The URL can be used to link to this page

Home My WebLink AboutDocumentation_Pension Public Safety_Tab 15_11/02/2009^ ^ ^ ^ ^ ^ ~ ^ ^ ~ ^ ~ s ^ ^ ^ ^ ^ ^ ~ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ~ ^ ~-.~~ ~ ~, t, , _ '~ Rockwood Capital Advisors ~ ..~ ~.:~ " ~' ;~ .. ~- Village of Tequesta Public Safety Officers' Pension Fund Third Quarter 2009 Review November 02, 2009 ~~~jROCKWOOD CAPITAL ADVISORS ^ ~ ~ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ~ w ^ ^ ^ ^ ~ ~ ^ ^ ^ Investment Policy Objectives 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 - ommensurate 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 two years or less. Perforrnance 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% Barclays 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 PSN 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 3rd Quarter 2 009 ^^^r^^^^^^^^^^^^^^^^^^^r^^^^^^^^ Portfolio Summary Tequesta Public Safety Officers' Pension Fund Beginning Market Ending Market % of Portfolio Est. Annual Income Current Yield Fixed Income $1,513,302 $1,651,073 35.6% $59,125 3.6% Equity $2,454,617 $2,754,735 58.9% $36,836 1.3% Cash & Equivalents $125,342 $258,299 5.5% $439 0.2% Accrued Income $14,464 $17,343 -- -- -- T~,+~I $4,107,725 $4,681,451 100% $96,400 2.1 Total Fund Performance Fixed InBCad~ ,~ Cash & ~ Equivalents 5.5 Equity 58.9°° 15 10 5 0 -5 .'~~ Tequesta Public Safety ~ 60 % 5&P 500 40 % Barclays Int C/C ~~~jROCKWOOD CAPITAL ADVISORS PAGE 2 3rd Quarter 2 009 Quarter One Year ^^^r^^^^^^^^^^^^^r^^^^^^^^^^^^^^ mar ~ _ ~ ~~ rte-.. •: ~ Market Value Summary Tequesta Public Safety Officers' Pension Fund Market Value Changes Total $ Change this quarter I $573 726 3rd Quarter Total Fund Return I 8.3% 3rd Quarter Summary Beginning Market Balance $4,107,725 Interest /Dividends 18,865 Contributions 240, 683 Net Disbursements (1,179) Net Realized & Unrealized (CJL) 315,358 Ending Market Balance $4,681,451 Fiscal Year Summary Beginning Market Balance (9/30/2008) $4,243,949 Interest /Dividends 94, 704 Contributions 553,431 Net Disbursements (97,836) Net Realized & Unrealized (G/L) (112,796) Ending Market Balance $4,681,451 c~I~~jROCKWOOD CAPITAL ADVISORS PAGE 3 3rd Quarter 2 009 ^^^^r^^^^^^^^^^^^^^^^^^^^^^^^^^ It's Over? ~~~`~ROCKWOOD CAPITAL ADVISORS PAGE 4 3rd Quarter 2 Ol ^^^^^r^^^^r~^^^^^^^^^^^r^^^^^^^^ Equity Two in a Row The equity markets continued their upward trajectory in the just completed quarter as the S&P 500 posted its best third quarter gain since 1970, up 15.6%. It was also the best back-to-back quarters for the U.S stock market since 1975. Global markets also continued to surge as the EAF1= Index was up over 18%. As we head toward the last quarter of the year, U.S. and global economies seem to be fuming the comer, as it appears that the recession that started in December 2007, is over. Stock markets around the world have been looking ahead and rallying as investors pin their hopes on improved economic data and corporate profits. It may confound investors that the markets should recover so robustly in the face of terrible economic headlines such as GDP contraction, failing banks, massive federal and state budget deficits, a collapsing dollar and rising unemployment We will simply remind you that the equity markets are a futures market The markets digest these realities quickly, as witnessed through the collapse in '08 and early '09, and then look ahead. The stock market recovery to-date should be viewed as highly constructive. As a leading indicator, the equity markets are signaling that better economic times are ahead. While we are grateful for the robust returns since the Spring '09 low, keeping pace with the powerful linear advance