FundQuest

Small-cap stocks have performed very well over the past decade, significantly outperforming their large cap peers. The length of this outperformance is unusual as typically small- or large-cap stocks alternate the performance lead every few years. Considering the challenging global market conditions, attractive valuations and the current economic recovery phase, FundQuest believes the stage is set for large-caps to outperform in 2011.

The currency exchange market is a global market with a daily trading volume of nearly $4 trillion transpiring worldwide. However, it is also a very fragmented market with no central exchanges and with arguably the most diverse participants. While fundamental factors such as economic growth and interest rates determine long- and intermediate-term trends of the market, random, and even irrational short-term factors, play an already disproportionate and ever increasing significant role. Rigorous risk-control and trading disciplines are essential for active participants.

After being neglected, gold has been on a spectacular run since the beginning of the new century. As compared to the struggling stock market of the past decade, the run looks even more impressive. Meanwhile, with its popularity as an investment on the rise, many investment vehicles such as gold ETFs have been created and introduced to the investor public. Formerly dealt with by central banks and large institutional investors exclusively, gold is now more available as an investment for average retail investors. The following commentary will examine several key aspects of gold as an investment.

The Great Recession of 2008 ended in June 2009. However, for the majority of 2010, the market was directionless, mired with shocks from European sovereign debt and mixed economic indicators. Inflationary concerns, born of massive liquidity from monetary authorities of the developed world, drove real assets to sky-high levels. Conversely, the traditionally lagging indicator of unemployment, sitting near 9%, has increasingly become a leading indicator of the broad market. Thus, many investors are pondering the possibility that the US might be on the path to a Japanese-style deflation scenario.

The municipal bond market has been an usually volatile asset class over the past year. In Q4, the Barclays Municipal Bond Index lost 4.17%, its worst quarterly performance in 16 years, and continued to decline in January. The recent turmoil for municipals was the result of the four primary factors: supply issues stemming from the expiration of the Build America Bonds program; excessive negative media attention that has spooked investors; the current economic downturn; and, rising U.S. Treasury rates. FundQuest still believes that the municipal bond market is an attractive asset class.

The recent near-record low in Treasury yields may be largely attributable to investors' capitulation to today's unusual and uncertain economic environment. While investments in Treasury bonds involve less uncertainty than other asset classes, their valuation is typically rich when yields are low. There remains a vast amount of potential for more lucrative investment opportunities in this low-yield environment, with only slightly more risk involved.