End of Quarter Update
April through June of this year saw more than its fair share of volatility, angst and pessimism. Yet with all that went on, major indexes were largely unchanged, as they have been for the year so far. Our accounts also are generally flattish on the year, with results largely tracking the indexes plus or minus a few percentage points, largely depending on account exposure to financials and REITs, and to some more disappointing tech positions such as Seagate and WEBX. The best performing account positions tended to be in energy and healthcare, such as Devon, Royal Dutch, TEVA, and SFCC. In hindsight, more energy and healthcare would have been beneficial to the quarter's performance, but as mentioned in the past, we are in it for long haul, and that means creation of diversified portfolios that can weather and thrive in different types of unpredictable market and economic environments. So we will remain a practitioner of diversification, seeking to find the best possible individual companies in which to place client capital.

We continue to hold some cash in client accounts to provide capital for emerging investment situations. Looking ahead, we foresee finding new opportunities in a familiar mix of undervalued, established companies that may have fallen on temporary hard times and/or investor skepticism and smaller, less well-known companies that have growth prospects as yet undiscovered by the crowd.

We look forward to the rest of the year with enthusiasm and thank all clients for the confidence you have placed in us.
- posted by Jay @ 5:00 PM

 
Diversification vs. Stepping Aside
Diversification is crucial to preserving capital and can avoid unforeseen, unpredictable events that can drive down even the soundest investment positions. A carefully constructed, diverse portfolio can lower risk while boosting expected returns. We endeavor to manage all client portfolios with diversification in mind, trying to find asset classes (financials, utilities, REITs, media) that have limited correlation yet demonstrated investment merit. At times, however, even the soundest diverse portfolio seems to have a position or two akin to stepping in front of the proverbial truck. Lately, with interest rates rising, many of the financials and REITs have fallen and may yet continue to fall. Yet, can a portfolio be considered truly diverse without at least some exposure to finance, a huge part of the U.S. economy?

We have considered this question carefully in the past few weeks, and have generally chosen to hold on to core financial and REIT positions that hold up under renewed analysis. Companies like Washington Mutual, with a generous dividend and buyout prospects, or a REIT such as Rouse, with retail exposure that should be beneficial in an improving economy. We chose to trim those positions where individual merit is not enough to overcome the larger current in the sector. This was the case with certain of the mortgage REITs that performed so well over the past year.

The result is that we have portfolios that remain diverse and girded against unforeseen events, yet we have raised cash over the past few months that we hope to profitably deploy as new, diverse opportunities are uncovered and the effects of rising rates are incorporated into the economic and investment scene.
- posted by Jay @ 5:43 PM