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Home My WebLink AboutDocumentation_Pension Public Safety_Tab 12_02/02/2009 ROCKWOOD CAPITAL ADVISORS .. t s j • • R. Rack~rvoa~ Capital. Advrs~rs . ~ ~~~ ~~ • .. s Strategy Review Presented By: Tony Brown Senior Partner tony@ rockwoodcapitaLcom Village of Tequesta Public Safety Officers' Pension Fund Fourth Quarter 2008 Review February 2, 2009 w~~~~ROCKWOOD CAPITAL ADVISORS ^^^^^^^^^^^^^^^^^r^^^^^^ Investment Policy Objectives ..^ r ^ ^ ^ ^ ^ ^ ^ - The Board recognizes that the obligations of the Fund are long-term and that the investment policy should be made with a view toward performance and return over a number of years. The general investment objective, then, is to obtain a reasonable total rate of return -defined as interest and dividend income plus realized and unrealized capital gains or losses -commensurate with the Prudent Investor Rule and any other applicable statute. - Reasonable consistency of return and protection of assets against the inroads of inflation are paramount. However, the volatility of interest rates and securities markets make it necessary to judge results within the context of several years rather than over short periods of finro years or less. - The performance of the total Fund will be measured for rolling three and five year periods and compared to the return of a portfolio comprised of 60% S&P 500 Stock Index and 40% Lehman Brothers Intermediate Government/Credit Bond Index. On a relative basis, performance for the combined portfolio over three to five year periods is expected to be in the 40% of the Mobius Universe. Additionally, on an absolute basis, performance for the combined portfolio over three to five year periods is expected to meet or exceed the actuarial earnings assumption of 8%. Authorized Investments - All investments made or held in the fund shall be limited to, obligations issued by the United States Government or guaranteed as to principal and interest by the US Govt. or by an agency of the US Govt. Additionally, stocks, commingled funds administered by national or state banks, mutual funds and bonds or other evidence of indebtedness, issued or guaranteed by a corporation organized under the laws of the United States, any state or organized territory of the United States or the District of Columbia. Fixed income securities are to be ranked Investment Grade by S & P or Moody's and 90% of the equities shall be rated by a major rating service in the top three quality grades. Not more than 5% of the Fund's assets shall be invested in the common stock, capital stock or debt of any one issuing company, nor shall the aggregate investment in any one issuing company exceed 5% of the outstanding capital stock of the company. Foreign securities shall not exceed 10% of the value at cost of the fund. ~ ROCKWOOD CAPITAL ADVISORS PAGE 1 ~~. 4~' Quarter 2008 ~ ^ ~ ^ ^ ^ ^ ^ ^ ^ ~ r ~ ^ ^ ^ ^ ^ ^ ^ ~ N ^ ^ ^ r ^ ^ ^ ^ ^ ^ r. Tequesta Publ is Safety Officers' Pensian Fund Portfolio Summary . Beginning Market Value Ending Market Value % of Portfolio Est Annual Income Current Yield Equities $2,187,326 $1,881,122 47.9% $34,862 1.9% Fixed Income $1,663,328 $1,513,775 38.8% $75,335 5.0% Short-Term Funds $376,762 $525,114 13.3% $525 0.1% Accrued Income $16,533 $14,590 -- -- -- Total $4,243,949 $3,934,601 100.0% $110,722 2.8% Total Fund Performance Domestic Equities 48% Short Term UrldS 3% Fixed come 39% 5% 0% -5% -10% -15% -20% -25% Tequesta PS ^ 60% S&P 500 40% LBIN ~~ROCKWOOD CAPITAL ADVISORS PAGE 2 4~ Quarter 2008 4th Qtr 2008 One Year Tequesia Public Safety Officers' Pension Fund Market Value