Third Quarter Update
SWCM continues to outperform
What a difference three months makes. Positive
signs for the stock market abound: in contrast to the last
few years we are beginning to see large capital in-flows to
the equity markets. Forty-year lows in interest rates, current
legislation reducing both individual and dividend tax rates,
and substantial cash reserves have combined to create a powerful
liquidity effect in the equity markets. So what has changed?
An interesting trait of investor psychology
is the natural tendency to extrapolate current trends into
the future. It didn't matter three years ago that the long-term
trend for stocks was to grow at 10% per year. The stock market
had been rising at three times that rate and future expectations
were huge. Consider that change from then till now. Bonds
have performed well while the trailing three year history
of stocks is abysmal. Once again, until most recently, investors
have been again extrapolating this trend into the future.
Hope and optimism are returning as investors begin to warm
to the idea that we will eventually recover from a recession
and survive this economic downturn. Cash reserves are almost
double what they were just three years ago at close to almost
$6 trillion, and they are earning next to nothing (chart below).
This has to change as investors look for higher yield in both
the equity and corporate fixed income markets. The shift in
investor sentiment over the last three months is nothing short
of amazing and we believe will continue to improve as the
economy recovers.
However, economic recoveries don't rebound
in a straight line; they cycle through changes before being
recognized (as we write this update the unemployment figures
were released and the rate rose to 6.4%). Monetary policy
has been very expansive, flooding the economy with liquidity
once again making money easier to come by. U.S. companies
have learned to prosper and grow in a scaled down and profitable
manner, showing signs of renewed economic strength and growth.
We are in the early stages of an economic and stock market
rebound. If the past is any guide to the future and recent
events are indicative of what lays ahead we are poised for
a significant increase in the equity markets.
The quarter ending June 30, 2003, was significantly
higher than expectations. I am proud to say that the SWCM composite
index continues to outperform. Welcome to the next bull market.
SWCM Composite
Portfolio (Equity and Fixed Income)
We continue to see signs of a corporate
and economic rebound. With this said, we continue to reduce
our holdings in government fixed income securities and are
purchasing higher quality strong cash flow names in selected
industries. Recent additions include Nextel Communications
(NXTL), Occidental Petroleum (OXY) and Proctor and Gamble
(PG). Each company leads its respective field and generates
cash flow and ROE in the 20 percent or greater level. PG is
the best consumer product company in the world and with a
weaker dollar should see stronger earnings, NXTL is becoming
the gold standard of cellular services and has virtually no
competition in the push to talk medium. We will continue to
add to these positions. On the fixed income front, we continue
to reduce our holdings in both short and long term maturities.
However, the conservative fund continues to add high yield
names and higher yielding Real Estate Investment Trusts (REITS)
along with a number of preferred equities. With our expectation
of a corporate rebound, we see opportunity in corporate and
higher yielding bonds. We also continue to believe that interest
rates will remain low throughout the year as the U.S. economy
and world events sort themselves out.
Our approach for the quarter
Volatility continues to vibrate through
the markets as we settle into a growth and bull market. During
the past few quarters SWCM has taken profits and trading gains
due to this volatility. However, on a few occasions we left
a significant return on the table. We have sidelined this
strategy and are utilizing a more traditional buy and hold
strategy, while adding to our more powerful names.
Closing Statement:
We continue to remain quite optimistic regarding
the long-term opportunities in the equity market and feel
more comfortable stating that the bear market is dead. Our
strategy has us taking advantage of market sell-offs and holding
our more powerful names in the core portfolio. With this approach
we add to our core equity holdings when the opportunity presents
itself. Our most recent strategic changes will help position
us for a longer, more powerful bull market.
As always, we value each client and continue
to focus on your investment objectives. If you have any question
or concerns please do not hesitate to call.
Jim Sullivan
President
