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July 25, 2007 Dear Client: In our continuing effort to improve efficiency and client service, I am pleased to introduce VirtualSafe, a more secure and convenient way for you to access your Investment Management statements, tax returns and other documents. With a single login to a new secure section of our website, you will be able to access your GFC documents in one central, organized location. Your statement is posted to your new VirtualSafe.
Market Summary Equity markets were volatile in a positive direction in the second quarter. Domestic large-cap stocks were tied with foreign large-caps, returning 6.3% and 6.4% respectively. U.S. large-cap equities, represented by the S&P 500 Index, finally rebounded to the level attained over seven years ago, in March 2000. Although the price of the S&P 500 Index is the same as it was seven years ago, the stocks that make up the index have paid dividends, resulting in an annualized gain of just under 2% over this period, or 13% total for the seven year period. Still, it is obviously dismal performance. The news is misleading in several ways: the S&P 500 Index is not the appropriate measure of portfolio performance. It is hard to imagine an investor today whose portfolio does not hold foreign equity investments. During the last seven years in which the S&P 500 has been flat, foreign developed markets have returned 56% (almost 7% annualized), small cap equities returned 76% (8% annualized), and emerging market equities a whopping 138% (13% annualized). A properly diversified equity portfolio has fared extremely well over the last seven years. As always, our advice is to ignore the headlines and stick to the fundamentals: diversification and a goal-based investment policy.
Alternative investments, hedge funds, private equity, venture capital, long-short funds, commodities, and leveraged buyout firms. It's a pretty wide range, but the common denominator is privacy. As professional skeptics, we have to ask why a private investment firm would want to take on public investors and the comcommitant scrutiny, regulation, administrative responsibilities and market expectations. The party line: for access to low cost capital. The skeptics' line: for increased fees. If the recent offerings of private equity partnerships The Fortress Investment Group and The Blackstone Group are any indication, investors are underwhelmed by the prospects of hedge funds' performance in the public markets. Do investors in the now publicly traded partnerships realize that they are buying a different business than the formerly private investment funds themselves? They are buying the profitability of the management, not the investment returns of the funds. And management may be a different business when you have a few million people and the SEC looking over your shoulder.
Chris Ailman, the Chief Investment Officer of the California teacher’s pension plan CalSTRS, commented on the news that private equity partnerships are going public in a recent interview: “I wish they wouldn’t, but I understand why they are." It is certainly true that some investment managers are able to outperform the general market. It is also true, although much less often, that some managers persistently outperform the market. It is always true, however, that risk and reward are inseparable, and any investment with higher than market returns will have higher than market risk. Superior investment managers quickly realize their value and adjust their fees accordingly. The bottom line is that the investor pays a premium for a superior manager, such that their net return after fees reverts to the market return. Professor Jonathan Berk has written two elegant papers that demonstrate this effect. The first paper applies the finding to closed-end mutual funds, as an explanation of the puzzling persistance of discounts of closed-end mutual funds. We believe that the flood of private investment firms to the public markets is not a positive development for their current investors, and certainly not a good opportunity for new investors. Our Code of Ethics and Privacy Policy The topic of our first Compliance Committee meeting last week was Ethics. It almost goes without saying that we will always act ethically, put your interest ahead of ours, protect your personal documents and private information, and never attempt to profit from information from or about our clients. Still, I want to assure you that we take our fiduciary responsibility very seriously, and have committed substantial resources to creating a culture of competence and security. If you have any questions please don't hesitate to call us. Regards, Audrey Grubman, CFP®
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