Changes Total $ Change this quarter I -$309,347 4~' Quarter Summary 4~' Quarter Total Fund Return I -10.5% Fiscal Year Summary Beginning Market Balance $4,243,949 Interest /Dividends 24,269 Contributions 161,878 Net Disbursements -25,832 Net Realized & Unrealized (CJL) -469,662 Ending Market Balance $3,934,601 Beginning Market Balance (10/1/2007) $4,243,949 Interest /Dividends 24,269 Contributions 161,878 Net Disbursements -25,832 Net Realized & Unrealized (G/L) -469,662 Ending Market Balance $3,934,601 ~~~~~ROCKWOOD CAPITAL ADVISORS PAGE 3 4~' Quarter 2008 ~^s^^^i^^^^~^^^^r^i^^^^s^s~r^^^^ .~ ROCKWOOD CAPITAL ADVISORS PAGE 4 4~' Quarter 2 008 ^ ^ ^ ^ • ! ^ ^ ^ ^ ^ ^ ~ ~ ^ • ^ ^ A ^ i ^ • ^ ^ ~ • ^ ^ ^ Equity One for the Record Books After an exhausting 2008, December kindly gave investors a modest reprieve. However, for much of the fourth quarter it continued to be a period of historical volatility, economic uncertainty and investor anxiety. All of these factors intensified in the second half of the year. The subprime crisis and haphazard government intervention combined to produce a worldwide decline in stocks, the likes of which has not been seen since the Great Depression. As a result, investor confidence has been shaken, in no small part due to the government continuously "changing the rules in the middle of the game." Only when investors believe they understand the rules, will they get back in the game of investing in stocks. For the year, perhaps the most challenging ever for equity investors, all market indices significantly underperformed their historical averages. During the year, the S&P 500 dropped 37% while the average U.S. stock fund decreased 39% in value. Investors in foreign stocks were hit hardest as the Morgan Stanley EAFE Index lost 45%. One has to go back to 1907 and 1931 to find calendar years that inflicted greater damage on U.S. stocks! There is no question that we face more than the usual uncertainties, thanks in part to the meddling of Washington. It was only last January when the Fed finally appreciated the gravity of the financial crisis. However, as investors, it is important to remind ourselves that current economic health does not necessarily determine future positive or negative investment returns. The stock market is a futures market and as such has already priced in much of the future pain that the economy is likely to endure. The most important question is how much bad news is currently priced in? In our opinion, the October-November period priced in the worst case scenario for the economy. As a result, most investments already reflect this reality. As Warren Buffet likes to say, "I am fearful when everyone is greedy and I am greedy when everyone is fearful." The fear surrounding the economy and the financial markets is obvious! (continued on next page) ROCKWOOD CAPITAL ADVISORS PAGE 5 4'~ Quarter 2008 •^^^•~^s^^^~^^^^^~^^^~^^~^^^^~^^ Equity Out of this volatile period will emerge a new group of market leaders. Currently our largest sector allocation is in the Consumer Discretionary area with holdings such as Burger King Holdings, Costco Wholesale Corp., McDonalds, Nike Corp., TJX Cos. Inc., and Wal-Mart Stores. It is a sector that represents 70% of the economy. We take great comfort in knowing that our discipline, which is predicated on identifying change, both positive and negative, will identify emerging leadership. As this develops, we will respond appropriately. This same discipline has served us well over many cycles since 1972, and we have full confidence that it will continue to do so for many years to come. Performance 20% 0% -20% -40% -60% Tequesta PS S&P 500 ,t~~~ROCKWOOD CAPITAL ADVISORS PAGE 6 4~' Quarter 2008 Two Years Three Years 4th Qtr 2008 One Year ^ w ^ ^ ~ ^ ^ ^ ^ ^ ^ ~ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ~ i ^ ^ ~ No Place to Hide Worldwide Equity Returns 4~' Qtr ~ 2008 :,,~~~ROCKWOOD CAPITAL ADVISORS PAGE 7 4~' Quarter 2008 Latin S& P Australia Europe Japan American Financials ^^^^^^^^^~^^^^^^^^^^^^^^^^^^s^^^ ,~ r- #, ,- ~ . - } .. , E u i Portfal io 2 ,.. q tY ~ ~~ ., ,,~, . ~ a .. 