2nd Quarter 2008 Review

From the Desk of Ron Rowland

With 2008 now entering its second half, the year so far has been eventful, to say the least.  Whether events were positive or negative depends on your perspective, of course.  I can recall years in the late 1990s when investors scoffed at annual gains that were "only" 50% or less.  This year most people are grateful if they are close to break-even, and ecstatic at single-digit gains.

As investors we often forget that we're not in a race.  The goal is not to make more money than a benchmark, or to beat everyone else.  The goal is to make enough money to meet our long-term goals.  Other things being equal, more is always better, of course. But other things are seldom equal.  Outsized gains are almost always accompanied by outsized risk.  Eventually the risk catches up to investors.

This means the wise investor takes as much risk as is necessary to reach his goals, and not a bit more.  If you can get where you need to be in twenty years with 8% annual returns, trying to make even more is probably not a good idea.

As I have mentioned in previous letters, we have a new Global Core Equity program at CCAM that we think is a good balance for many growth-oriented investors.  It includes an allocation to actively managed long-term growth funds as well as exposure to our sector, style and international rotation strategies.  We designed this program to help investors focus on long-term results and customize their risk level to the point they find acceptable.  We're pleased that it has outperformed its benchmarks since inception last year.  Of course, past results are not indicative of future results.

While Global Core Equity is not suitable for every investor, I believe it is an excellent combination of several proven strategies.  It is also simpler since you can gain access to multiple programs in one brokerage account.  Please ask an account representative if Global Core Equity is right for you.

The Quarter in Review

Following a rough first quarter, investors did not find an easier path in April, May and June.  Economic news remained negative, inflation intensified and the housing market deteriorated even further.  The Fed ended its rate-cutting campaign, at least for now, while the global economy looked for direction.  All the major equity benchmarks showed fractional gains at best.

With crude oil nearing $150 a barrel, energy was by far the best-performing sector for the quarter.  Yet even there the ride was unusually volatile, with a sharp correction in late April forcing many investors out of their energy positions.  Utilities and materials sector funds also did well.

For the broad market, the energy outperformance was offset by underperformance in financial services stocks.  Earnings at banks, brokerage and insurance firms continued to suffer as more subprime mortgage losses emerged.

The quarter ended on a sour note as investors began to sense that inflation could get out of control and the Fed seemed uninterested in doing anything about it.  Losses continued into early July and the third quarter is not off to a good start.