Quarter End Commentary July 25, 2011
Through June 30, 2011, our five year composite track record, net of all fees, through June 30, 2011 shows that we produced an average annual return of 6.07% for our discretionary clients during a tumultuous time in the financial markets. By contrast, the Standard & Poors 500 stock index averaged only 2.94% per year. This is by far the best five year relative performance we have generated for clients. Importantly, this was achieved with a very low rate of volatility as measured by “standard deviation”, a commonly used measure from statistical analysis. Full disclosure requires me to note, however that even this very decent return fell short of that you could have earned on an index of bonds, at 6.52% per year. Why not move all your funds into bonds? Well, right now, interest rates are most unattractive, the largest bond issuer in the world, the US government, may default, and historically, bonds have outperformed stocks only during the Great Depression of the 1930’s (hmmm…what does that say about the current era?). I continue to believe that a balanced approach, using various financial instruments of high quality will achieve superior returns for our clients, whatever the future brings, when the client commits to an investment time frame of three to five years.
A number of clients and acquaintances have asked my opinion of the meaning of a possible U.S. government default for investor portfolios. First, I agree with those who do not believe such a default will occur. Even the most inadequate politicians are usually nudged by history to make bold decisions. This is one of those moments and as I write, we are hours away from yet another self-imposed deadline in which it appears likely that the midgets in Washington will kick the can down the road. Problem is, the end of the road is close at hand and the can will likely bounce back into the laps of elected officials very soon. The more worrisome aspect of this debacle is that we will likely see our national credit rating dropped below AAA. This has ominous implications for our ability to raise funds to pay our out of control borrowing. Certain trusts, covenants and legally binding investment policy statements do not allow investment in instruments with less than a “AAA” rating. Thus, we may discover that a large pool of investment funds is no longer available to Uncle Sam, leading to rising interest rates at a time when our economic recovery is fragile. While I do not see any reason for immediate optimism, I absolutely believe there continue to be opportunities to make money and do not see a need to retreat into cash at this moment. For a history of how we got to this messy junxure and how we are positioning our clients to deal with the situation take a look at the July-August Newsletter in the Newsletter section of this web site. The link is to be found in the coffee colored section of the first page, at the very bottom of the list. Look up and to the right!
