Year-End Review 2002

From the Desk of Ron Rowland

The events of 2002 have moved into the history books, and the opportunities of a new year are before us. There is one item now being discussed that could potentially bring significant changes to Wall Street: the proposal to eliminate the double taxation of dividends. The U.S. tax code has always appeared to me as a convoluted collection of rules and regulations. One of the items in the tax code that always strikes me as being more absurd, or unfair, than many others is the double taxation on corporate dividends. Under current law, a company that pays a dividend does not get a tax deduction for that expense. This means that dividend distributions consist of money that the company has already declared as a profit and has paid corporate income taxes on. Given this background, it is a wonder that there are any companies that pay dividends. However, it doesn't stop there. People who receive these dividends must then declare them as income and pay taxes on them again.

A few months ago, when I first learned that some of the potential tax reform and economic stimulus plans being considered contained a plan to end the double taxation of dividends I became excited. I thought that companies would finally be able to take a deduction for the expense of paying a dividend. To me, this was the logical solution, if not the only solution. 

Imagine my surprise when the details of the dividend tax reform plan started to come out. Instead of allowing companies to take an expense deduction, the politicians are now discussing various ways that dividends would be distributed to the shareholders as tax-free income. One of my reactions was that this was simply politics at work because shareholders vote, corporations don't. Nevertheless, the debate surrounding dividend taxation alternatives promises to be one of the more interesting topics of 2003. Whatever approach is finally agreed upon, there are bound to be ramifications and unintended consequences. Many shortcomings of the current proposal are already being discussed, including the negative impact to municipal bonds and the fact that investors who hold dividend-paying stocks in IRAs and other tax-deferred accounts will not receive any benefit. 

Unless the final version of the dividend taxation changes are significantly watered down from what is being discussed today, the changes are bound to alter the way investors and companies think and act. The concept of tax-free dividends could drastically change the way that many companies operate and reward their shareholders. Once the new rules are finalized you can also expect to see some new investment vehicles that are designed to exploit the new tax code.

The Quarter in Review

It has been virtually impossible for anyone to achieve positive returns on the long side of the stock market through the bear market that has been with us for nearly three years now. If your investments have lost less, percentage-wise, than the major market indices, count yourself a successful investor. 

The market seemed to be showing signs of life in the fourth quarter of 2002, but it was still a trying period. While the market indexes did have a positive quarter, most of those gains were achieved in the course of just a couple of weeks in October. In other words, if you blinked, you missed the bulk of the rally. And if you missed the bulk of the rally, there wasn’t much benefit to be had by jumping in late. The only people who got much out of this quarter's rally were buy-and-hold investors and extremely short-term traders, a.k.a. day-traders.

To put things in perspective, buy-and-hold investors - say those in an S&P 500 Index Fund, for example - made about 8% for the quarter. But this was on the heels of having lost over 43% in the two years leading up to the beginning of the fourth quarter of 2002 - nearly 30% in the first 9 months of 2002 alone. Even with this quarter's rally, these investors are still down more than 35% over the last 9 quarters, and down more than 22% for the year 2002. As for day-traders...well, you could probably assemble all of the world's successful day-traders in your nearest McDonald's dining area and still have enough seating left over to accommodate the Dallas Cowboys…and their cheerleaders. Day-trading usually borders on gambling, and we don't believe in gambling with your hard-earned money. 

In short, don’t feel too badly if you didn’t get much out of this quarter’s “rally.” When the economy and the stock market get serious about turning around to the upside, we’ll be there. If you have been investing with us for a few years, you have most likely outperformed the market indexes by a long shot, and we aim to keep it that way.

Expanded Services and Offerings

At CCAM, we are committed to helping you achieve your investment goals. In order to provide you with a complete and diversified investment solution, we have employed the services of many talented outside companies and money managers in addition to our own dedicated in-house staff. CCAM Management Services is the name we use to describe the investment services provided directly by us. When utilizing the outside expertise available through Capital Cities Strategic Partners or Capital Cities Alliances, you still get the convenience of account consolidation and the comfort of dealing with your own personal CCAM representative. These expanded services are outlined below.


