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OVERVIEW: As I write this memo, the S&P 500 index has fallen approximately 42 percent this year to a five-year low, and has dropped approximately 48 percent from its high reached in October of 2007, according to data compiled by Bloomberg. The S&P 500 index is headed for its biggest annual decline since the Great Depression, when it fell 47 percent in 1931.
While we do not compare our performance to any benchmark, we are pleased that the accounts we manage for our clients on a discretionary basis are performing substantially better than the broad market indices.
So.....Have we hit bottom? When will we hit the bottom? How long will it take for the market to recover? Unfortunately, the answers to these questions are unknowable at this time, but we do believe 2009 will be a very difficult year for the U.S. economy.
The government has taken unprecedented steps to prevent a collapse of the financial system and it appears for now they have succeeded. However, moving forward there is a lot of work that still needs to be done to try to jump start the economy and this will take some time.
CURRENT STRATEGY: Hold the line! Early in the year, we aggressively re-positioned our discretionary accounts into an allocation of about 70%-80% in short-term U.S. Treasury notes and about 20%-30% in a Global Stock Fund. Our goal was simply to preserve capital during what we anticipated would be a turbulent year.
We believe that the economy is likely to slow rapidly in the months ahead and that the financial markets will remain extremely volatile. Until we sense there is some light at the end of the tunnel we plan to maintain our current defensive position.
At some point, when the economy begins to show signs of gaining traction, we will slowly begin to re-allocate monies back into good companies that we believe are very attractively priced. Patience will be a key to successfully navigating this next phase.
A CAREFULLY REASONED APPROACH: While no one has a crystal ball, we believe that our carefully reasoned approach and our willingness to choose our own course set us apart from most other money managers.
Over the past few months we have repeatedly been asked, "How do you decide what to do in times like these?" This is a great question, so we thought it would be helpful to outline the fundamentals that guide our decision making process.
1) Flexible Approach: We take a unique, "open architecture" approach to investing. We invest in securities regardless of market capitalization, geographic location, sector, or asset class and are willing to hold cash or short-term treasuries if we are not finding compelling values.
2) Absolute Return Focus: We know that positive, absolute returns are what matter most. Rather than trying to guess the short-term movements of the markets, we attempt to preserve capital and consistently generate positive absolute returns independent of broad market conditions. We hate to lose money.
3) Benchmark Agnostic: With a focus on seeking absolute returns and preservation of capital, we do not manage money with a goal of beating any specific investment benchmark. Rather, we believe that the value we add is through our disciplined approach and expertise in careful investment analysis and selection. We understand that relative returns provide little comfort when benchmarks are down.
4) Focus on Risk Control: We attempt to manage risk by investing in quality businesses trading at sensible prices. Specifically, we look for the following qualities in an investment:
- An understandable business model
- Owner-managers with a significant financial interest in the company and a proven track record of integrity and capability
- Substantial free cash flow and a strong balance sheet
- Sustainable competitive advantage
- A depressed price relative to its intrinsic value
5) Disciplined Investment Process: We perform all of our own independent research and use a time tested approach to valuing opportunities. We constantly play devil's advocate by asking, "what can go wrong?" or "what are we missing?" Knowing what we don't know is a key focus of our investment process.
We hope this is helpful. These are difficult times as the game is changing for everyone. If we can help you or someone you know in any way, please contact us.
Sincerely,
Craig P. Kelley Sean P. O'Hara
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* Performance information stated above is for the one year time period, January 1, 2008 through December 31, 2008, from December 31, 2008 through January 31, 2009, and from inception, March 31, 2006 through January 31, 2009, as is indicated. Performance information is for Kelley Investments Managed Accounts Program where client accounts are managed on a discretionary basis. Not all accounts managed by Kelley Investments are part of the discretionary Managed Accounts Program. Performance information stated above does not pertain to any accounts that are not part of the Managed Accounts Program. Performance results for accounts that are not part of the Managed Accounts Program may differ significantly. Performance information quoted above represents past performance and is not a guarantee of future results. Performance information is quoted on a Gross basis and does not include deductions for management fees or trading expenses. If these fees and expenses were taken into account, performance would be lower. The investment return and principal value of investments in the Managed Income & Growth or Managed Growth Portfolios will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost.
**For illustrative purposes only. It is not possible to invest directly in an index. Comparisons with the S&P 500® Index are not meant to be indicative of any of Kelley Investments Managed Portfolio strategies, asset composition or volatility. Given the wide scope of securities held by S&P 500, it should be inherently less volatile. Our results may differ markedly from those of the S&P 500 in either up or down market trends. The performance of the S&P 500 is shown with all dividends reinvested into the index and does not reflect any reduction in performance for the effects of transaction cost or management fees.
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Conference Call
To listen to a replay
of our
January 12, 2008 Conference Call, dial (877)471-6587
and enter Program ID 1038358075004#
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Craig P. Kelley offers Investment Advisory Services through Kelley Investments, A Registered Investment Advisor. Client assets are held in custody at Fidelity Investments clearing firm, National Financial Services LLC (NFS).
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