Weathering the Storm

1Q 2011

Global financial markets extended their rally during the first quarter despite significant unrest across parts of Northern Africa and the Middle East, a massive earthquake, tsunami and partial nuclear meltdown in Japan, renewed sovereign debt issues in Europe, and continued inflationary pressures in several key developing economies. Although these exogenous shocks did cause a temporary spike in the “fear gauge” commonly known as the VIX, investor psyche and positive market momentum returned by the end of March amid optimism that the recovery from the financial crisis had become self-sustaining.

In reviewing the statements that follow, we hope you’ll observe the diversity that’s been built into your customized portfolio structure. Given that we’re all forced to live in a world of certain uncertainty, we believe it’s only prudent to spread resources across numerous asset classes and to then abide by an established rebalancing discipline. Historically, this implementation has provided investors with a smoother experience through the tempering of extremes (both high and low).

Quarterly results for these varied asset categories are below:

• Domestic equities returned between 5.9% (Large Core) and 9.2% (Small Cap Growth). Smaller company stocks have now outperformed their larger contemporaries by an annualized difference of 5.6% over the last three-years, enabling them to reach new all-time highs.
• Ongoing weakness in the U.S. dollar versus a trade-weighted basket of currencies aided returns for the international stock categories. That said, the advances in foreign markets were relatively contained at the index level, ranging from 2.1% (Emerging Markets) to 3.4% (Large Cap Developed), and results diverged widely at the individual country level.
• Steady, mostly upward trends within commodities (particularly the energy complex) allowed Managed Futures to once again produce a positive return of 3.6%.
• Although the Case/Shiller Home Price Index has been discouraging for homeowners (negative for last 6 months), the global commercial real estate holdings represented within client portfolios continue to appreciate modestly (+2.0%).
• Interest rates on U.S. Treasury obligations rose only modestly during the quarter, allowing the Barclay’s Aggregate Bond Index to provide slightly positive returns of 0.4%. As investors seek ways to mitigate potential interest rate risk going forward, strategic categories such as high yield credit (+3.9%) and TIPS (+2.1%) have continued to provide incremental value. The pending expiration of the Federal Reserve’s current quantitative easing program on June 30th will be closely watched by bond market analysts, as some question who will be the new buyer of our government’s debt.

The 2008 global market crisis and the subsequent difficulties have left many investors fatigued. Although we’ve now passed the two-year anniversary of the market’s low point, it’s historically consistent that some investors have been slow to regain confidence. Many have accepted talk about a “new normal” in which stocks and other financial assets will offer lower returns in the future. But we believe it’s important to remember that earlier generations of investors faced similar worries. Today’s headlines only echo the past with stories about government spending, armed conflict, surging inflation, rising oil prices,  economic stagnation, high unemployment, and market volatility. As your wealth management consultants, we strive to position ourselves as the filter for synthesizing this flow of information and developing strategies that can weather the inevitable storms yet to come. Once again, we thank you for your trust and confidence in this endeavor.