4th Quarter

January 12, 2000

The year 1998 was the most volatile year for equities since 1987. The volatility was accompanied by the largest disparity in returns since the 1929-30 market when contrasting large-cap stock returns with small-cap stock returns. The large cap S&P 500 index returned double digit positive returns while the small-cap Russell 2000 index returned double digit negative returns.

Even within the large-cap S&P 500 index, only the top 5 deciles (250 largest companies) produced positive returns. in general, size of market cap, the more negative the return. Even within the large-cap category, growth managers’ returns far outpaced value managers’ returns.

Globally, world equity funds produced an average 2.3% return. Real estate funds (REITS), with a negative 17.2% return, were extremely hard hit after several years of outstanding returns. within the fixed income categories, the disparity of returns was also very evident. U.S. Treasuries performed very well in the declining interest rate environment, while lower quality issues substantially under performed.

Generally, investors favored perceived safety offered by large-cap growth stocks and fled less liquid mid and small- cap stocks, The result was portfolio managers like ourselves that adhere to Modern Portfolio Theory (asset allocation/diversification/risk control/etc.) returned performance well below the publicized large-cap indexes for 1998 (Dow Industrials and S&P 500) This was because our diversified portfolios included under performing small-cap stocks, international stocks, REITs and some lower grade bonds.

Asset allocation suitable for each client has been investment philosophy. We will continue to follow this philosophy and the principles of Modern Portfolio Theory for portfolios entrusted to our management. When the is a great disparity in returns, as just experienced, our portfolios may under perform the well publicized large-cap indexes.However, over longer periods of time, we are convinced asset allocation and diversification will provide superior risk adjusted returns when compare to the appropriate benchmarks.

If you desire Morningstar reports, or the most recent copy of our Form ADV, Part II, please call us. If your investment objective or personal financial situation has changed, it is important to notify us so we can reevaluate your portfolio.

Enclosed, you will find your fourth quarter, 12-month and 36-month (or since inception) Portfolio Performance Summaries, Portfolio Holdings Statement as of December 31 and a quarterly Account Management Fee Statement.

We appreciate your business and wish you a healthy and prosperous New Year!

 

P.S. For all taxable accounts, we will mail 1998 information on realized gains and losses by the end of January. You will receive 1099 forms directly from your custodian at approximately the same time. If you prefer this information be mailed directly to your tax preparer, please advise us.