4~' Quarter 2008 Portfolio Summary Top 10 Holdings Five Best Impact # of Stocks 3 7 Beta 0.9 Yield 1.8% P/E 14.1 x S le Box Val Cr Gn!v Large Cap - 51.2% Mid Cap - 46.2% Small Cap - 2.6% Average Market Cap $38.0 billion Median Market Cap $14.3 billion 1. Stericycle Inc. 3.2% 2. Wells Fargo & Co. New 2.6% 3. Lockheed Martin Corp. 2.5% 4. Wal Mart Stores Inc. 2.5% 5. Bayer AG 2.5% 6. Baxter Int' I Inc. 2.5% 7. Praxair Inc. 2.5% 8. Yum Brands Inc. 2.5% 9. McDonald's Corp. 2.5% 10. Medco Health Solutions Inc. 2.4% 1. Yum Brands Inc. +12.2% 2. Wells Fargo & Co. New +11.9% 3. McDonald's Corp. +1.6% 4. Marsh & McLennan Cos. -0.8% 5. 1. Burger King Holdings Inc. -2.5% Five Worst Impact United States Steel Corp. -56.6% 2. Schlumberger Ltd. -46.2% 3. Agnico Eagle Mines -44.6% 4. Thermo Fisher Scientific -38.1 5. Boston Scientific Corp. -36.9% s -~ROCKWOOD CAPITAL ADVISORS PAGE 8 ,~ '+r ~ f } f+c a}e ~ ~ t t a ~ M` . W E ui r~a~ ~~s _and Attribution ~~~ .~~ a ~ ~. ~_=k 4 Util ~= Rockwood ~ S&P 500 Performance 20% 0% _, 0.0 -2.9 r 0 -20 /o _15.6 -13 5.15.7 ~~ -12.7 -21.1 -21.1 -22.3 -40% -23.4 -24.7 -31.2 -31.4 "24.2 -26.0.32.8 -24.7 -37 ', -60% Staples Discretionary Health Materials Info Energy Industrial Tele Finance Care Tech Util ~~~,~ ROCKWOOD CAPITAL ADVISORS PAGE 9 4~ Quarter 2008 ^ ^ ^ ^ ^ i ~ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ Equity Transactions Sold Stock Oct First Solar Inc. ................................................... McDermott Int'I ................................................... Suncor Inc. ................................................... PPL Corp. Nov United States Steel Corp. ................................................... Edison Int'I VeriSign Inc. Dec Schlumberger Ltd. Agnico Eagle Mines Purchased Stock Mkt Cap Sector Description Oct. St. Jude Medical Inc. LCap - Grw Health Care Leading maker of heart valves and other ............................................... .......................... ....................... cardiac devices ............................................................................. Nationwide Health Prop. MCap -Val Finance REIT invests in senior housing and L-T care ............................................... Alberto-Culver Co. .......................... MCap - Grw ....................... Con Staples ............................................................................. Producer of personal care and household / ............................................... .......................... ....................... grocery products ............................................................................. Progressive Corp. LCap - Grw Finance Leading underwriter of auto insurance and other lines of coverage Nov Copart Inc. MCap - Grw Con Desc Internet auto remarketing and sales service ............................................... Yum Brands Inc. .......................... LCap - Grw ....................... Con Desc ............................................................................. Worlds largest fast food operator and ............................................... .......................... ....................... franchiser; Pizza