The Third Dimension
The uncertainty generated by the ongoing sovereign debt crisis in Europe and policymakers' deadlock in the U.S. is likely to persist for a while, but it should not drive long-term investors out of the market. We believe it is prudent to stay focused on the third dimension -- time -- and to remain committed to one's long-term investment strategy with an emphasis on diversification, capital preservation, and careful manager research and selection.
A Rare and Dying Breed
Despite the rapid ascent of index funds and ETF investing during the past decade, we contend that carefully researched and selected active strategies offer the best opportunities for our clients to achieve their investment objectives while taking the least amount of risk possible. Our conviction is based on past experience, and our analysis of manager performance in the context of "active share", an objective new measure introduced by Yale School of Management's Cremers and Petajisto in a 2006 academic paper discussed below.
The Right Page of the Right Book
The beginning of 2010 saw a continuation of the 2009 rally. Most stock exchanges around the world, with the notable exception of China, posted positive returns for the quarter and added to their gains off the March 9, 2009 trough. The major indices, however, remain well below their previous highs. The post-bear rally has been fast and furious and at this time, a pause seems justified. The exact timing and nature of this pause, however, are highly uncertain.
A Speeding Ticket
Most indices are down from their January highs. But this pull-back is more of a speeding ticket than a suspended license, and markets will soon be able to travel cautiously toward their destinations. This environment will favor investors with a focus on security selection, a strong research effort and unwavering valuation discipline.