1st Quarter 2008 Review

From the Desk of Ron Rowland

In my last quarterly letter to you I mentioned our new Global Core Equity program.  Since we have received positive feedback from several clients, I thought I would share with you a little more about this unique concept.

For years the investment profession has been divided into two camps: the "active managers" and the "buy and holders."  Active managers think they can add value by selecting securities that will outperform in the future or by timing their buys and sells to maximize profit and/or minimize risk.  Those with the buy and hold belief argue that it is impossible to "beat the market" over time, so they preach investing in a handful of securities and holding them for many years.

Both these approaches have their own advantages and disadvantages.  Obviously, CCAM is in the Active Manager category.  Despite recent difficulties, I think the long-term record shows we have been able to deliver outstanding results.  At the same time, I recognize that the longer-term and more strategic (as I like to call it) approach has merit as well.  In fact, those with a strategic bent may call folks like me tactical managers.

The reason many investors do not achieve their goals is they change their approach at just the wrong time.  For instance, picture some investors who firmly intend to buy and hold but lose their confidence as a bear market unfolds and they see their account value dropping.  They jump to an active strategy – usually just as the market bottoms.  Conversely, investors in active strategies that are temporarily out of favor may give up and buy into a passive strategy right at the top of the market.

How do you get off this financial merry-go-round?  That’s where Global Core Equity comes in.  As a multi-strategy portfolio, it includes both a tactical rotation component as well as strategic positions in top-rated funds and ETFs.  We think this combination has the potential to deliver solid long-term results and takes diversification to a whole new level.  We think this approach gives the portfolio a much better chance to perform well over a full market cycle.

Keep in mind that "strategic" does not equal "buy and hold."  While the strategic portion of the portfolio remains fully invested at all times, we still make periodic incremental adjustments.  This is not the same as the "buy, hold, and pray" approach preached by many.

We will be glad to provide more information about how Global Core Equity may help you achieve your investment goals.  Please contact us to learn more.

The Quarter in Review

From the opening bell on January 2, the major equity benchmarks turned downward and finished the first quarter without ever returning to positive territory.  The Dow Jones Industrial Average lost -6.9%, the S&P 500 dropped -9.5%, and the Nasdaq Composite fell -14.1%.  It was the Dow's worst quarterly performance in 5 1/2 years.

The housing bust continued to be problematic, with the impact spreading from mortgage-related financials to other sectors.  The SPDR Select Sector ETFs, which divide the S&P 500 into nine sectors, provide a deeper perspective.  Here are the quarterly results, from best to worst:

As you can see, every equity sector had a negative return for the quarter, but some were much worse than others.  The three weakest sectors – Health Care, Financials, and Technology – also happen to be three of the largest in terms of market capitalization, which helped drag down all the broad-market indexes.

One benchmark that did deliver a nice gain in the first quarter was the Commodity Research Bureau Index.  The CRB gained +8.5% for the period and would have made much more if not for a sharp reversal in March.  With gold moving above $1,000 an ounce, oil above $100 a barrel, and huge rallies in agricultural commodities, natural resources were the big winners of the quarter.  Unfortunately, this strength did not carry through to resource-related equity sector funds, most of which still had losses.

The commodity rally was driven in large part by weakness in the U.S. dollar, which was in turn driven by the Federal Reserve's drive to reduce interest rates.  Faced with both the threat of recession and inflationary pressures, the Fed is in a tough position.  It remains to be seen if they can navigate this treacherous course without making matters even worse.   Falling interest rates were beneficial for many bond funds, particularly long-term Treasury bonds.  Chaos reigned elsewhere in the fixed-income world, however, with the popular "auction-rate" municipal bond market almost grinding to a halt.  High-yield corporate bonds, which tend to trade much like stocks, were characteristically weak during the quarter.

As the second quarter opened, the commodity rally appeared to be resuming.  The energy sector is looking particularly strong.  We anticipate continued volatility but are looking for better trading opportunities this spring.