Hut, Taco Bell, KFC ............................................................................. TJX Companies Inc. LCap - Grw Con Desc Discount apparel and home fashion chains Dec Wells Fargo & Co. LCap -Blend Finance Bank holding company Marsh & McLennan Cos. LCap -Blend Finance Global insurance, investment management and consulting service company __` ROCKWOOD CAPITAL ADVISORS PAGE 10 4~ Quarter 2 008 ^ ^ ^ ^ ^ `~ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ r ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ Equity Holdings p~ .! Exchange Ticker Com an Name Shares Avg Cost Total Cost Price Market Value Percent of Mkt Val (% Current Yield %) Annual Income ISS CGQ - Cash 477,828 1.00 477,828 1.00 477,828 20.2 0.1 478 _ NA ACV Alberto-Culver Co. New 2,200 27.41 60,309 24.51 53,922 2.3 1.1 572 0.35 BAX Baxter Int'I Inc. 1,100 58.90 64,791 53.59 59,235 2.5 1.9 1,144 0.35 BAYRY Bayer AG 1,000 55.32 55,318 59.40 59,400 2.5 2.8 1,634 99.00 BSX Boston Scientific Corp. 4,760 12.69 60,393 7.74 36,842 1.6 0.0 - 0.48 BKC CVX KO Burger King Holdings Inc. Chevron Corp Coca Cola Co. 2,300 620 1,000 28.62 85.34 61.91 65,826 52,910 61,906 23.88 73.97 45.27 54,924 45,861 45,270 2.3 1.9 1.9 1.1 3.5 3.4 575 1,612 1,520 0.61 0.67 0 66 CPRT Copart Inc. 1,550 34.20 53,013 27.19 42,145 1.8 0.0 - 0.11 COST ETR Costco Wholesale Corp. New Entergy Corp.New 980 580 66.91 111.76 65,575 64,818 52.50 83.13 51,450 48,215 2.2 2.0 1.2 3.6 627 1,740 0.04 0.92 HSIC HEW Henry Schein Inc. Hewitt Associateslnc. 1,085 1,490 46.78 40.16 50,753 59,834 _ 36.69 28.38 39,809 42,286 1.7 1.8 0.0 0.0 - - 0.77 0.89 HPQ Hewlett Packard Co. 1,485 33.46 49,682 36.29 54,009 2.3 0.9 475 0.52 HNZ HJ Heinz Co. 1,160 42.56 49,367 37.60 44,097 1.9 4.4 1,926 0.94 HCBK Hudson City Bancorp Inc. 3,390 18.97 64,296 15.96 54,104 2.3 3.3 1,763 0.64 IBM Int'IBusinessCorp. 613 110.24 67,575 84.16 51,590 2.2 2.4 1,226 0.23 LSTR LandstarSysteminc. 1,240 49.48 _ 61,354 38.43 47,653 2.0 0.4 198 0.20 LMT _ Lockheed Martin Corp. 710 _ 64.92 46,095 84.08 59,697 2.5 2.7 1,619 0.16 MMC Marsh & McLennan Cos. 2,160 24.48 52,870 24.27 52,423 2.2 3.3 1,728 0.32 MCD MHS McDonald's Corp. Medco Health Solutions Inc. 950 1,330 52.86 50.05 50,213 66,563 62.19 41.91 59,081 55,740 2.5 2.4 3.2 0.0 1,900 - 0.53 0.45 MTD Mettler-Toledo Int'I Inc. 632 102.87 65,012 67.40 42,597 1.8 0.0 - 0.78 NHP Nationwide Health Properties Inc. 1,700 34.30 58,317 28.72 48,824 2.1 6.1 2,992 0.77 NKE Nike Inc. 980 67.83 66,472 51.00 50,225 2.1 2.0 980 0.05 ORCL PEP Oracle Systems Corp. Pepsico Inc. 3,100 700 21.59 7014 66,920 49,099 17.73 54.77 54,963 38,637 2.3 1.6 0.0 3.1 - 1,190 0.44 0.92 PX Praxair Inc. 1,000 63.70 63,700 59.36 _ 59,360 2.5 2.5 1,500 0.84 PGR Progressive Corp. 3,550 16.87 59,901 14.81 52,576 2.2 0.0 ~ - 0.61 _ SIAL _ Sigma-Aldrich Corp. 1,150 58.39 _ 67,150 42.24 48,576 2.1 1.2 598 0.30 STJ St. Jude Medical Inc. 1,400 42.30 59,220 32.96 46,144 2.0 0.0 - 0.61 SRCL Stericycle Inc. 1,440 33.13 47,713 52.08 74,995 3.2 0.0 - 0.39 TROW T. Rowe Price Group I 1,250 35.30 44,130 35.44 44,300 1.9 2.7 1,200 0.53 TMO Thermo Fisher Scientific Inc. 1,219 49.08 59,827 34.07 41,531 1.8 0.0 - 0.30 TJX TJX Companies Inc. New 2,090 25.41 53,100 20.57 42,991 1.8 2.1 920 0.91 WMT Wal Mart Stores Inc. 1,060 60.95 64,607 56.06 59,675 2.5 1.7 1,007 0.36 WFC Wells Fargo & Co. New 2,050 26.34 53,990 29.48 60,434 2.6 4.6 2,788 0.07 YUM Yum Brands Inc. _ 1,680 28.07 52,776 31.50 59,220 2.5 2.4 1,429 0.62 _ Portfolio Total $2,633,222 $ 2,360,631 100.0 1.5 $35,341 4~ Quarter 2008 ~~~~ROCKWOOD CAPITAL ADVISORS PAGE 11 Company Shares Voted Meeting Date Agenda