March 31, 2010

To Our Investor Clients:

Who among us could have predicted a year ago what the last twelve months would have given investors? Consider these facts:

• The S & P 500 Index is up over 68%
• This is the best one year rebound from a bear market in OVER 50 YEARS!
• The previous best was +58% after the 1981-1982 bear market

Let’s issue an “Official Warning”:  Trees Do Not Grow to the Sky.  And bull markets do not last forever, so we are watching carefully to determine how best to take fullest advantage for those seeking maximized returns and how best to protect the inevitable downside that can come from such a rapid advance. Investors everywhere are asking, “Is this sustainable? It’s not April Fools Day.

The Macro-Economic View

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At VPA, we focus our attention in our Investment Committee meeting on each month’s report on Economic Indicators from the Conference Board. Based on data as of the end of January, the most current report, here are some important highlights:

• Five of Ten leading indicators increased
• Three of four coincident indicators increased
• Two of seven lagging indicators advanced

As we have detailed for you in the past, for investors who are still accumulating assets from earnings, and who are committed to long-term investing, leading indicators are important guideposts to knowing when to accept the risks of equities, while investors who are living off accumulated reserves might be more mindful of lagging indicators, preferring to be more certain of the economy’s recovery before taking on more risks with equity investments. From the progression above, you see what we can see:  the economy is clearly recovering and a variety of economic data support that conclusion.

Risks remain to sustained recovery. While GDP growth was actually robust at the end of 2009, unemployment, a lagging indicator, remains close to 10% as reported and anecdotally quite higher. It is not a stretch to believe the recovery remains fragile at best, since the US consumer has traditionally represented a third or more of our country’s economic growth. Until consumers feel more confident in their job security, we are likely to have uncertainty among business owners still trying to keep inventories light and employment to a minimum. Job growth needs to return, and we seem months away from seeing new job creation. We need to first get past feeling good about results that could have been much worse and start seeing results in the marketplace that are actually good.

The recent Federal Reserve statement of their intention to keep interest rates low for the foreseeable future likely allows businesses to begin plans for expansion in late 2010 or into early 2011. There is light at the end of this tunnel, but the other end is still quite a long way off for most consumers that typically have short attention spans and are bombarded by thirty second sound bites from the media. There can be little doubt the consumer has been given a shock of tremendous proportion and it will likely take quite a while, even as equity markets move higher, to feel the confidence to return. There are record inflows to mutual funds but mostly into bond funds, which in turn keep interest rates low and make riskier assets growing faster.

Our Recommended Investments

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Every month, we review our currently recommended investments, measuring their performance against appropriate benchmarks and comparing their results against their peers. We focus on near term performance, but have determined to make 3 and 5 year peer performance more important to our selection process. Managers are human and make mistakes, but over a relatively short time frame, say three years, these decisions to over or underweight various sectors of the market should prove to be either right or wrong. It is much harder to judge this quality of advice over shorter time frames. We watch for trends and we can see some right now:

• Equity managers that focused on less risky, dividend-paying companies did not perform as well in 2009 as those who exposed their portfolios to greater risk.  Portfolios exposed to emerging markets had a huge rebound.
• Bond managers who are being protective of capital, worrying about higher rates eroding the value of existing bonds, performed worse than broad benchmarks in 2009, but that is already reversing itself. We, too, have now moved away from a broad bond benchmark in favor of active management and it is paying off handsomely so far this year. The broad benchmark is dominated by US Government debt, with smaller allocations to corporate debt, and now we see managers better able to shop among the bonds of companies that have survived the downturn and are prospering.  The federal government has been propping up mortgage bonds and is now backing away, so that market has turned more volatile.
• We also switched from a passive commodity index, “DJP”, to a managed commodity index fund from PimCo and have seen a nice boost from this change.  This is directly related to PimCo’s use of inflation-protected securities alongside the commodities futures contracts.
• Finally, REITs are very hot, with the NAREIT index having advanced 19.9% in 2009 and 9.6% so far this year. Our managers have kept pace or outperformed the index, and we see opportunities to diversify some cash flow and are hoping to add REITs back into the portfolios of those living off their assets. Firstly, we need a bit more stability in the recovery.   

