1st Quarter 2009 Powerpoint


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  • 1st Quarter 2009 Powerpoint

    2. 2. First Quarter Review
    3. 3. <ul><li>Concerns about the damage to the financial system, mounting job losses, and sharp declines in corporate earnings sent stocks to new lows by the second week in March </li></ul><ul><li>Stocks have rallied since, but still finished the first quarter with double-digit losses (though a continued rally has brought them close to breakeven for the year by mid April) </li></ul><ul><li>High-yield bonds had the best quarter of the asset classes we follow, while REITs had the worst </li></ul>Losses Continued in the First Quarter of 2009
    4. 4. Asset Class Returns Asset Class (current tactical overweighting  or underweighting  ) Index 1st Qtr. 2009 12 Months 5 Years (Ann.) Domestic Larger-Cap Blend (  since Nov-08) Vanguard 500 -11.0% -38.1% -4.9% Domestic Larger-Cap Growth iShares Russell 1000 Growth -4.2% -34.3% -4.5% Domestic Larger-Cap Value iShares Russell 1000 Value -16.7% -42.3% -5.0% Domestic Smaller-Cap Blend iShares Russell 2000 -14.9% -37.3% -5.2% Domestic Smaller-Cap Growth iShares Russell 2000 Growth -9.7% -36.2% -5.4% Domestic Smaller-Cap Value iShares Russell 2000 Value -19.6% -38.7% -5.4% Foreign Stocks  Vanguard Total International -13.0% -46.6% -1.0% REITs  Vanguard REIT -32.1% -58.1% -8.8% High-Yield Bonds  Merrill Lynch High-Yield 5.3% -19.9% -0.3% Domestic Investment-Grade Bonds  Vanguard Total Bond 0.3% 3.2% 4.1% Global Investment-Grade Bonds  Citigroup World Gov’t Bond -4.8% -3.8% 4.6% Commodity Futures Dow Jones AIG Commodities -6.3% -45.0% -3.2% Short-Term Emerging Markets Local Currency Bonds JPMorgan ELMI+ -3.9% -11.8% 6.8%
    5. 5. <ul><li>While we don’t like losing money, we are encouraged that we beat our benchmarks by significant margins in the opening quarter </li></ul><ul><li>Our fixed income managers were able to add much of the value while tactical allocations in the equity markets helped us later in the quarter </li></ul><ul><li>The majority of our holdings beat their index for the quarter </li></ul><ul><li>Our tactical allocations continued to add value in aggregate so far in 2009 </li></ul><ul><ul><li>Our high-yield bond positions were very strong </li></ul></ul><ul><ul><li>A position in a stock index ETF allowed us to capture the rally </li></ul></ul><ul><ul><li>An allocation to a Natural Resources stock fund also allowed us to capture the rally and provide us exposure to an increase in commodity prices </li></ul></ul>Our Portfolios Did Well in the First Quarter
    6. 6. Fund Performance 5.63 6.4 4.13 4.9 3.13 3.0 .12 1.5 Barclays Aggregate PIMCO Total Return - - - - - - .12 1.3 Barclays Aggregate PIMCO Unconstrained Bond Fund Benchmark Index 1st Quarter ’09 12 Months 5 Years (Ann.) 10 Years (Ann.) Return Bench-mark Return Bench-mark Return Bench-mark Return Bench- Mark Artio Global High Yield Barclays High Yield 5.5 5.98 -18.26 -19.31 1.04 -.10 - - Atrio International Equity MSCI EAFE -16.24 -13.85 -46.20 -45.23 - - - - Dodge & Cox Income Barclays Aggregate .26 .12 -.6 3.13 2.72 4.13 5.21 5.63 DWS Managed Muni Barclays Muni 4.29 4.22 -.54 2.27 2.59 3.21 4.15 4.59 DWS Short Duration Barclays Aggregate 2.59 .12 -3.93 3.13 2.88 4.13 4.19 5.63 Hussman Strategic Growth S&P 500 7.03 -11.01 -2.75 -30.07 2.33 -4.76 - - Ivy Global Natural Resources S&P 500 4.78 -11.01 -56.67 -30.07 2.93 -4.76 11.34 -3 Kinder Morgan S&P 500 4.28 -11.01 -8.05 -30.07 7.64 -4.76 18.05 -3 Leuthold Asset Allocation S&P 500 -8.25 -11.01 -35.61 -30.07 - - - - Loomis Strategic Income Barclays Aggregate -.06 .12 -21.45 3.13 1.19 4.13 6.32 5.63 Putnam NJ Tax Exempt Barclays Muni 4.32 4.22 -.04 2.27 2.53 3.21 3.68 4.59 Barclays TIPS Barlcays U.S. Government 5.20 -.99 -1.77 6.95 - - - - TCW Total Return Barclays Aggregate 2.46 .12 1.86 3.13 4.24 4.13 5.96 5.63 Vanguard Total Stock Market S&P 500 -10.93 -11.01 -38.08 -30.07 -4.36 -4.76 - -
