S&P 500 Industry Group Representation As of September 28, 2001 Number of Cos. 1-Year Daily Chart of the Consumer, Cyclical Index vs S&P 500

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1 M. A. Wright Fund Consumer Discretionary Sector Report By Jane Elliott, Brent Konstanzer, and Chris Lovisone S&P 500 Industry Group Representation As of September 28, 2001 Number of Cos. % of Market Capitalization Consumer Discretionary % Consumer Staples % Energy % Financials % Health Care % Industrials % Information Technology % Materials % Telecommunication Services % Utilities % Source: 1-Year Daily Chart of the Consumer, Cyclical Index vs S&P 500

2 Summary of Industry Outlook Consumer confidence and the economy remain stagnant, and there is the possibility of a recession in the U.S. While there are a few attractive industries such as do-it-yourself building supplies, we believe that the M.A. Wright Fund will benefit from being equal-weight in the consumer discretionary sector. Although the long-term outlook for discretionaries is positive, some of the industries within the sector face certain challenges, particularly in the short-term timeframe. The outlooks for our industry groups are as follows: 1. Automobiles & components: slightly negative 2. Consumer durables & apparel: neutral 3. Hotels, restaurants, & leisure: neutral to slightly negative 4. Media: neutral near-term; positive long-term 5. Retailing: neutral near-term; positive long-term Performance of Industry Groups: Automobiles & Components 1-year Daily Chart of the Dow Jones U.S. Automobiles And Parts Index sm Industry Trends & Current Environment After back-to-back declines in 1999 and 2000 this industry saw a 38.5% rise through July 20 th. The consensus among analysts is that these gains will not be sustainable even with the continuing interest rate cuts. The multiples for public auto parts companies have decreased due to a decline in new vehicle sales and a slow down in demand for replacement parts in the U.S. and Europe. New car sales are expected to decline from a record high of 17.8 million units in 2000 to 16.7 million units for The big 3 are expected to continue to lose market share to foreign brands. The declining level of production will add to the decline of profitability for the vehicle parts suppliers. Industry Analysis Page 2

3 Profitability is decreasing due to the lack of consumer confidence and decreasing sales. As consumers look for low priced deals, the big 3 are pressing their suppliers to reduce prices which is hurting the profitability of these companies. A positive for the parts suppliers is that as the manufacturers demand high-tech features and attempt to comply with safety and emission regulations they are looking for parts suppliers to differentiate themselves from the rest of the industry. Outlook - The U.S. automobile and components industry has a slightly negative outlook. Consumer Durables & Apparel 1-year Daily Chart of the Dow Jones U.S. Textiles And Apparel Index sm Industry Trends & Current Environment The industry trend for consumer durables and apparel is neutral. Baby boomers desire for bargains has been directing them away from department stores and toward discounters in the pursuit of basic clothing. Meanwhile, teenagers are heading toward specialty stores; apparel makers have begun to target them due to their rising spending power. Mass merchants, off-price retailers, and specialty stores have continued to experience strong sales growth at the expense of department stores. However, until consumer confidence rebounds, there will not be improved spending for discretionary items. Outlook In the long-term, the demographic consumers for apparel sales are weak. An older population will be less interested in the latest hot fashion trend. They tend to focus on other priorities. There is an excess of retail square footage in America causing chains to cut back on their expansion plans, close under performing units and invest in cost-cutting technology. Industry Analysis Page 3

4 Costs are being brought in line with more modest sales expectations, which should benefit the companies with superior management, a strong consumer franchise, and moderate levels of debt. Hotels, Restaurants, & Leisure 1-year Daily Chart of the Dow Jones U.S. Entertainment And Leisure Index sm Industry Trends & Current Environment Prior to September 2001, many analysts held neutral outlooks for the hotels, restaurants, and leisure sector due mainly to declining consumer confidence and spending levels. The events of September 11 th had an immediate negative effect on the sector as shown by the comparison chart above. Hotelier Wyndham International Inc. on Tuesday said it was furloughing or laying off approximately 1,600 of its workers, or 5 percent of its work force, in the wake of an industry-wide slowdown in business. (Source: Reuters: October 2, 2001) The recent problems encountered by the airline industry and record unemployment rates have further hindered outlook for this sector. Same-store sales in the restaurant industry have been slowing amidst the declining economy and cautious customers. Construction of new store units has eased as well, which actually has a somewhat positive effect in that it has helped the competitive landscape of the industry. Nevertheless, there still remain many choices of places to eat-out. Lodging and hotels have been extremely hurt by recent events and the slowing economy. Not only are individuals canceling vacations, but many companies are foregoing planned business trips for other methods of meeting such as video conferencing. According to the August 2001 S&P Industry Survey, the S&P Lodging-Hotels Index fell 19.4% in 2000, versus an 8% decline for the S&P Industry Analysis Page 4

