Intrinsic Value Fund
September 30, 2008
Strategy
The financial crisis that began in August 2007 accelerated into uncharted territory in the third quarter of 2008. Previous concerns about rising prices for oil, food and commodities were set aside as the credit crisis evolved into a full-blown liquidity crisis. Only a few months back, investors were worried about rising inflation and the potential for higher interest rates. Events during the quarter changed those discussions. The government takeovers of Fannie Mae and Freddie Mac, the Lehman Brothers bankruptcy, the demise of insurance giant American International Group (AIG), government-arranged bank mergers and bank failures turned the conversations to the three d’s: de-leveraging, deflation and declining interest rates. Investors took note, driving stock prices substantially lower in every major equity market. Equity market losses were punctuated by sharp declines near quarter end as Congress was unable to collect the necessary votes to pass the rescue bill allowing the Federal Reserve to buy problem mortgages. In this environment, Evergreen Intrinsic Value Fund Class A shares reported a total return at net asset value of -10.17%, trailing the S&P 500 Index (-8.37%), the Russell 1000 Value Index (-6.11%) and the Lipper Large-Cap Value Index (-8.64%). Relative investment performance suffered at quarter end as investors fretted over the government rescue bill and the potential for weakening demand for consumer products. In particular, on the last day of the quarter, strategy performance lagged due to an underweight in Financials as that sector skyrocketed on hopes of a government bailout.
The uncertainty in the marketplace in the third quarter of 2008 provided the opportunity for us to add to some existing holdings and to make new investments in what we believe are high quality businesses, such as Merrill Lynch. As of September 30, Evergreen Intrinsic Value holdings were selling, on average, 30.2% below their target prices, representing an average appreciation potential of 49.0%. These figures are higher than their historical averages, suggesting to us that, while the current credit and liquidity concerns have led to declines in stock prices, the underlying fundamentals (or intrinsic value) of the holdings in the portfolio remain compelling.
Contributors to performance
Relative to the Russell 1000 Value Index, Evergreen Intrinsic Value Fund benefited from an overweight in Consumer Staples and an underweight in Energy—both the result of security selection decisions. In Consumer Staples, UST, Inc. enjoyed a strong performance. The investment team had first invested in UST in January 2006, impressed by the company’s 65% share of the U.S. smokeless tobacco market and its substantial free cash generation. On September 8, 2008, Altria Group, Inc. announced they had entered into a friendly agreement to acquire UST for $69.50 in cash, representing approximately a 30% premium to the existing price. While we do not select our investments based on the potential for acquisition, because our analysis is conducted from the perspective of a private owner, it is not an uncommon occurrence that one of our investments is acquired.
In Financials, JPMorgan Chase & Co. contributed to fund performance, despite the sector’s general woes. The primary catalyst for our investment in JPMorgan was the management team led by Jamie Dimon and its ability to make acquisitions (such as Bear Stearns and WaMu) that were accretive to earnings from the outset.
Detractors from performance
Third quarter results were negatively affected by an overweight in Information Technology and an underweight in Financials. (In our fundamental investment process, sector weighting differences result from bottom-up security selection decisions.) Weak stock selection in Financials, Energy and Consumer Staples also subtracted value. However, in both Consumer Staples and Energy, weak stock selection was offset by the positive impact of relative sector weights,
The strong performance of a number of holdings in Financials was not enough to offset the negative impact of American International Group, Inc. (AIG) and Washington Mutual, Inc. (“WaMu”) in the group. In Consumer Staples, meanwhile, the stock price of agricultural processor Archer Daniels Midland Co. (ADM) reacted negatively to concerns over the reduction in ethanol subsidies and the resultant reduction in corn volumes. Our long-term investment thesis in ADM is based on the worldwide growth in demand for agricultural commodities and the resulting positive impact on ADM’s profit margin and cash flow thus far. The investment team remains convinced that ADM is uniquely positioned to benefit from the industry consolidation that has occurred in recent years.
In Industrials, Deere was a detractor from performance during the third quarter. As with ADM, the stock price of agricultural and construction equipment manufacturer Deere & Co. was adversely affected by concern over corn prices and reduced planting. In addition, investors were worried about higher material prices and slowing demand for construction and forestry equipment. We currently continue to maintain our long-term investment rationale: Deere is the world’s leading manufacturer of farm equipment and holds a dominant share with few competitors. We believe a healthy farm economy, coupled with an experienced and financially focused management team, have the potential to provide an excellent foundation for strong earnings and cash flow over our investment time horizon of three to five years.