of the equity markets since then has not been easy. As investor risk tolerance has improved, new themes are emerging and old themes are eroding at a rapid pace. This is certainly not uncommon, as we have witnessed this scenario play out many times before. Rest assured, this is normal and within the confines of our discipline at major inflection points of equity markets, such as the bear to bull market transition witnessed in March. As you are likely aware, our methodology is predicated on investing in the dominant long-term trends (typically 18-24 months) that exist in the market As a result, coming into the March low, in a continued effort to protect investor capital, our portfolio held a large concentration of more defensive areas (i.e. consumer staples & health care) and little exposure to long-term underperforming areas such as financials. As this market transitions from bear to bull, it is very normal that some of the more depressed, oversold areas (the long-term relative underperforming areas - "Dash For Trash") will garner the most attention in the initial phase of recovery. This has certainly been the case, as sectors such as financials and basic materials have performed extremely well off the bottom while defensive areas have underperformed (see accompanying chart on page 9). It may be helpful to think of the crushing bear market as a rubber band that is stretched so far in one direction that when the tension is released it snaps back sharply. Areas that were stretched the most (financials, basic materials etc.) have snapped back the most in the early stages of the recovery. ~~~~ROCKWOOD CAPITAL ADVISORS PAGE 5 3rd Quarter 2 009 ^^^^^^^^^^^^^^^r^^^s^^^^s^r^a^^^ Equity The world's best investors concede that trying to consistently pick tops and bottoms in the stock market over the long term is near impossible. As such, prudence dictates that we wait for an accumulation of evidence to confirm to us that short-term price action indeed represents the start of a new bull market rather than simply a brief countertrend rally within alonger-term decline. Absent such confirming evidence, an investor is simply gambling on the markets and ignoring sound risk management In our experience, confirming major theme changes typically takes between 3-6 months. As such, over the past several months, we have significantly reduced exposure to defensive areas and added to improving areas such as consumer discretionary, information technology, financials, and foreign ADRs. We feel we are in the later stages of this 3-6 month transition period and expect to finish the year very strong. Looking ahead, we are increasingly confident that the equity markets are in the early stages of what will be a longer-term (5-10 year) bull market Unprecedented global central bank cooperation, easing credit markets, extremely low interest rates and an unprecedented amount of "sideline" cash (estimated to be 3-4 trillion dollars!) is a recipe for growth. It is clear that for the time being investors are not being rewarded for keeping cash reserves, as money market rates are near zero. If human nature remains constant (which it always does), the rampant fear of the equity markets will soon tum to a "fear of missing ouY', a powerful catalyst to send the market even higher. We are still in the first inning!!! Performance 20 I 16.3 11.9 10 t ~~~jROCKWOOD CAPITAL ADVISORS PAGE 6 3rd Quarter 2 009 ^~^^^r^^~r^^^^^^^^^^^^^^^^^^^^^a Equity Portfolio Portfolio Summary # of Stocks I 3 8 Beta 1.1 Yield 1.3 P/E 15.6x Style Box Val Cr Grw Large Cap - 38.0% Mid Cap - 56.7% Small Cap - 5.3% Average Market Cap $30.5 billion Median Market Cap $13.6 billion Top 10 Holdings 1. Hewlett Packard Co. 3.5% 