April 15, 2006
We are off to a good start in 2006. The first quarter turned in the best first quarter since the stock market bubble burst in 2000. The S&P 500, which represents large-cap stocks, gained 4.2%, while the real standouts were smaller-cap stocks, up almost 14%, and foreign stocks, which rose 9.4%. In the face of steadily rising interest rates, the Lehman Brothers Aggregate Bond Index was down 0.65%. As you already know, our investment management objectives continue to focus on much longer time periods.
As mentioned above, small-cap and foreign stocks continued their dominance over other investment areas during the first three months of 2006. This is forcing many of our mutual fund managers to gravitate to the large/mid-cap and growth oriented stocks where they are finding slightly better values. As our country continues its acceleration into a global marketplace, investors are feeling more and more comfortable investing their hard-earned money in foreign countries. Our current allocation to foreign stocks is approximately 25% of the equity portion of your portfolio. While foreign stocks can be inherently volatile, we are comfortable with this weighting for the time being.
Rising interest rates, fear of a declining housing market, a growing current-account deficit and the ongoing turmoil in the Middle East have all been on investors’ minds the last few months. With these items in the forefront, the stock market is due for some turbulence in the months ahead. We hope to stem this volatility with our continued tilt towards the value side of investing.
Value managers try to buy companies selling at discounts compared to their intrinsic value. The intrinsic value is what a company would be worth to a private owner independent of the stock market and its daily quotations. Most of our managers desire a discount of 30% or more. It is with this discount that value managers try to distance themselves from the daily stock market gyrations. Recently, many of these value managers have been dipping their toes in the growth waters. We are leaving it up to them to decide whether the growth side of equation is offering a large enough incentive to make it worth their investment. On the flip side, our growth fund managers care less about the discount they are receiving when they purchase a corporation and more about the company’s consistently high earnings growth.
We also have a fairly large weighting in a total stock market index or the S&P 500 index fund within most of your portfolios. These two funds have a combination of growth and value stocks included in their index. It is our hope that when you mix the growth style with the value style, large-cap with small-cap and domestic with foreign, that taken together, you will end up meeting your financial goals with the least amount of risk.
Enclosed, you will find your Portfolio Holdings Statement as of March 31, Portfolio Performance Summaries, a quarterly Account Management Fee Statement, and a Notice Regarding Treatment of Confidential Information. Please call us should you desire the most recent copy of our Form ADV, Part II. In addition, do not forget to notify us should your investment objectives or personal financial situation change.
Yours truly,
William A. Bullock
President