    7. 7. The Current Environment and Outlook
    8. 8. <ul><li>For decades, steady growth in debt has fueled spending and profit growth </li></ul><ul><li>In recent years, the trend was self-reinforcing as purchases with borrowed money drove up asset prices (such as homes) and profits, which supported even more borrowing </li></ul><ul><li>But now the trend has reversed … </li></ul><ul><li>Falling asset prices and lower spending/profits is a self-reinforcing “feedback loop” that is doing serious damage to the economy </li></ul><ul><li>This kind of debt-deflation spiral can be difficult to break </li></ul>A Rising Spiral of Debt and Wealth Is Now Inverted
    9. 9. The Total Volume of Debt Has Grown Steadily
    10. 10. <ul><li>No one knows for sure how successful their efforts will be </li></ul><ul><li>Efforts to date have been positive, but serious problems remain </li></ul><ul><li>Longer term there will be a cost for the actions taken today </li></ul><ul><ul><li>Likelihood of a weaker dollar? </li></ul></ul><ul><ul><li>Higher interest rates? </li></ul></ul><ul><ul><li>Higher inflation? </li></ul></ul><ul><li>Both the uncertainty and the real economic damage is taking a toll on any investment perceived as having risk </li></ul>We Think the Government Will Do Everything it Can to Prevent a Debt-Deflation Spiral from Taking Hold
    11. 11. In-Depth Research Underlies Our Investment Decisions
    12. 12. <ul><li>We often receive questions asking if we have considered a particular negative (and usually scary) scenario </li></ul><ul><li>These questions reflect concern that the environment is changing so rapidly that the basis for investment decision making can quickly become obsolete </li></ul><ul><li>The answer is that in all of our analysis we have gone to great lengths to factor in even very negative outcomes and to challenge our own views </li></ul><ul><li>We think walking through our analysis will give investors confidence that our investment decisions are sound even if a very negative scenario plays out </li></ul>We Have Undergone a Major Research Effort to Recalibrate Our Analysis Based on a New Economic Reality
    13. 13. <ul><li>We consider four broad scenarios in assessing equities as well as other asset classes </li></ul><ul><li>Our scenarios look ahead and are the basis for our investment decisions, although we strongly consider shorter term opportunities when making tactical trading decisions </li></ul><ul><li>We don’t know what scenario will play out, but we believe it will involve components of one or more of the scenarios we analyze </li></ul><ul><li>We assess possible worst case outcomes and the tradeoffs between risks and potential return </li></ul><ul><li>Our goal is to provide more predictable “absolute returns” </li></ul>Our Longer-Term Outlook for Equities
    14. 14. <ul><li>Scenario 1: “Muddle Through” </li></ul><ul><ul><li>Economic recovery in late 2009/early 2010 but subpar recovery for several years. Inflation gradually rises. </li></ul></ul><ul><li>Scenario 2: “Stagflation” </li></ul><ul><ul><li>Economic recovery in late 2009/early 2010 but subpar recovery. Strong inflation (mid single digits) near the end of the five-year period. </li></ul></ul><ul><li>Scenario 3: “Severe Recession/Deflation” </li></ul><ul><ul><li>Extended/deep recession and potential deflation through 2010, due to severe deleveraging and negative wealth effects. Recession does end but recovery is anemic. </li></ul></ul><ul><li>Scenario 4: “Goldilocks” </li></ul><ul><ul><li>Government policies are effective and economy starts growing in the latter half of 2009. An average recovery with moderate inflation. </li></ul></ul>Our Four Broad Scenarios
    15. 15. Investors Typically Become More Risk-Averse After Major Bear Markets Rolling Five-Year P/E Ratios Lower P/E multiples following bad bear markets reflect periods of risk aversion (remember that because each point reflects the trailing five years there is a lag relative to the dates shown).
