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How Have We Done?
2008 went into the books as one of the most difficult financial years in history.
While we are never pleased to see our client's accounts drop in value over an entire calendar year, we are pleased that the two discretionary Portfolios we manage for most of our clients ("Income & Growth" and "Growth") performed very well relative to some other investment strategies.
WHAT WE EXPECT IN 2009
In late 2007 we ventured to forecast that valuations and debt levels were out of balance and could be a source of trouble in 2008. Although those predictions turned out to be right and our portfolio actions successful, we must say that we have been surprised by the magnitude of the current economic crisis. Moving forward, we will be taking less of a broad brush approach and will instead focus on investments where we see sustainable free cash flow, great management, low debt and compelling valuations. We will focus more on the quality of the individual companies we own in our Managed Portfolios and less on trying to position for events we cannot control.
Looking ahead, we believe that 2009 will be a continuation of the slow and painful process of global deleveraging (the failure or restructuring of anything financial that is fundamentally unsound).
If 2008 was the year of systemic risk, 2009 is setting up to be the year dominated by specific risk. In other words, we can be sure that corporate earnings will drop further and more companies will default on their debts and fail in some manner, but we probably won't see the panic we did last year that caused complete system failures.
We think the "health of the credit markets" will likely be the main economic theme for years to come and will determine the outcome of this economic downturn.
ANTICIPATED ACTIONS IN OUR MANAGED ACCOUNTS
In early 2008 we took a defensive strategy and significantly reduced our overall allocation to stocks in our Growth Portfolio from about 90% down to about 30%. As we have stated over the last few months, we see some very compelling investment opportunities and think it is approaching the time to slowly and carefully begin the process of shifting from "defensive" to "offensive" strategies.
Throughout 2009, we anticipate slowly but perhaps significantly increasing our overall allocation to stock investments in the Growth Portfolio, and at the same time taking a more focused strategy of owning fewer companies with stronger financials. We will also be looking for a higher returning investment for our allocation to bonds/cash to replace our current position in short-term US Treasury Notes which have performed beautifully, but perhaps have run their course.
We are aware that this economic crisis is far from over, that there remain significant risks, and we will continue to offer a sensible and rational approach in this irrational environment.
If you have any questions regarding your accounts that you would like to discuss privately, please call us at (858)350-1010.
Sincerely,
Craig P. Kelley Sean P. O'Hara
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* Performance information stated above is either for the one year time period, January 1, 2008 through December 31, 2008, or from inception, March 9, 2006 through December 31, 2008, whichever 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. He is a Registered Principal with and offers securities through Rydex Financial Services, Inc., A Division of Rydex Distributors, Inc. Member FINRA, SIPC. Client assets invested through Kelley Investments are held in custody at Fidelity Investments clearing firm, National Financial Services LLC (NFS).
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