Blue Haven Capital
Personalized Investment Management with a Purpose
In This Issue
THE MARKETS
TREASURY INFLATION-PROTECTED SECURITIES
BUILD AMERICA BONDS
LOOKING BACK
Recent Press and Awards
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  January 2010
Greetings!

Thank you for interest in Blue Haven Capital. We welcome your questions and comments and can be reached via email at [email protected]

Question: Who said "The market may be inefficient, but it remains close to invincible." ?

Click here for the answer!
THE MARKETS
Stock Index Performance as of 12/31/2009

Blue Haven Capital Model Portfolio Returns:

Blue Haven Capital Traditional Equity Portfolio:
3 months...........................................+5.21%
1 year...............................................+40.93%
3 years..............................................-3.59%

Blue Haven Capital Socially Responsible Equity Portfolio:
3 months............................................+5.22%
1 year.................................................+39.78%
3 years.............................................. N/A
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Current Interest Rates:
10 year US Treasuries...........................3.82%
10 year AAA rated municipal bonds..........3.02%
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Standard & Poor's 500 Index
3 months...........................................+6.04%
1 year................................................+26.46%
3 years...............................................-5.63%

Domestic Index Performance Year to Date:
Dow Jones Industrial Average.................+22.68%
Standard & Poor's 500...........................+26.46%
Russell 2000.........................................+27.17%
Domini 400 Social Index (DSI)................+34.24%

International Index Performance Year to Date:
MSCI Japan (in $US).............................+8.72%
MSCI Pacific xJapan (in $US)..................+72.68%
MSCI Latin America (in $US)..................+109.35%
MSCI EAFE (World xUS in $US)..............+27.75
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The Blue Haven Capital Model portfolios are constructed from a diversified mix of small, medium, and large capitalization stocks and include both domestic and international exposure. Portfolios tilt slightly towards large capitalization stocks and slightly towards value investments.

The Blue Haven Capital model portfolio data quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate thus an investor's securities, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than return data quoted herein. Figures do not include Blue Haven Capital management fees.

WHY TIPS (TREASURY INFLATION-PROTECTED SECURITIES) AREN'T THE ANSWER

Inflation is coming, are TIPS the answer?

It is somewhat agreed upon that with all the additional money being injected into the system and with interest rates as low as they are, that at some point in the next year or so, we will begin to see the effects of inflation. How does one traditionally protect a portfolio against inflation?

One recommended way to defend against inflation is to use higher coupon bonds. In a blog article posted last year, we displayed the difference a higher coupon bond would make in preserving the principal of a portfolio facing rising interest rates. All things being equal, a higher coupon bond will move less in relative value than a low coupon bond in a given interest rate change. If your bond portfolio is being used as collateral for a loan, or if you tire of seeing dramatic price swings in your bond portfolio, consider higher coupon bonds.

Another recommended defense against inflation is the purchase of Treasury Inflation-Protected Securities or TIPS. TIPS, like most bonds, pay interest twice a year. However, in addition to interest, TIPS also change in principal value according to the US Consumer Price Index or CPI. The thinking is that as inflation rises, the CPI will rise, and as the CPI rises, the value of TIPS will rise. The error in this thinking is that a CPI increase will match what a consumer experiences. It is Blue Haven Capital's argument that the inflationary period that we will soon enter will be quite different than any we have experienced before. We expect energy, agriculture, industrial metals, precious metals, and livestock to rise, but we do not expect to see much movement in housing prices for a very long time. Since housing price makes up approximately 43% of the weighting of the CPI, we do not think the CPI will accurately depict the inflationary pain the consumer will feel. 

As an alternative to TIPS, Blue Haven Capital is using a small position in the iPath Dow Jones-UBS Commodity Index Total Return fund, symbol DJP, to hedge against inflation. We believe that the things people "need" such as energy, food, and manufacturing materials will become more expensive. We also believe that the things people "have" such as homes will not change much in price.

Overall, we believe that by having some exposure in DJP and by gravitating towards higher coupon bonds, we will dramatically lessen the portfolio volatility caused by an increase in inflation. As always, we welcome your questions or comments.
BUILD AMERICA BONDS - ONE YEAR LATER
The continued attraction of Build America Bonds will ensure high supply into 2010

Build America Bonds (BABs) are a somewhat recent new debt instrument in the bond world. A Congressional act in February 2009 gave state and local governments the ability to finance capital projects (and hopefully in turn help rejuvenate the economy) through the issuance of Build America Bonds. The issues were immediately popular and continue, almost one year later, to be very well received.

Normally when a state or local government issues bonds, the bonds are issued as tax exempt instruments and the audience to which these bonds appeals is limited to individuals, some insurance companies, and some corporations. BABs however are taxable, so they appeal to individuals, insurance companies, pension funds, and many non domestic bond buyers. What makes BABs unique is the fact that the interest payments due on the bonds are partially offset by a payment from the Federal Government to the issuing entity. In essence, the Federal Government is reimbursing some of the financing cost for City of Geneva General Obligation for example. With a lower financing cost, an issuer is more likely to begin a project sooner rather than later.

Blue Haven Capital uses BABs and is pleased with the security and performance shown by these new bonds. The universe of taxable bonds used to be much smaller and consisted only of Treasuries, Agencies, Mortgage Backed paper, and Corporates. Now, in addition to widely used corporates, we also use BABs. The creation of BABs has given the investing public one more high quality tool for portfolio management.
2009
Looking Back 

The unusually high return achieved in our model equity portfolio was due to some dramatic increases in certain areas of the world. Fortunately we had some exposure to Latin America (up over 90% in 2009) and the Emerging Markets (up over 70% in 2009).  However, being diversified meant we also had exposure in Japan (up less than 9% in 2009). The US markets delivered between 25% and 52% depending upon which index one followed.

Diversification does not guarantee good returns...but the alternative is tantamount to using a crystal ball. We continue to believe that wide diversification across domestic and international markets, balanced with prudent fixed income exposure will maximize available returns.

We wish all those who are reached by this newsletter a productive and fulfilling 2010. Again, we welcome the opportunity to meet with individuals and institutions who are leaving a traditional brokerage relationship and searching for highly experienced, low cost and objective investment management.
Blue Haven Capital is a fee-only registered investment advisor providing experienced, professional low cost investment management for individuals, associations, private foundations, and public charities. If you know an individual or group who might be interested in our services, please forward this email to them!


 
Best Regards,

Donald Cummings             Bill Moucka
Principal                              Principal


Blue Haven Capital LLC
630.588.3800