A Difficult Start

The first quarter of 2008 witnessed poor performance in virtually all equity asset classes. Still, as a result of broad diversification and careful selection of specific investment vehicles, our clients’ portfolios suffered a good deal less than major domestic market indices...and generally much less than alarmist media coverage would cause one to believe.

For clients with many years of experience with our patient, strategic investment approach, our consistent focus on long range expectations, with relatively little reaction to short-term disturbances, should ring very familiar. While this past quarter’s performance is worse than we’ve seen in five years, it’s important to remember how exceptionally good those intervening five years have been. Aggregate gains since 2003 through the end of 2007 were stunning, even with some quite poor quarters at the beginning and the end and along the way.

So, in context, declines in asset values from recent highs should be less concerning. These general declines since last October are well within the range of normal, periodic retrenchments and do not, themselves, give cause for changes in long term strategic placements. Further, the heightened day to day volatility in recent months, [there were 15 days this quarter when the commonly watched Dow Jones was up (5 days)…or down (10 days) more than 200(!) points] confirms the wisdom of our practice of not trying to “time” market movement. While everyone’s temptation is to try to seize short term advantage by “doing something”, logic and our experience tell us that no-one can predict a durable advantage from short term moves and history is eloquent that the cost of being wrong in those moves can be very great.

While we are very mindful of the several threats the domestic economy currently faces (heightened inflation, dollar weakness, still declining residential real estate values, a near collapse of some credit markets, failing brokerage firms, and the brink of a recession in the overall domestic economy), it’s difficult for us to take a particularly pessimistic stance, even in the near term, from here.

Economic fundamentals around the world are reasonably strong, with absolute levels of employment high, inflation moderate, and production and consumption growing. With recent repricings in equities, real estate, and credit markets, current valuations will, we think, attract increasing interest. Add to this mix direct domestic fiscal stimulus and a Federal Reserve that seems determined to deploy old methodologies (rate reductions) and new (lending directly to brokerage firms as well as to commercial banks, and accepting mortgage paper as collateral) to maintain confidence in market mechanisms. These governmental responses are not without their own risks (even greater deficits, higher inflation potential, and moral hazard), but seem likely to prevent severe losses for investment market participants.

Beyond this very big picture, however, there are some important lessons from recent events that should help us continue to refine our approaches to specific areas of investment placements. In articles to follow, Rich Palmer describes some of the surprises that occurred in supposedly very low risk short-term debt investments and Jason Thomas and Mike Fitzhugh discuss current insights on investing in developing markets.

Integration Update

The integration of our newly merged firm continues at an accelerating pace. We’re planning a first gathering of the entire staff of both offices together early next month. Meanwhile, that staff continues to grow. Since the beginning of the year, we’ve made three additions: one to expand our investment strategies and research function and two to our senior level administrative personnel so our core client service staff have even greater support resources.

We’ve also made considerable progress in articulating our unified business strategy and its implications for some subtle changes to our internal organizational structure. Most importantly for our clients, we’re making significant enhancements to our investment platform and to our planning approaches to quickly capture the intellectual and operational advantages our merger provides.

Lastly, we’re about to launch our firm’s new name, still largely “under wraps.” We’re very enthused about this opportunity to create a new public identity and are planning to go “live” in mid-May. This will be our last Commentary under the name Kochis Fitz/Quintile.

As evidence of the merit of the key purpose behind this merger, to create a new firm, more resourceful and more durable than either of its constituents, we’ve all moved from some degree of remorse over losing our old names…to now looking forward to leaving them behind.

Tim Kochis, Editor