Item Mgmt Rec Vote Cast Burger King HokJ, Inc 2,300 11/20/2008 ElectDirecbrs For For (BKC) Ratify Audibrs For For Oracle Corp. 3,100 10/10/2008 EledDirecbrs ~ For For (ORCL) Approve Executive Incentive Bonus Plan For For Ratify Audibrs For For Advisory Vob b Ratify Named Executive Officers' Compensation Against Against Rockwood Capital Advisors, through our equity sub-adviser, Contravisory Research 8 Management Co., has retained Institutional Shareholder Services ("ISS") to coordinate and vote proxies with respect to client securities. Proxy voting is an important right of shareholders and reasonable care and diligence must be undertaken to ensure that such rights are properly and timely exercised. When the Adviser has discretion to vote the proxies of its clients, they will be voted by ISS in accordance with their Proxy Voting Guidelines in effect from time to time. The Adviser believes that having proxies voted by a professional proxy voting service which has the staff and resources to carefully evaluate voting issues is in the best interests of its clients and will remove the possibility of encountering conflicts of interest on the part of the Adviser with respect to the voting of proxies. The Compliance Officer has reviewed the most recent ISS Proxy Voting Guidelines and believes that having proxies voted in accordance with such guidelines is consistent with the best interests of the Adviser's clients. The Chief Compliance Officer has also determined that ISS, as a leading proxy voting firm, has the capacity and competency to adequately analyze proxy issues. The Compliance Officer has also received information from ISS demonstrating to the satisfaction of the Compliance Officer that ISS has adopted procedures to ensure that it is independent with respect to its proxy voting decisions, including using "Chinese wall" and other procedures to segregate its proxy voting operations from its corporate servicing operations. ISS has agreed to notify the Adviser if it believes ISS faces a material conflict of interest with respect to voting the proxies of a particular issuer. The Compliance Officer will monitor ISS to ensure that all proxies are being properly voted by periodically engaging in "spot reviews" of votes made by ISS. The Compliance Officer will also have ISS confirm annually that it is maintaining appropriate records as set forth below. Client quarterly reports contain information with respect to each voted proxy about which the client portfolio held during the period, including (a) the name of the issuer, (b) the proposal voted upon, and (c) how ISS voted the client's proxy. Additionally, the Compliance Officer will maintain files relating to the Adviser's proxy voting procedures in an easily accessible place. Records will be maintained and preserved for five years from the end of the fiscal year during which the last entry was made on a record, with records for the first two years kept in the offices of the Adviser. Records of the following will be included in the files: Copies of this proxy voting policy and procedures, and any amendments thereto. A copy of each written client request for information on how ISS voted such client's proxies, and a copy of any written response to any (written or oral) client request for information on how ISS voted its proxies. The Adviser has arranged with ISS to have ISS maintain and make available promptly upon request (i) copies of each proxy statement that is received for one of Adviser's clients, provided however that ISS and the Adviser may rely on obtaining a copy of proxy statements from the SEC's EDGAR system for those proxy statements that are so available, (ii) a record of each vote that ISS casts for one of Adviser's clients and (iii) a copy of any document ISS created that was material to making a decision how to vote proxies, or that memorializes that decision. .