What a wild investment ride it was. U.S. equity markets began the year in free fall, down 25%
in the first 10 weeks. The ensuing rebound- a comeback of historic proportions from the March
trough- provided welcome relief for investors who suffered significant losses in 2008 and
resulted in a banner year. By no small coincidence, the market turn was in direct response to
economic data showing signs of bottoming in March (as I wrote in my April newsletter) and
very loose monetary policy by the Fed. U.S. equity markets, as measured by the Dow Jones
Industrial Average and the S&P 500, finished the year appreciating 22.7% and 26.4%,
respectively. I am pleased to report that the composite return of Shapiro Asset equity only
clients once again exceeded the market results, with a composite return of 30.8%. This is on
top of the 500+ basis point outperformance last year.
From February 28th to April 30th Shapiro Asset invested available liquid assets in five new
positions to fully participate in the rebound foreshadowed by economic data. The companies
were: Varian Medical Systems (medical equipment, up 55% from purchase to year end);
Patterson Cos. (Medical equipment distributor, up 53%); Pactiv Corp. (Packaging &
Containers, up 71%); Mednax Services (Pediatric Care, up 71%); and Harris Corp.
(Communication Equipment, up 53%). Our best performing stock in 2009, J. Crew, the
retailer, was purchased December 22, 2008 and appreciated 270%. The positions each
reflected Shapiro Asset’s methodology of investing in companies exhibiting strong free cash
flow and stable balance sheets, allowing them to withstand a further macroeconomic
deterioration, if it reappeared.
Fallout of the loose monetary policy noted above is extremely low short term yields. At this
point money market yields are almost zero while short term bonds yield minimally more. For
investors, this can create some hard to resist temptation, such as trading into longer maturities
to pick up yield, like the ten year treasury yielding 3.8%. This rate is modest by historical
standards but is attractive relative to money markets, but this strategy has risk. The risk is
interest rates-at both the long and short ends of the yield curve-are expected to rise this year as
the economy keeps expanding and the Fed tightens up monetary policy. When bond yields
rise, their prices fall. The effect is magnified for longer term securities, so a 30 year maturity
would fall in value much more sharply than, say, a 6 month Treasury bill.
As many of you know, Shapiro Asset also manages balanced accounts, those which include
fixed income securities to diversify risk. The allocation between fixed income and equities is
a reflection of each client’s risk tolerance and investment time horizon. Shapiro Asset’s current
stance on maturities in this low yield environment has been to ladder maturities from six
months to four years. A laddered portfolio results in securities maturing on a regular basis
which can then be reinvested at current rates, thus mitigating interest rate risk. All Shapiro
Asset balanced accounts produced excellent absolute and relative returns in 2009.
Shapiro Asset remained committed to its core strategy –fundamentally investing in equities and
fixed income to reflect each client’s risk tolerances and time horizon. This strategy has
allowed clients to participate in the market upturn during the past ten months and will allow
them to do so going forward.