Management outlook
We see many long-term positives in the U.S. economy even today. We believe the biggest one is the ability of our system to adapt: Policymakers (including the Fed) and market participants alike have reacted (and in some cases, overreacted) quickly to changing circumstances. Other factors such as the existence of insurance safety nets, a still relatively low (though rising) unemployment rate, technology-driven productivity gains, solid balance sheets for non-financial companies and improving global competitiveness all factor into our present long-term positive outlook. Consequently, while households and financial firms currently have limited borrowing capacity and are receiving most of the media’s attention, many non-financial companies are not overburdened by debt and are in a better position than in past cycles to manage their businesses in a slowing economy.
Nevertheless, while the actions taken in recent weeks may help stem the current crisis, obstacles will likely remain. However, we believe that now, with the full attention of world central banks, governments and regulators, financial markets will make their way through the chasm caused by an historical confluence of circumstances.
While our risk management discipline dictates that the analysts spend the majority of their time monitoring existing holdings, our experienced investment team continues searching for the best companies around the world. This company-by-company approach has served clients well over the years through global events that were unprecedented. The investment team remains focused on the long term. We firmly believe that it is in difficult markets such as the current environment that our fundamental approach and pursuit of high-quality companies in great businesses has the potential to add the most value for clients relative to the market and other value-oriented managers over a complete market cycle.
Fund performance
Fund inception date: 08/01/2006
Performance as of: 09/30/2008
| 3-Month Return | YTD Return | 1-Year Return | 3-Year Return | 5-Year Return | 10-year Return | Return Since Inception |
| Class A | ||||||
| -15.34% | -24.94% | -24.74% | ——— | ——— | ——— | -4.12% |
| Class A at NAV | ||||||
| -10.17% | -20.36% | -20.15% | ——— | ——— | ——— | -1.46% |
| Max Sales Charge | Expense Ratio Net* | Expense Ratio Gross* |
| Class A | ||
| 5.75% | 1.20% | 1.36% |
*As per prospectus dated 12/01/2007. Net ratio includes contractual waivers and/or reimbursements set to expire on 05/25/2009.
Mutual Funds: Not FDIC-Insured. Not Bank Guaranteed. May lose value.
Past performance is no guarantee of future results. The performance quoted represents past performance and current performance may be lower or higher. Investment return and principal value of an investment will fluctuate so that investors’ shares, when redeemed, may be worth more or less than their original cost. To obtain performance information current to the most recent month-end, go to EvergreenInvestments.com/Fund Information. Returns referred to as Class A, Class B or Class C reflect a deduction of the maximum sales charges. Performance at NAV does not include the effect of sales charges. Performance includes the reinvestment of income dividends and capital gain distributions.
Performance results are extremely short term, and may not provide an adequate basis for evaluating a fund's performance over varying market conditions or economic cycles. Unusual investment returns may be a result of a fund’s recent inception, existing market and economic conditions and the increased potential of a small number of stocks affecting fund performance due to the smaller asset size. Most mutual funds are intended to be long-term investments.
The fund incurs 12b-1 fees of 0.25% for Class A.
Returns reflect expense limits previously in effect, without which returns would have been lower.
The fund's investment objective may be changed without a vote of the fund's shareholders.
Foreign investments may contain more risk due to the inherent risks associated with changing political climates, foreign market instability and foreign currency fluctuations.
Since the fund tends to invest in a smaller number of stocks than many similar mutual funds, changes in the value of individual stocks may have a larger impact on its net asset value than such fluctuations would if the fund were more broadly invested.
Value-based investments are subject to the risk that the broad market may not recognize their intrinsic value.
Net asset value (NAV) is the value of one share of the portfolio excluding any sales charges. Had sales charges been included, performance would be lower. Prices shown reflect the prior business day's closing net asset value (NAV) prices. Prices are available for weekdays only, and are not available for weekends or NYSE holidays. Orders for redemptions placed before 4:00 p.m. Eastern time will receive that day's closing share price. If received after 4:00 pm, you will receive the next business day's closing share price.
The previous information is the opinion of the portfolio manager(s) of the fund, and it is not intended as investment advice.