~ROCKWOOD CAPITAL ADVISORS PAGE 12 4~' Quarter 2008 ^^^^^^^^^^^^^r^^^^^^^^^^^^^^^^^^ ~. +- ;~ } ~, Flxed lncae ~ ~ ~.r Beware of the Next Bubble 2008 will no doubt go down as one of the most noteworthy years of this generation. Besides the election of Barack Obama, the economic upheaval of the past year is unlike anything seen since the Great Depression. The Fed and the Treasury have developed proposal after proposal, seeking to contain the damage. Paulson and Bernanke always seemed to be reacting to the latest crisis; creating some new acronym to address the newest problem even before the efficacy of the previous program was evaluated. The federal government has made it clear that almost no program or proposal is too large, and that they will spend any amount to stimulate the economy. Unfortunately, this government largess has a dark side, and we fear that this drunken binge of spending is setting the stage for the next investment bubble. The Aftermath of the Real Estate Bubble. The bursting of the real estate bubble, brought on by government- sanctioned risky lending coupled with overly loose monetary policy, severely damaged large financial institutions. The prices of a wide array of mortgage-related assets have been hammered, and the resulting losses have pushed some firms to the brink of insolvency. With the prices of formerly "rock solid" investments plummeting, investors scurried for the safety of the "risk-free" asset - US Treasuries. (continued on next page) 6% 5% 4% 3% 2% 1% 0% U.S. Treasury Yield Curves 20% 10% 0% -10% -20% -30% Sector Index Returns 3 2 5 10 30 Tsy Agy MBS Credit CMi3S FIY mos yrs yrs yrs yrs ~~~~ ROCKWOOD CAPITAL ADVISORS PAGE 13 4~' Quarter 2 008 ^^r^^^^^^^^^~^^^^^^^^^^^^^^^^^^^ ~, Fixed Income The Growing Treasury Market Bubble. In our view, just as we experienced a bursting real estate bubble in 2007, we are now sitting on a growing bubble in the US Treasury market. Exhibit A is what transpired in the US T-bill market in the fourth quarter. Some very short maturity T-bills were priced at NEGATIVE yields. In other words, demand for T- bills was so great that some investors were willing to earn a small negative return (a.k.a. lose money) because they feared greater losses elsewhere! Longer term treasury yields are at their lowest levels since the 1950's. The panic buying of Treasuries propelled the 30-year T-Bond to a whopping 41.2% return in 2008, the Bond's highest return ever. For months, we have been concerned about the valuations in the Treasury market. In retrospect, we wish we had invested 100% of our clients' funds in Treasuries. However, that would have been imprudent. We were a bit early with our call, but we are more convinced than ever that those who still hold their Treasury positions at this time next year will regret their failure to reallocate their funds to investments with a more attractive risk/return profile. Our 2009 Strategy. Our plan is to selectively increase our credit exposure, and overweight high quality corporate bonds, CMBS and Agency mortgages. Over the long term, allocations to high quality bonds and mortgages will be a winning trade. Investors would be well advised to invest in those sectors supported by Uncle Sam, particularly if one has the foresight to anticipate the next bailout recipient and to arrive before the crowd gets there. Performance 20% 15% 10% 5% 0% -5 -10% 