1st Quarter 2012
March 31. 2012

The first quarter of 2012 brought a big move up in the equity markets. We saw all three of the major averages move higher with the Dow up 8%, the S&P 500 up 12% and the Nasdaq up 19%. This was the best start of a calendar year since 1998, and considering many of the “experts” were not predicting it, many people were caught by surprise. The other interesting fact about this move is that it was done while stock funds were in net redemptions (more people selling than buying) and money was pouring into bond funds. As we have mentioned before, it is unfortunate timing for those who can’t control emotion because they have missed out on a 25% move in the markets since September, and they continue to buy bonds at all-time peak. We appreciate that our clients are not getting trapped in that cycle.

The first quarter performance for portfolios has been a reward for our patience with several management teams that struggled during 2011. The first example is the Fairholme Fund managed by Bruce Berkowitz. The fund was down over 30% last year due to his purchases of insurance and banking stocks like AIG and Bank of America. His decisions were sound, but many investors sold the fund when it was down and questioned his processes. We had many internal discussions in our office and conference calls, but at the end of the day we believed he made good investments. This year in the first quarter alone the fund is up over the 30% proof that his ideas are working.
The second example is the Third Avenue Value fund managed by Marty Whitman. The fund struggled last year but has had a strong recovery since the August selloff. In February, we learned that Marty Whitman was retiring and would no longer be involved with the day to day decisions. We feel that Anytime a manager retires, resigns, or leaves, it is best to sell and find a replacement. The fund was up over 13% this year at the time we sold the fund.
We have also added some new positions in the portfolio. The first is Fidelity New Insights, which is a smaller version of Fidelity Contrafund managed by William Danoff. This adds some exposure to large companies in the US and gives us a breadth of diversification in that part of the market. We also continue to search for another fund with a global reach to participate wherever there is value. We believe this long term focus on equities will give us the best chance to allow portfolios to beat inflation.

We are constantly evaluating all of the funds within client portfolios to make sure we are positioned for the best relationship of risk and reward. The economy is still on a slow growth trend line, and similar to last fall when the media cried double dip recession the numbers show we are not in a recession, nor are we in a big expansion. We do believe key answers to uncertainty such as the Supreme Court ruling on healthcare, elections this fall and the federal tax code expiration will provide stability for businesses and consumers to make plans for the future. We can never control the markets, politics, IRS, etc. but we can make plans to deal with circumstances at hand. We look forward to seeing you at your next review meeting and updating your personal financial plan.

Daniel P. Michalk, CFP®, ChFC