VPA Technology Update:

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We continue our efforts to provide you high level technological improvements. In addition to going paperless with statements and trade confirmations from Schwab, we have begun integrating a new tool that will allow VPA to consolidate outside held accounts into your investment policy and allow VPA to provide investment performance reports that include these investments currently held at other firms. Being able to blend a client’s 401K into their overall investment plan makes being properly diversified an easier objective, allowing VPA to reduce the overall risk of every client’s portfolio. In addition, it is not unusual for 401K investment options to be quite limited and often fairly unattractive on their own, so being able to reduce your dependence on these limited options adds increased performance value, too.  We also have the ability to Skype, which we recommend to all of our clients at a distance. We are regularly conducting web-based appointments, too.
 
We are finalizing everyone’s ability to use our new VPA Cyber Vault, accessible through our website.  This Vault allows us to send sensitive or confidential information to you safely and securely. You may also post personal information, whether it’s a list of your account numbers and passwords (recommended), passport, household inventory, VPA investment performance reports, current estate documents, or copies of tax related data, in a password protected format. To get you a head start, VPA will post your latest investment performance reports, latest tax return, and any estate documents we have on file. Further, the VPA Cyber Vault also allows us to quarterback the relationship with your other professionals by sharing information easily and securely.

First quarter performance reports will be posted on the website by mid-April and emailed to you directly. For those already connected to their VPA cyber vault, (and it is our plan to include everyone that uses e-mail) the June 30 performance reports will only be posted to the Vault. This enhances the security of your financial data. You will receive an email alerting you that the report is posted and awaiting your review.  Please take a moment now to familiarize yourself with the site, accessible via our website: http://vantagepointadvisors.com/vault-login.php. There are a series of short instructional videos on our website under the "For our Clients" tab at http://vantagepointadvisors.com/for_clients/resources.php.  Our staff member, Linda Duong, is available to answer your questions and help you to begin using this new client tool. 

Staff Notes

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Being current on the wide variety of financial subjects that come up in our client conversations means all VPA staff have to be tuned in to current events and economic data. We discuss everyday business regularly and our staff continues to increase outside learning experiences, too. Erik and Terry recently spent a full day at an Investor’s Forum in Baltimore which brought together a variety of money managers from across all the asset classes we use as well as economists. Linda is continuing her Registered Financial Paraplanner courses and Simone is pursuing her Certified Financial Planner designation. Patty has spent a good portion of her time working with our new IT consultants as we integrate a new server and increase our offsite connectivity. Karen is very involved with her professional association, NAPFA, especially planning educational events for other planners. We also conducted a lunch and learn with a local accounting firm before their season went into full swing.

It’s Tax Season

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Taxes are on everyone’s minds these days, but just wait. There will be so many new tax wrinkles coming, it will mean hours in the classroom for all of us. This year, it is all about ROTH IRA conversions and whether they make good sense. We have reviewed everyone’s situation and are making those conversions happen that make the most sense. Guessing about future income tax rates or estate tax rates is itself taxing, so we are working with what we know and reacting as the rules change. And they are going to change. The new Health Care Reform legislation impacts income taxes in varied ways. Higher rates on the upper income taxpayers, but taxes on investment income and higher Medicare rates will mean factoring in taxes to investment decisions will be even more important going forward. We have always focused on taxes as an investment decision point, but obviously, higher taxes mean more opportunities to look for savings. Maximizing retirement accounts remains the number one device, but tax-free income from municipal bonds will see increased importance, as will knowing more about the issuer, as tax liabilities also get passed to states and local communities.

A New Building Update

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We are pleased we have received all of our Horsham Township approvals and our PennDoT highway permit. We will be selecting our construction management firm shortly and advancing toward building permits. We should be ready to commence construction this Spring. Keep your fingers and toes crossed. It is a very exciting project, one that will incorporate state of the art environmental and energy efficient design elements. We are working to achieve LEED certification, the standard of excellence from the US Green Building Council. Our project team of architects, engineers, designers and construction experts, including lots of lawyers, have been working for almost two years to get us to this point. Now we are close to starting our new home, where we expect to relocate within a year. We look forward to seeing all of you visit.

Twenty-five years ago, my staff and I moved into our new home in Spring House. We were a fledgling financial planning firm, a law firm and a title insurance agency. Within two years, we were solely focused on doing what we are still doing:  helping people enhance the life they have, using whatever resources they have to work with, and passing along a legacy of fiscal responsibility. It’s been quite an interesting and rewarding time and we are looking forward to being there for you, your family and friends, for years to come.  
 
Respectfully,

Terry J. Siman, President and Chairman
Vantage Point Advisors Investment Committee

The Monthly Index Report for March 2010

 

Vantage Point Advisors 1029 North Bethlehem Pike | Lower Gwynedd, PA 19002| 215 643-5600 | 800 643-5655  

   

 

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