3.1% 4.8% 3.1% 5.1% 5.3% 6.2% 4.9% 5.5% 4th Qtr 2008 One Year Two Years Three Years Tequesta PS Lehman Int GoWt/Credit g~ ROCKWOOD CAPITAL E~DVISORS PAGE 14 _v=~~'~- 4~' Quarter 2008 ^^^^^^r^^^^^^^^^^^^^^^^^^^^^^^^r ~ Fixed Por~olio Structure Characteristics Tequesta I Lehman Int PS Gov't/Credit Average Maturity ~ 4.6 yrs ~ 4.6 yrs Effective Duration 3.9 yrs 3.8 yrs Yield to Maturity 3.9% 3.4% Effective Maturity so°io 40% 20% 0% - 1 to 3 yrs 3 to 5 yrs Tequesta PS 5 to 10 yrs 10+ yrs ^ Lehman Int Gov't/Credit Portfolio Lehman Int G/C Nbrtgages Nbrtgages 20% U.S. 0% Treasuries ,.w. 44% Agencies U. S. 21 Treasuries ~~ 3% Agencies Cash ;;<;,t~ 44% CMBS ~~ o ~.. o 3% e:. ~s~ `,: ~. CIIABS ~ Int'I 7% ABS 5% AEiS 3% 0% Corporates Corporate 30% 20% -'~~~~ROCKWOOD CAPITAL ADVISORS PAGE 15 4~' Quarter 2008 Fixed Holdings f ROCKWOOD CAPITAL ADVISORS p', e PAR 000 CUSIP ISSUER MDYS S&P CG GRADE COUPON % MATURITY PRICE ORG COST MKTVAL 000 % OF PORT YTMIC EFF DUR 47 20 OOOOOOCM 06051 GDX Cash & Cash Equivalents BANK AMER FDG CORP M Aaa Aa2 AAA A+ - C+ 0.00 5.65 11112009 5/1/2018 100.000 100.593 47,286 18,688 47,286 20,307 3.01 1.29 0.100 5.567 0.08 7.35 25 15 15 07386VAB 086516AG 14041NEF A-2-FIXED RTBEAR STE BEST BUY INC NT CRS A-FIXED RTCAPITAL ON Aaa Baal Aaa AAA BBB- AAA - B - 5.33 6.75 4.85 1112/2045 7/15/2013 4/15/2011 78.694 93.357 92.782 25,137 15,060 14,981 19,785 14,529 13,950 1.26 0.92 0.89 11.785 8.413 8.454 2.76 3.69 2.08 20 161571CH A-FIXED RTCHASE ISSU Aaa _ AAA - 5.12 10115/2014 92.769 20,000 18,599 1.18 7.359 3.31 20 161571CP A-FIXED RTCHASE ISSU Aaa AAA - 4.65 311512013 88.785 19,999 17,798____ 1.13 7.867 3.66 11 17275RAC CISCO SYS INC SR NT Al A+ B 5.50 212212016 105.916 11,015 11,868 0.75 4.520 5.92 15 __ 172967ES CITIGROUP INC SR NT A2 A C 6.13 5/15/2018 101.112 14,947 15,284 0.97 6.563_ 7.16 _ 20 30161MAE EXELON GENERATION CO A3 BBB _ B _ ___ 6.20 10/1/2017 86.001 20,069 17,510 1.11 8.497 6.50 139 3128MSZ0 FHLM POOL G04051 Aaa AAA - 6.00 _ 2/112038 103.114 141,728 143,509 9.12 3.577 1.36 25 3133MLT8 FEDERAL HOME LN BKS Aaa AAA - _ 5.25 211312009 100.563 25,940 25:637 1.63 0.414 0.12 50 3133X15Y FEDERAL HOME LN BKS Aaa AAA - 4.10 3/3012009 100.938 49,725 50,987 3.24 0.341 0.24 200 3133XM08 FEDERAL HOME LN BKS Aaa AAA - 5.00 11/1712017 114.656 233,734 230,534 14.65 3.099 7.49 20 3134A3EM FEDERAL HOME LN MTG Aaa AAA - 5.75 311512009 101.094 20,866 20,557 1.31 0.416 0.20 25 31359MH8 FEDERAL NATL MTG ASS Aaa AAA - 5.00 311512016 112.656 24,199 28,532 1.81 3.031 6.17 105 31359MHK FEDERAL NATL MTG ASS Aaa AAA - 5.50 3115!2011 109.344 110,959 116,512 _ 7.40 1.194 2.07 22 31371NBD FNMA POOL 256636 Aaa AAA - 5.50 31112037 102.085 21,739 22,051 1.40 2.605 0.48 100 3137EABA FEDERAL HOME LN MTG Aaa AAA - 5.13 1111712017 115.875 106,780 116,501 7.40 3.068_ _ 7.46_ 100 __ 3137EABU FEDERAL HOME LN MTG Aaa AAA - 3.13 _ 10/2512010 103.531 100,276 104,547 6.64 1.154 1.75 23 31413GN7 FNMA POOL 945114 Aaa AAA - 5.75 _ 811/2037 100.000 23,286 23,266 1.48 3.506 0.95 10 36200EUP GNMA I POOL 599190 Aaa AAA - 6.00 3115/2035 103.374 9,887 9,887 0.63 3.900 3.04 46 36291 W7H GNMA I POOL 640896 Aaa AAA - _ 7.00 4/15/2035 103.984 49,324 47,992 3.05__ 4.426 _1.68 60 36291XMW GNMA I POOL 641273 Aaa AAA - 4.50 4/15!2035 102.162 58,582 61,411 3.90 3.650 3.12 20 38144LAC GOLDMAN SACHS GROUP At A B+ 5.45 11/1/2012 _ 95.391 20,135 19,260 1.22 6.634 3.38 15 428236A0 HEWLETT-PACKARD A2 A B- 4.50 _ 3/1/2013 101.508 15,040 15,451 0.98 4.432 3.74 20 46625HHB JPMORGAN 8 CHASE & C Aa2 A+ B 4.75 511/2013 98.677 19,937 19,694 1.26 6.091 3.84 20 46625YNC A-4-FIXED RTJP MORGA Aaa AAA - 4.74 7/15!2042 78.395 19,095 