Enclosed please find your reports for the first quarter of 2006. Surprisingly, the market showed the ability to spring ahead, achieving robust gains amidst data that provided mixed signals!
Economic and Market Overview
There has been some good economic news on the horizon. The S&P index reached a five-year high, corporate America is posting strong profits and revenues, and the employment reports for March were solid and increasing to higher levels.
Current issues concerning us include the Federal Reserve’s policy of tightening rates beyond safe levels as they did in 1999. They seem unwilling to declare a stopping point or state that inflation is under control. We don’t see these inflationary fears as valid. It would be unfortunate if rates continue to rise until the economy slows.
The housing situation is worrisome, since new homes sales are declining in many parts of the country. A combination of rising interest rates and stagnant real estate values would most likely curtail spending by consumers, who have been using home equity loans for consumer/retail spending.
Geopolitical concerns continue to be on our minds, although foreign markets have been a boost to portfolio returns.
Portfolio Update
Year-to-date, our investments in small cap international and domestic funds were the top performing sectors of all the markets. Artisan International Small Cap Fund (up 15.6%) and Laudus Rosenberg International Small Cap Fund (up 13.4%) were well above their benchmarks. On the domestic front, all our small cap funds delivered greater than 10% returns. Keeley Small Cap Value Fund was our best performer - up 14.6%. In fact, we added additional funds to your holdings in Keeley earlier this quarter.
We were very encouraged by a recent meeting with Mark Keeley. He mentioned that the fund defines small companies as having a market cap between $200 million and $1.3 billion. Once a position increases in value and grows to more than 2% of the fund, it is sold to reduce the position and decrease risk to the portfolio. We agree with this risk adjustment philosophy. The rebalancing allows the fund to stay consistently in the small cap universe. An overall theme of the fund is focusing on companies that are spin-offs from larger companies. This overlooked sector represents about 40% of the portfolio holdings. Since these positions are not covered by Wall Street there is a distinct competitive advantage..
We sold our holdings in American Beacon Small Value Fund, as their fund of funds strategy no longer displayed the degree of rigor we have come to expect. Proceeds were divided between Keeley Small Cap Value Fund and a new fund, Stratton Small-Cap Value, which we first noticed in a commentary on tax efficiency. This comes from the very low turnover of the fund, which is currently 15% compared to a sector average of 62%.
In the small growth segment of our portfolio, we recently sold a portion of Baron Small Cap, and invested in a new fund, Managers Essex Small / Micro Growth Fund. This fund is unique in that it is managed by an all-female team. Similar to the Keeley philosophy, this fund looks for inefficiencies in the pricing of small cap stocks due to the lag of Wall Street analysts.
In a diversified portfolio, there is always an under-performing asset class. For the first quarter it was the PIMCO Commodity Real Return Fund, which was down 5.6%. This fund tracks the Dow Jones AIG Commodity Index returns and also invests in TIPS, which are inflation-adjusted government bonds. The returns were not encouraging in the first quarter, but we are long-term bulls of commodities. We are looking for an opportunity to add to our commodity exposure. Commodities have fixed supplies, and are experiencing rising demand as developing countries like China and India build out their infrastructure. We like this fund because we feel the combination of the commodity exposure with TIPS offers a real hedge to inflation. The positive news is that this fund is our smallest holding.
For those of you who hold variable annuities, we will be making some changes in the coming weeks. As you know, we recently implemented an enhanced trading strategy for annuities. This will lead to greater efficiency, and allow us to respond quicker to market conditions. You will receive separate correspondence addressing the changes we make to the annuities.
News at Singer Xenos
In mid-April, Liam Molloy, CFA will join our research team after re-locating from Seattle. He will divide his time between working with advisors and enhancing our investment research process. We know he will be a great addition to our firm.
In May, we will be holding an informal cocktail party at the ballroom of our Coral Gables offices. Keep an eye on your mailbox for invitations. Our annual Client Gala will follow in December this year, coinciding with Art Basel week. It should be a beautiful event.
Faith Xenos was recently interviewed by Glamour magazine. Her article will appear in the May issue.
We continue to grow our practice through the kindness of your referrals and recently reached $700 million of managed assets. We are grateful to you, our clients, for your support and loyalty.
/Singer Xenos Wealth Management
