D3 Business Update:

We have reconciled all of your accounts between our portfolio management system (IAS) and Fidelity.  We are currently generating your year end performance reports.  Our goal is to mail them out to you on February 1st.  We will look forward to discussing them with you on the phone or in person when we receive your tax documents.

 

Speaking of taxes, the IRS is not accepting returns for people who itemize their deductions in 2010, until after February 15th.  We will start to focus on preparing the returns for our Family Office clients starting February 1st.  Our goal is to be completed with all of our client’s taxes by March 30th.

 

We have nearly completed our review of our asset allocation models relative to global risk/reward expectations.  As we shared last month, we are attempting to better gauge the sensitivity of our clients assets to the economic environment using Macro Risk Analytics.

 

We are also spending many hours listening to the portfolio managers of the mutual funds our clients have in their portfolios.  We anticipate starting our comprehensive, quantitative mutual fund review during the last week of January.

 

Lastly, we have been very because we have been adding new clients.  Thank you for referring people whom you think can benefit from our services.  We are very focused on managing our work flow so we have started a short waiting list for those folks who want us to serve their financial planning and investment management needs.  To assist with our increased workflow, we have been interviewing financial planners and administrative personnel to add to our staff.

 

D3 Investment Outlook:

For 2010 the S&P 500 index returned 15.1%.  For 2010 the total bond market index returned 6.5%.  We have attached a chart showing the performance of various asset classes for 2010.  We also have a very detailed and somewhat complex presentation from Fidelity reviewing global investment performance for 2010.  If you would like us to email this to you, please let us know.

 

This is the time of the year when all of the heavy weights in the investment management arena provide their prognostications about the macro economic environment and the sectors of the market that they think will perform best in 2011.  We have been busy listening to the likes of Hersh Cohen from ClearBridge Advisors, Bill Miller from Legg Mason, Chuck Royce from the Royce Funds, William Fries from Thornburg, Bill Gross from Pimco, Abbey Joseph Cohen from Goldman Sachs and most of the other mutual fund portfolio managers we use in our client’s portfolios.  Our objective is to gain insights on how other institutional managers intend to operate in the coming year and to determine if there is validation of the investment themes we have implemented in your portfolios.

 

We are happy to report that the focus on high quality dividend paying stocks is a consistent theme (similar to what we started to move into last November).  Additionally, these leaders, like us, anticipate an improved economic environment, especially in the United States.  In fact, there is a general consensus that the discount on U.S. equities prices is too great.  No where else in the world can investors own well capitalized, strong earning companies, paying dividends  at price earnings ratios under 15 (i.e GE, Microsoft, Walmart, Johnson and Johnson  etc.).

 

Another consensus view is that bonds are not a dead asset class after the end of the 30 year bull market.  Short term interest rates will stay low but longer term rates may rise further, especially if the economy grows faster than 3% and the unemployment rate drops.  The prospect of an   improving economy and rising longer term rates would favor high yield bonds which have higher correlations to equities than long dated corporate or treasury bonds.  Non dollar denominated foreign bonds would also benefit due to higher real rates in these countries and the potential for a decline in value of the U.S. dollar.

 

Let me say a few words about the decimated municipal bond market.  We believe this is headline induced, compounded by seasonal and technical supply and demand imbalances. With the Build America Bond program ending on 12/31/2010, the supply of municipal bonds ballooned in the last month of the year.  Additionally the negative headlines of states potentially going bankrupt, resulted in retail investors fleeing the market, and for the first time in 2 years, net redemptions in bond funds.  As is typical, the news does not reflect the fundamentals.  State and Local government revenues (taxes and fees) have actually been increasing and will likely show significant improvement by this June when most of these government’s fiscal years end.

 

Last but not least, for more aggressive investors, investing in risk assets (those exhibiting significant volatility) may be rewarding in 2011.  This will only work if the reason for the volatility is understood and can be taken advantage of.

 

D3 Investment Insight and Strategy :

This may start to sound old, but we continue to believe the stock market is appropriately valued for a slow economic growth forecast.  Our strategy continues to focus on replacing non-dividend paying funds with dividend paying funds and moving out of taxable bond funds into income oriented funds that will move more with the equity markets than with interest rates.

 

Lastly…..

We have included our annual privacy policy notice as required by law (we do not disclose any client information to anyone).  Additionally we have included your first quarter invoice. 

As always thank you for your confidence in D3 Financial Counselors.

 

Donald D. Duncan MBA CFA™ CPA CFP®               Adam Glassberg, Financial Planner

Michael Meyers MBA CFP®                                       Patty Shipinski, Administrative Assistant