15,758 1.00 12.263 5.03 30 46629PAE A-M-FIXED RTJP MORGA Aaa AAA - 5.37 5/15/2047 47.388 26,762 14,351 0.91 10.489 6.00 30 52108HU5 A-4-FIXED RTLB-UBS C Aaa AAA - 4.51 12115/2029 90.866 29,388 27,335 1.74 11.740 2.60 25 565849AD MARATHON OIL CORP SR Baal BBB+ B 6.00 101112017 85.267 25,030 21,692 1.38 8.410 6.55 20 58013MEB MCDONALDS CORP MED T A3 A B+ 5.80 10115/2017 106.937 20,416 21,632 1.37 4.821 7.04 15 595620AD MIDAMERICAN ENERGY C A2 A- B- 4.65 10/1/2014 95.150 14,073 14,447 0.92 5.648 4.96 20 61166WAF MONSANTO CO NEW SR N A2 A+ B+ 5.13 4115/2018 104.922 20,002 21,201 1.35 4.471 7.56 20 61747YCE MORGAN STANLEY FR 6% A2 A B+ 6.00 4/28!2015 86.273 19,806 17,465 1.11 5.981 5.22 15 713448BF PEPSICO INC SR NT 5. Aa2 A+ B+ 5.15 511512012 103.236 14,993 15,584 0.99 4.111 3.08 10 78387GAP SBC COMMUNICATIONS I A2 A B+ 5.10 9/1512014 98.299 9,621 9,980 0.63 5.449 4.87 15 806605AJ SCHERING PLOUGH CORP Baat A- B+ 6.00 911512017 98.991 14,994 15,114 0.96 6.150 6.76 20 907818CZ UNION PAC CORP NT 5. Baal BBB B- 5.75 11/1512017 94.821 19,992 19,111 1.21 6.527 6.94 50 912828HX UNITED STATES TREAS Aaa AAA - 2.13 413012010 102.391 49,607 51,377 3.26 0.324 1.31 25 35 92343VAJ 929766X2 VERIZON COMMUNICATIO A-5-FIXED RTWACHOVIA A3 Aaa A AAA B- - 4.35 4.66 211512013 5115/2044 96.719 87.492 24,971 34,103 24,591 30,758 1.56 1.95 5.244 11.851 3.69 3.06 Total $1,582,193 ;1,573,840 100.0 PAGE 16 4~' Quarter 2008 ^ ^ ^ ^ ^ ^ ^ ^ ^ i ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ • The current economic crisis was triggered by falling home prices; unfortunately they continue to tumble. • Financial institutions have greatly reduced their borrowings in an effort to repair decimated balance sheets. • On the other hand, the Fed is attempting to fill the void, becoming the lender of last resort. While probably necessary, the Fed's aggressive stance could be inflationary at some point. n% Chsnyss h The Cass Shipst Composlt~-70 Moms Mcs Index ~% nn~::?~d w% zo% ~ zo% 75% Year-owr-Year \ 1 75% Change ,o% ,o% 5% ~ 5% 0% ~ Quarter-over-Quarter Change -5% -5% ror tirzma dfJNt9gt ~d 9)% 70% ~.~% -70% -15% -15% 20% -20% - f ~ F ~ ~ ~ ~ f ~ ~ ~ ~ ~ ~ ~ ~ f _'~~~~ROCKWOOD CAPITAL ADVISORS PAGE 17 4~' Quarter 2008 ~' e~ r f H istaric Bu ire O rtuni ? ~ : ~ ~_~~ :~ ~N Y g p~ tY ,~ ~~` .. ~ "~ ' ~ ,. ~. ~~ .~ • Investment grade corporates, asset-backed and commercial mortgage-backed securities are all trading at or near their "cheapest" levels ever. • Residential MBS remain an attractive sector on a historic basis Fannl• Mar 30-Yrar Mortpapr Cprrads 2.W 2.80 1121Y2008 2 40 316/2008.7 385 2.324 2.40 10282008 2.20 &182006 120 1.00 11/102007 1113/08 1.~ 1.60 8/1612007 5/6/1008 9/1S'200 1.40 1.20 1 00 0 80 ~Qe r0. ~ ~ ~ ~ ~ ~ g a a~ a ~ S as a a a 2.00 1.80 1.60 8 1 4G 1.20 1.00 0 80 Investment Crad~ Spreads 7tte Optlon•Adlusted spread 100.5} d the Merrill Investrnent Grade cotporese Master Index 3DD 7oD 650 Bs0 800 B00 +,5p 550 500 500 +sD +sD +00 400 g ~~ 350 35D p m m 300 3Q62306, 316 300 f Qn N2m2, 761 250 750 1?b2700, 203 700 700 150 ngn996.+u nl 160 SA 9/A05,r10 J' 100 .--.,~~ 100 i(?en999 fig ?2fi/:007, 6fi 50 50 ~~~~~°s°sss"ss""~ ~~"a"sass"sass a a a a_ a~ a_ a a a m m~ ~~ a a Thr Mrrrill Lyneh ABi Mrstrr Inds Option-P.dtusted Speed 1100 1.100 TODD 1000 900 000 800 800 700 700 S BW 60D ~ 500 500 400 400 300 300 Merrell Lynch W3> Masrer Index 100 200 100 100 0 D ~ s ~ ~ 8 ~ _ r ^' 3 ~ g 8 ~ o ~ ~ ~ ~ ~ a 3 $ ~ ~ ~ ~ 4~' Quarter 2008 ~~~ROCKWOOD CAPITAL ADVISORS PAGE 18 Rockwood Capital Advisors, LLC 721 Emerson Road, Suite 565 St. Louis, MO 63141 314-962-8336 • toll -free 1-888-962-8336 rockwoodcapital.com