and Watson Pharmaceuticals, and rising prescription growth aided distributors AmerisourceBergen and McKesson.

Laggards included institutional pharmacy company Pharmerica, which was hit by a declining bed count; biopharmaceutical company Genzyme, which dealt with an infection at its main manufacturing plant; and biotech bellwether Amgen, whose products are facing regulatory risk.

Looking ahead, healthcare reform before the end of the calendar year is possible, but might not occur until 2010. The likely outcome is broader insurance coverage for Americans, which should increase the utilization of healthcare services, accompanied by various types of price controls or other types of regulation. The sector will be affected by the ultimate shape of the legislation in Washington, but it is important to remember that the market is aware of this and has therefore already discounted the impact it expects.

The above commentaries represent the managers’ assessments of their respective Funds and the market environment at a specific point in time and should not be relied upon by the reader as research or investment advice.

Oak Library

2009 Manager Discussion & Analysis

White Oak Select Growth Fund

Pin Oak Aggressive Stock Fund

Rock Oak Core Growth Fund

River Oak Discovery Fund

Red Oak Technology Select Fund

Black Oak Emerging Technology Fund

Live Oak Health Sciences Fund

My Oak Account