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November 2003 performance review

December 15, 2003

Equities and debt both gained in November, but most of the action was in smaller cap issues. The Russell 2000 index was up over 3.5%.

The Aggressive Growth portfolio was up .95% in last month, barely outpacing the S&P500, Dow, and the Lehman Brothers Long Term Treasury bond index. 

Japan was weak in November as a category, giving back a little of its strong recent gains. The Growth Portfolio’s T. Rowe Price Japan fund was down just under 5%. One question in the great recovery in long downtrodden Japanese equities is this: how well can a primarily export driven society do if our dollar keeps falling making their goods more expensive? One answer is that other currencies are not falling against the Yen. Another is that Japan makes some items in our country to create a natural hedge against currency movements. 

The Bridgeway Ultra Small company market fund continued its big ascent, up 4.24% for the month. This fund is turning out to be one of the hottest funds of the year, gaining over 73% in the last 12 months. The fund benefited from a continued rally in micro cap stocks, but we are cautious about small and micro-caps going forward. It seems like the main reason investors hare clamoring into them is because “small caps always do well in the early stages of a recovery”. 

Foreign stocks were strong in U.S. dollars, but in local currency were not up much more than our markets. The Artisan International Small Cap fund was up 2.26 %. 

A falling dollar continues to reward foreign bond investors. The Fidelity New Markets Income fund was up 1.6% for the month. The possibility that Iraq’s outstanding debt with countries like France and Russia might not get repaid has not roiled emerging market debt. 

As noted in the commentary for our more conservative portfolios, low risk investing will be difficult next year with possibly rising rates and inflation. Investing for growth won’t be much easier. While a chart of more speculative funds or markets looks like we are only just starting what should be a long big move back to the levels of a few years ago, the fact is we are not likely to hit those heights anytime soon.

A more realistic view of the market would indicate that current stock prices do not leave much room for big gains going forward. This is particularly true for smaller cap stocks and other more speculative fare. 

Even the dollar, which we have been negative on for years, has fallen quite far and has likely hit bottom. This will hold back more big gains in foreign bonds and stocks. 

Normally REITs (real estate investment trusts) make a good inflation hedge as they tend to borrow money to buy assets (properties). High inflation can increase the value of their real estate portfolio and income (rents) and make the debt easier to pay off. Real estate prices have already climbed, however, and there is risk in real estate at these prices. If we get a good size pullback in REIT prices and the economy remains strong enough to fill offices, we’ll consider adding REITs back to the portfolio.

Other traditional inflation hedges like gold are already priced high, and do not offer a safe haven at this time. Oil companies may prove to be safe place for investors as oil gets expensive when the dollar. Pharmaceuticals are another possible beneficiary of inflation and a weak dollar, but prices are not low enough to make such an investment low-risk enough for a very conservative investor. The recent drug bill passage does, however, add another reason to own drug stocks. We may be moving into these areas in the coming months.