A Rollercoaster Ride!

 What a quarter!  Although one quarter is a very short period of time when evaluating equity returns, 1Q08 marked the worst three-month period for equity performance since 2002.  The major equity indices have now posted negative returns for five consecutive months (November 2007 through March 2008).  Market volatility remained elevated.  Commodities continued their strong run with metals and energy leading the way.  The price of oil set a new record, while global food shortages are driving agricultural commodity prices significantly higher.

The economic news over the course of the quarter was bleaker than in previous quarters, providing mounting evidence of a U.S. economy heading into a recession.  The housing market, which is at the epicenter of the ongoing liquidity and credit crisis, continues to deteriorate.  Employment and inflation indicators have led to forecasts of a significant slowdown in consumer spending growth.  Increasing likelihood of earnings disappointments, the uncertainty regarding the ultimate size of balance sheet write-downs, and concerns about falling corporate profits fueled market gyrations ruled more by emotions than long-term fundamentals.  The good news is market bottoms have historically taken place during the worst of the media headlines.

By the end of the quarter, equity indices were off their mid-March lows and many analysts opined that some level of normalcy is returning to equity and fixed income markets, helped by aggressive Fed action including rate cuts, liquidity injections and a decisive involvement in the Bear Stearns sale to J.P. Morgan.  The Treasury yield curve has steepened and LIBOR spreads, while still elevated, are finally coming down, as illustrated in the following “Timeline of a Crisis” provided by Goldman Sachs Asset Management:

et Indices Had a Tough Quarter; Active Managers Fared Worse

The following table details the results for all major market indices over the last three months:

Beacon Pointe typically benchmarks client composite portfolio performance to the S&P 500 Index and the Lehman Brothers Aggregate Bond Index.  In volatile markets, such as the one we experienced in 1Q08, these benchmarks are difficult to beat.  To illustrate, we show the performance of various mutual fund categories relative to the most appropriate benchmark for their investment style.  (We used the Wall Street Journal as a source for mutual fund returns.)

Note: Mutual fund category performance is based on an arithmetic average of all the mutual funds in the Lipper category.

The most difficult categories for active fund managers were Small Cap Growth Equities, Large Cap Growth Equities, and Fixed Income.  Underperformance, however,  prevailed across all styles, sizes, and geographies.  Despite this poor showing, many investment managers are now finding more opportunities than ever before and are optimistic about the remainder of 2008.  A survey of investment managers conducted in early March by Russell Investments found that 66% of managers forecast positive market returns for all of 2008 and another 9% expect a flat market for the year.  A record 42% of investment managers believe that markets, in general, are undervalued.

Conclusion and Recommendation lusion and Recommendation

Beacon Pointe is seeing the same cautious optimism in our conversations and meetings with Focus List investment managers.  Most of our managers are excited about the investment opportunities available as a result of recent market dislocations.  Whether it is value stocks trading at single digit multiples of normalized earnings, or great growth franchises selling well below fair value, or mortgage bonds trading at record high yields, most  managers are taking advantage of these opportunities and are actively upgrading their portfolios into higher-quality, lower-risk, and/or higher-potential-return investments.

This portfolio repositioning should ultimately benefit our clients.  The managers Beacon Pointe recommends have proven stock/security picking abilities.  Their approach is fundamental and relies on intensive bottom-up research.  While their timing is not always perfect, they remain committed to their respective investment disciplines and focused on the long-term preservation and growth of capital for our clients.  The volatile and “emotional” market of 1Q08 will eventually give way to fundamentals, fair valuation, consistent growth, and high quality – an environment that greatly benefits the managers we recommend for our clients.  The ride may be bumpy, but we will get there.  Just make sure your seatbelts are fastened!

Please feel free to call your Beacon Pointe consultant at 949-718-1600 should you need additional information or have any questions.

(c) Beacon Pointe Advisors, LLC

www.bpadvisor.com