1) CCAM Management Services

You are probably already familiar with many of the investment offerings provided directly by Capital Cities Asset Management, including our sector rotation, style rotation, and international rotation investment strategies. However, you may not be aware of some of our other investment offerings, including:
Capital Preservation – Capital Cities Asset Management has been managing a conservative capital preservation program for more than seven years. This low volatility investment program gained more than 9%* in 2002 and has never had a losing year. 

Moderate Investing – Capital Cities Asset Management now offers a moderate version of its No-load All Star Program. The original No-load All Star Program is designed for aggressive investors and has a risk/reward benchmark that can be best approximated by a blend of 50% S&P 500 and 50% Nasdaq Composite. The newer moderate version of this program has a goal of outperforming the S&P 500 with less risk than the S&P 500.

Long/Short Equities – Capital Cities Asset Management now offers a stock investment program that can take short positions in stocks as well as the more traditional long positions. 

Variable Products – In most cases, variable annuity and variable universal life sub-accounts can be managed by CCAM much like our mutual fund and ETF programs. 

Non-Discretionary – Various non-discretionary services are also available through CCAM where you make the investment decisions while enjoying the benefits of having a registered investment advisor on the account.


2) Capital Cities Strategic Partners

Capital Cities Asset Management has taken several steps to increase the effectiveness of our overall investment services. We have formed an alliance with several additional prominent investment management firms under the banner of Capital Cities Strategic Partners. These services include:

Portfolio Strategists – Our list of strategists includes Goldman Sachs, Morgan Stanley, Wilshire Associates, UBS, Litman/Gregory, and others. Our strategists apply their proprietary asset allocation and manager selection methodologies, including strategic and tactical asset allocation approaches, to provide portfolios targeted for six unique risk/reward profiles.

Private Managed Accounts – For many of our clients, a separate account that invests directly in equities and fixed income instruments may be appropriate. Separate account managers available through Capital Cities Strategic Partners include: Ariel, Brandes, TCW, Lazard, Black Rock, Pimco, and many others.


3) CCAM Alliances

Capital Cities Asset Management has been doing business with the Fidelity Institutional Brokerage Group for many years. You might already be familiar with the outstanding brokerage, custodial, and Institutional Funds Network services provided by Fidelity. Clients of Capital Cities Asset Management also have access to other Fidelity services, including:

Fidelity Private Offering Program – provides access to Fidelity managed nontraditional investments (such as limited partnerships and hedge funds) that are not generally available to the public.

Fidelity Separate Account Network – Similar to the Private Managed Accounts provided through Capital Cities Strategic Partners, the Fidelity Separate Account Network provides clients of Capital Cities Asset Management with access to many prominent money managers including: Babson, Dreman, Alger, Navellier, Neuberger Berman, Nuveen, State Street Global, and numerous others.

CCAM News

Preliminary Tax Reports for 2002 - Preliminary tax reports have been sent for the 2002 tax year. If you have taxable accounts with CCAM and have not received a preliminary report, please call us at (800) 767-2595. In addition, we can send copies of these reports directly to your accountant. Please send us a letter or fax with your accountant's name, address, and phone number along with permission to send these reports on your behalf. Each year, we will send both the preliminary and final reports.

The All Star Fund Trader is now available electronically. For those of you that currently subscribe to the All Star Fund Trader, we now have the ability to send the newsletter to you electronically via a .pdf file instead of the paper copy. The benefits of receiving the newsletter electronically are many. You will receive the monthly newsletter quicker because you do not have to wait for printing and mailing time. Also, it is easier to store the newsletter electronically and retrieve an archived copy at a later date. Switching to the electronic version of the newsletter is easy. All you need to do is contact your account executive and ask for this new service.


For more information on any of our services, please contact Capital Cities Asset Management at (800) 767-2595.

* Disclosure: The performance cited for the capital preservation program is based on the composite of all accounts under management that were in the CCAM Flexible Income investment program for the entire quarter and includes reinvestment of all dividends and distributions. Reduction due to management fees has been accounted for. The performance of individual accounts will vary from the composite presented. Past performance is not a guarantee of future results. All investments involve risk and you could lose money. All services, investment programs, strategists, and money mangers listed in this document were accurate to the best of our knowledge as of the date of this writing (January 2003), but are subject to change at any time.

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