Fourth Quarter 2009 Review

Broadleaf Partners

Doug MacKay

January 7, 2010

Performance Commentary

	Q4 2009	2009	3 Years (Annualized)	Inception (Annualized)
Broadleaf	6.2%	43.7%	0.0%	3.0%
S&P 500	6.0%	26.5%	-5.6%	0.1%
Russell 1000 Growth	7.9%	37.2%	-1.9%	1.5%

The stock market continued to post strong gains during the fourth quarter, albeit at a smaller rate than the third quarter’s fifteen percent gains. All in all, the markets finished 2009 on a very strong note as fears of the next Great Depression faded and anticipation of the end to the Great Recession grew.

During the quarter, most areas of the market did well. Financials were the only laggard, roughly flat for the quarter, while the more defensive health care sector perked to life with double digit gains as an outcome on political reform became clearer. In general, our results were in line with the markets, but with some differences in sector contributions. Stock picking helped us within the financial and technology sectors, but hurt us in the consumer discretionary and industrial spaces.

Since inception, the portfolio continues to meet its primary objective of outperforming the S&P 500 on a net of fees basis – by roughly 300 basis points annually. If the economy continues to improve as we expect, our portfolio is positioned to outperform.

(Fund Inception 8/19/05. Portfolio performance reflects Broadleaf’s Growth Equity Composite, described more fully under the caption “Performance Disclosures.” You are urged to read that information in its entirety in connection with any evaluation of Broadleaf’s performance statistics. All figures are shown net of assumed fees. Any assumed fees have been calculated on a pro forma basis, reflecting the highest fee levels that Broadleaf would charge clients per our disclosures in Part II of our Form ADV.)

Market Review & Outlook

Each year at this time, we like to reflect on the year that was with the hope of gleaning a few nuggets of wisdom. With the caveat that the last two years have been anything but ordinary, these are our observations on 2009:

1. Investment decisions made on the notion that “it’s different this time” usually end up in the bucket of dumb investment ideas. When fear ran rampant last March, it was easy to expect the worst. Very few – including ourselves - would have guessed that the stock market would prove capable of climbing 70% off those lows, but that is exactly what happened. For our portfolio, the most difficult investment decisions also proved the most profitable.

2. We don’t remember a year when so many folks were so distraught by the change in Washington and what it might mean for their investment portfolios. As is so often the case, reality rarely ends up the way right wing or left wing extremists paint it to be, whether we’re talking global warming or the end of capitalism. This year once again reminded me that politics and investment policy make for very poor bedfellows.

3. Selling anything in 2009 was a mistake, just as buying about anything proved to be in 2008. Good results are easier to come by when the markets are strong like they were this year.

4. Hiring and training new employees is alot of work but it sure beats the alternative. Installing new, firm wide software isn’t for the faint of heart either, especially if you lack an IT staff.

5. The S&P 500 has been moving sideways at the 1100 level for most of the last six weeks, roughly the level it traded when Lehman Brothers went under fifteen months ago, ushering in a recession that far exceeded garden variety expectations. Breaking above this level in 2010 could symbolize a similarly important healing point for the economy, the stock market and investors at large.

Looking forward, we expect that the economy will do very well in 2010 and that the stock market should follow suit, although perhaps not to the same extent that we saw in 2009. We believe that investors will become increasingly comfortable with the durability of the recovery. This should serve to mute the downside type corrections we experienced during the last half of 2009, but will also dampen the strong upside moves we similarly experienced. In general, we are biased to tilting the portfolio in the direction of later stage cyclical companies whose stocks tend to outperform as the economic recovery matures.

Unanticipated moves in the stock market are usually the result of unexpected events. What might be the surprise of 2010? Most economists and investors predict a much slower rebound in GDP than would typically be expected in a recovery year, primarily as a function of a stubborn jobless rate. Currently, the consensus for GDP growth in 2010 is 3-4%, while 8% would be the historical norm for a recovery year. In this sense, the surprise might be an improvement in employment that is larger than expected, leading to a more robust rate of GDP growth in 2010. As is always the case, time will tell, but we believe the surprise bias could be a positive one.

www.broadleafpartners.com

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