5 Supply growth in the U.S. lodging industry has been slow due in part to the effects of interest rate hikes in 1999 and The recent cuts in interest rates may translate into some new construction, but we feel that most new project will not occur in the very near future. Outlook For the near term, we hold a neutral to negative outlook for the hotels, restaurants, and leisure sector. However, due to lowered interest rates and eased competitive landscape in the restaurant industry, we feel that the supply side of the sector will begin to improve after the economy moves out of its recessionary state. This period should also find improving consumer confidence, which will help the demand side. Media 1-year Daily Chart of the Dow Jones U.S. Advertising And Media Index sm Industry Trends & Current Environment Due to the lack of consumer spending; therefore, decreased revenues for retailers and diminishing advertising budgets, the advertising revenues for the media industry have been in a sharp downturn hurting the bottom line for media stocks. Industry competitors have instituted cost cutting measures to maintain a level of profitability without advertising revenues. The newsprint media has reduced editions, cut pages sizes, and laid off employees. The decline in circulation seems to have reached the bottom and with aggressive pricing the media companies have been able to maintain a rise in circulation revenue. Both newsprint and TV media will face challenges ahead following the events of September 11, They will face increased costs of attempting to cover the worldwide events as they unveil along with flat advertising revenues. These concerns may be counterbalanced by increased circulation of newsprint and a slight increase in TV advertising due to the number of people reading newspapers and watching the evening news to remain up to date on current events. The future holds promise as the economy recovers from the low points of the past Industry Analysis Page 5

6 year. As consumer confidence and spending increase the retailers will be looking to flood the media with advertising to attract consumers back to the store. The remaining question is, when will this happen? Outlook The long-term outlook for media stocks is positive, but the short-term outlook is neutral. Retailing 1-year Daily Chart of the Dow Jones U.S. Retailers Index sm Industry Trends & Current Environment There is a declining trend in retailing, and the outlook for the near future appears bleak. The health of the US economy depends greatly on retail trade. In 2000, retail sales accounted for 32% of US GDP. With the high level of employment, personal income continued to grow in 2001, up 1.5% the first quarter. But consumers cut back on their spending, mostly on higher price items, such as cars and appliances. Personal consumption expenditures rose only 1.2% in the first quarter. In 2001, the stock market anticipated weak economic growth. This cooling in the economy hurt consumer confidence. Consumer confidence peaked in mid-2000 at and began to drop sharply late in the year. Reflecting consumers concerns about weakening business conditions and a less favorable job market, the consumer confidence index dropped eight points. Retailers will continue to strive for greater efficiency, weeding out under-performing stores and merchandise categories. Consumers are more value conscious than they've been in the past. There shopping habits have shifted from department stores to discounters and mass merchandisers. Many consumers can find the same items at a mass merchandiser that they can find at a department store at a substantially lower price. Consumers are much more valueoriented which has contributed to the growth of mass merchandise stores. Another indication Industry Analysis Page 6

7 is the growth of the warehouse or wholesale club store concept over the past two decades. These stores allow consumers to buy products in bulk and save money. These stores mostly carry fast moving merchandise brands, which are number one or two in their respective product categories. Outlook The outlook for the retailing industry is neutral. Certain specialty areas in retail may improve based on economic conditions. The retailing industry is mature and slow growing. These factors mean companies will have to do a better job of managing their operations. Specifically, retailers must close unprofitable stores, locate in regions with faster growth, and manage their inventory better. Retailers must also invest in automated processes to keep their costs down. Some companies have taken steps to reduce their exposure to economic cycles and consumer trends. The outlook for home shopping retailers is cautious for the near term. For general merchandise, the near term outlook remains neutral. Current M.A. Wright Fund Holdings in Consumer Discretionary Sector Ticker Name Last Price ( ) Current Shares LMG/A Liberty Media Cl A $ BBBY Bed Bath & Beyond $ JNY Jones Apparel $ LOW Lowes $ TRB Tribune $ WMT Wal-Mart $ Industry Analysis Page 7