    16. 16. <ul><li>Our overall equity return expectations are not exciting from current levels </li></ul><ul><li>But some of the active managers we use report finding “once-in-a-generation” opportunities </li></ul><ul><li>They don’t know exactly when the market will reflect what they believe are the true underlying values of their companies but are highly confident that over the next several years they can earn very good returns </li></ul><ul><li>We have already seen sharply improved performance from some of our active managers over recent months </li></ul><ul><ul><li>Hussman Strategic Growth is a prime example returning 7% during the first quarter </li></ul></ul><ul><li>Bond managers also have a unique opportunity to add value in this environment </li></ul><ul><ul><li>Spreads in the high yield, municipal, and investment grade sectors remain at high levels </li></ul></ul>Active Managers May Have an Advantage in this Highly Disrupted Environment
    17. 17. <ul><li>Even assuming record high defaults and record low recoveries from issues experiencing bankruptcy, returns are compelling and our portfolios have already benefited materially </li></ul><ul><li>We recently made even more negative assumptions in our models but our thesis remains solid </li></ul><ul><li>Most of our high-yield position is funded from equities </li></ul><ul><ul><li>This reduces our overall portfolio risk </li></ul></ul><ul><ul><li>A strongly positive environment for equities would also be positive for high-yield </li></ul></ul><ul><ul><li>But in such a positive scenario our high-yield positions would cost us some return </li></ul></ul><ul><li>We own a number of active managers because no good index alternative exists </li></ul><ul><ul><li>Our active managers are a bit less aggressive in aggregate than the benchmark </li></ul></ul>We Continue to Own a Large Tactical Position in High-Yield Bonds
    18. 18. Quarterly Performance of High-Yield vs. Equities Since 2007 Market Peak The credit crisis and forced selling drove high-yield bond prices to compelling levels when we first added them in the fourth quarter.
    19. 19. <ul><li>We are in the process of developing entry points for other asset classes </li></ul><ul><li>We have identified entry points for certain sectors such as small cap stocks and large cap stocks </li></ul><ul><li>Emerging markets look somewhat more attractive than U.S. equities in all scenarios, and we are evaluating an entry point for a tactical allocation </li></ul><ul><li>Foreign stocks (of developed countries) are at valuation levels comparable to U.S. stocks and so we are neutrally weighted there </li></ul><ul><li>There are many fixed-income opportunities and we are using managers with the flexibility to take advantage of them </li></ul>Tactical Considerations for Other Asset Classes
    20. 20. <ul><li>Most recently, actions by the Fed (quantitative easing) have increased our concerns </li></ul><ul><li>We continue to believe deflation is the primary concern in the near term, but we are also thinking about hedges given our longer-term concerns about inflation and the dollar </li></ul><ul><li>We held TIPS in our portfolio which returned over 5% during the first quarter but removed the position due to short term deflation concerns </li></ul><ul><li>Over the long term we believe inflation will become an issue </li></ul><ul><li>We have purchased a natural resources fund in our models and are considering emerging markets </li></ul>We Are Considering the Longer-Term Impact of Governmental Actions
    21. 21. In Summary …
    22. 22. <ul><li>The sharp rise in stock prices in the second half of March and first part of April have investors feeling good for now </li></ul><ul><li>But rallies of this and even larger magnitude commonly occur within bear markets </li></ul><ul><li>Remember that the rally in late November and December had investors feeling better, but it was followed by painful new lows </li></ul><ul><li>We aren’t predicting another steep decline, but investors need to consider the possibility and more importantly how they would react </li></ul><ul><li>We can help you gauge possible portfolio losses in the event of another big downturn in stocks to help you determine what level of risk you can handle </li></ul>Shorter-Term Risk Remains
    23. 23. <ul><li>Markets often overshoot what rational analysis suggests is fair value </li></ul><ul><ul><li>This happens on both the upside and the downside </li></ul></ul><ul><li>Buying an undervalued investment is difficult because losses will likely continue in the near term </li></ul><ul><ul><li>Investing exactly at the bottom is not possible </li></ul></ul><ul><ul><li>Therefore investors must be willing to accept near term (temporary) losses as a requirement to taking advantage of compelling longer-term opportunities </li></ul></ul><ul><ul><li>It is easier said than done </li></ul></ul><ul><li>As valuations change, we expect to adjust our portfolios to reduce risk if an asset becomes overvalued </li></ul><ul><li>We will also take risk if an asset is compellingly cheap </li></ul>Short-Term Losses Are Painful but Also Create Longer-Term Opportunities
    24. 24. <ul><li>There is a great deal of uncertainty and this is a challenging investment environment </li></ul><ul><li>We have worked very hard to gain all the information possible to assess the return environment and risks in the years ahead </li></ul><ul><li>We are challenging our own assumptions and seeking out contrary views to make sure we are considering all possibilities – both at the macro and asset class level </li></ul><ul><li>The investment approach we employ will, as always, seek to capitalize on mis-valued assets and take a long investment view </li></ul><ul><li>Though it will be a tough road, we are confident that ultimately the economy will emerge from this difficult period and grow again (although it is unlikely that it will be at the same levels we recently experienced) </li></ul><ul><li>And we are confident we can add value beyond what the markets give us, especially in this often dysfunctional market environment </li></ul>We Are Taking Nothing for Granted
    25. 25. Thank You!