2. Ross Stores Inc. 3.4% 3. Nike Inc. 3.3% 4. Medco Health Solutions Inc. 3.1 5. Nvidia Corp 3.1 6. Staples Inc. 3.0% 7. Henry Schein Inc. 3.0% 8. Int' I Business Corp. 3.0% 9.Oracle Systems Corp. 2.9% 10. Choice Hotels Int' I 2.9% Five Best Impact 1. Nvidia Corp +43.3 2. Netgear Inc. +28.4 3. Ameriprise Finl Inc +28.3 4. Salesforce Com Inc +26.5 5. Nike Inc. Five Worst Imp 1. Mosaic Co +25.4 act -12.4 2. Lockheed Martin Corp. -7.9 3. Qwest Communications -6.2 4. O'Reilly Automotive -5.2 5. St Jude Medical Inc. -5.1 ROCKWOOD CAPITAL ADVISORS PAGE 7 3rd Quarter 2 009 ^^^r^^^^^^^^^^r^^^^r^r^^^^^^^^^^ Equity Analysis and Attributic 3rd Quarter 2 009 Health 28% Staples Discretionary Care 24% 23.0% r 20% 16% 12.5% 13. 12% 11.5 9.2% 8% ._1 4°/a 0% PerFormance ao°io 30% 20% 18.9% 21.0 12.5% 0 12.4% 10% 10.5 /0 8.7% 8.9% 8.1 0% -10% -20% Staples Discretionary Health Materials Care Rockwood ~ S&P 500 ROCKWOOD CAPITAL ADVISORS PAGE S Sector Allocation Info Materials Tech Energy Industrial Tele Finance Util Info Energy Industrial Tele Finance Util Tech ~r^^^^^^^^^^^^^^^^^r^^^^^^^^^^^^ Sector Performance Consumer Health Staples Disc Care 160% 140% 120% 100% 80% 60% 40% 20% 0% -20 -40 -60 -80% -100% J "Beta Trade" Market Rally (Previous Year vs. Current Rally) Materials Info Tech Industrials Energy Finance Utilities 138.6 Year Ended 3/8/09 ^ Bull Rally (3/9 - 9/30) Int'I 72.5 -54.5 ~~~,ROCKWOOD CAPITAL ADVISORS PAGE 9 3rd Quarter 2009 ^^^^^^^^^~^^^^^^^^ir^^^^^^^^^^^^ Historic Quarterly Relative Returr 14 12 -, ~, 10 8 6 4 2 0 -2 -4 -6 -8 -l Mar-00 Rockwood Strategic Equity Portfolio Quarterly Performance Relative to S&P 500 Index January 2000 -September 2009 Mar-01 Mar-02 Mar-03 67% Rate of Success ~ I~ Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 ~~~ROCKWOOD CAPITAL ADVISORS PAGE lO 3rd Quarter 2009 ^ ~ ^ ^ ^ ^ ~ ^ ^ ^ ^ ^ ^ ^ w ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ Equity Transactions Sold Stock July McDonald's Corp. Owens & Minor Inc Pepsico Inc. Aug Chevron Corp. Costco Wholesale Corp. HJ Heinz Co. Kroger Ca. Wal Mart Stores Inc. Sept Baxter Int'I Inc. Helmerich & Payne Inc. Lockheed Martin Corp. Netgear Inc. Stericycle Inc. Purchased Stock Mkt Cap Sector Industry Desc July Nvidia Corp. MCap - Grw Info Tech Company develops and markets 3D graphics processors for computers & games O'Reilly Automotive I MCap - Grw I Con Desc I One of the largest U.S. retailers of car parts and accessories Scotts Co. MCap - Bld Materials Company is a leading Intl. supplier of products for lawn & garden Aug Ameriprise Financial Inc. MCap - Grw Financial Services Diversified Financial Services firm spun off from AMEX in '05 Helmerich & Payne Inc. I MCap - Bld I Energy I Contract drilling services for oil & gas wells in U.S. and Intl. Morgan Stanley I LCap - Bld ( Financial Services) One of the largest financial services firms in U S Mosaic Co. I LCap - Grw I Materials I . . Produces and markets phosphate and potash crop nutrients for ag industry Salesforce Com Inc. MCap - Grw Info Tech Leading provider of on-demand customer relationship mgmt applications Sept Affiliated Managers MCap - Grw Financial Services Holding company invests in investment management firms China Pete & Chem Co. I LCap - Bld ~mer Dep Receipt Integrated petroleum company based in Beijing Equinix Inc. I MCap - Grw I Info Tech I Provides Internet software and services to enterprises and integrators Ericsson LM Tel Co. I LCap - Grw ~ 4mer Dep Receipt Swedish co. is leading Intl. supplier of wireless and wireline systems NYSE Euronext I MCap - Grw ( Financial Services) Six equities and derivatives exchanges in six countries Commissions Paid 3rd Quarter Fiscal 2009 Year-to-Date Lynch, Jones & Ryan $ 1,000 $ 3,030 . ~ ROCKWOOD CAPITAL ADVISORS PAGE 11 3rd Quarter 2 009 t~ #~~ ~ ,~ *~. Equity Holdings ~ .: ~~,~ ~" ~ 3rd Quarter 2009 Exchange Ticker Com an Name Shares Unit Cost Ori final Cost Market Price Total Market Value % Mkt Current Yield Annual Income ISS CGQ - CASH & EQUIVALENTS 51,351 1.00 51,351 1.00 51,351 1.8 0.2 87 N/A ACV ALBERTO-CULVER CO. NEW 2,200 27.41 60,309 27.68 60,896 2.2 1.1 660 0.31 AMG AFFILIATED MANAGERS 1,000 66.90 66,903 65.01 65,010 2.3 0.0 - 0.19 AMP AMERIPRISE FINL INC 2,200 28.31 62,292 36.33 79,926 2.9 1.9 1,496 0.68 BAX BAXTER INT'L INC. 0 57.01 286 0.0 1.8 0.43 BSX BOSTON SCIENTIFIC CORP. 6,560 11.66 76,473 10.59 69,470 2.5 0.0 - 0.34 CHH CHOICE HOTELS INT'L 2,600 28.93 75,210 31.06 81,237 2.9 2.4 1,924 0.77 CRM SALESFORCE COM INC 1,400 45.01 63,008 56.93 79,702 2.8 0.0 - 0.12 EOIX EQUINIX INC 790 83.83 66,222 92.00 72,680 2.6 0.0 0.31 ERIC ERICSSON L M TEL CO 6,440 10.26 66,041 10.02 64,529 2.3 1.6 1,030 N/A HEW HEWITTASSOCIATES INC. 1,940 37.39 72,538 36.43 70,674 2.5 0.0 - 0.26 HPO HEWLETT PACKARD CO. 2,065 33.67 69,518 47.21 97,654 3.5 0.7 661 0.47 HSIC HENRY SCHEIN INC. 1,525 43.67 66,594 54.91 83,738 3.0 0.0 - 0.92 IBM INTL BUSINESS CORP. 693 109.33 75,769 119.61 82,890 3.0 1.8 1,525 0.21 JNJ JOHNSON & JOHNSON 1,150 49.65 57,097 60.89 70,024 2.5 3.2 2,254 0.38 KO COCA COLA CO. 1,300 57.46 74,704 53.70 70,343 2.5 3.1 2,132 0.10 LOW LOWES COS INC 3,600 20.64 74,303 20.94 75,384 2.7 1.7 1,296 0.58 LSTR LANDSTAR SYSTEM INC. 1,992 43.64 86,933 38.06 75,816 2.7 0.5 359 0.11 MHS MEDCO HEALTH SOLUTIONS INC. 1,570 49.50 77,720 55.31 86,837 3.1 0.0 - 0.80 MOS MOSAIC CO 1,200 54.89 65,869 48.07 57,684 2.1 0.4 240 0.69 MS MORGAN STANLEY 2,150 30.27 65,074 30.88 66,392 2.4 0.7 430 0.19 NHP NATIONWIDE HEALTH PROPERTIE: 2,420 31.54 76,330 30.99 74,996 2.7 5.7 4,259 0.57 NKE NIKE INC. 1,420 61.18 86,871 64.70 92,229 3.3 1.6 1,420 0.05 NVDA NVIDIA CORP 5,720 10.49 59,976 15.03 85,972 3.1 0.0 - 0.42 NYX NYSE EURONEXT 2,390 28.08 67,117 28.89 69,047 2.5 4.2 2,868 0.23 ORCL ORACLE SYSTEMS CORP. 3,930 20.84 81,917 20.84 81,901 2.9 1.0 786 0.40 ORLY O'REILLYAUTOMOTIVE 1,620 38.13 61,778 36.14 58,547 2.1 0.0 - 0.01 PGR PROGRESSIVE CORP. 4,675 15.90 74,353 16.58 77,512 2.8 0.0 - 0.63 Q OWEST COMMUNICATIONS 14,270 4.45 63,430 3.81 54,369 1.9 8.4 4,566 0.29 QCOM QUALCOMM INC. 1,770 35.44 62,724 44.98 79,615 2.8 1.5 1,204 0.65 ROST ROSS STORES INC. 2,010 30.41 61,119 47.77 96,018 3.4 0.9 884 0.22 SIAL SIGMA-ALDRICH CORP. 1,390 54.73 76,078 53.98 75,032 2.7 1.1 806 0.29 SMG SCOTTS CO 1,770 35.38 62,616 42.95 76,022 2.7 1.2 885 0.18 SNP CHINA PETE & CHEM CO 740 89.07 65,910 85.15 63,679 2.3 2.4 1,531 N/A SPLS STAPLES INC. 3,600 15.63 56,265 23.22 83,889 3.0 1.4 1,188 0.89 STJ ST. JUDE MEDICAL INC. 1,730 39.87 68,982 39.01 67,487 2.4 0.0 - 0.52 TJX TJX COMPANIES INC. NEW 2,090 25.41 53,100 37.15 77,644 2.8 1.3 1,003 0.94 YHOO YAHOO INC 3,870 16.16 62,545 17.81 68,925 2.5 0.0 - 0.86 YUM YUM BRANDS INC. 1,880 28.07 52,776 33.76 63,469 2.3 2.3 1,429 0.46 Portfolio Total $2,567,813 $2,808,871 100.0 1.3 $36,923 ~~~jROCKWOOD CAPITAL ADVISORS PAGE 12 Proxy Voting Meeting Shares Date Agenda Item Record Meeting Shares Date Agenda Item Mgmt Vote Rec Cast Nike, Inc. (NKE) Mgmt Vote Rec Cast 1,420 9/21/2009 Elect Directors For For Ratify Auditors For For Amend Qualified Employee Stock Purchase Plan For For H.J. Heinz Co. (HNZ) 8/12!2009 Elect Directors For For Ratify Auditors For For ^_ Provide Right to Call Special Meeting For For Proxy Foatriote Rockwood Capital Advisors, through our equity sub-adviser, Contravisory Investment Management, 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 far one of Adviser's clients and (iii) a copy of any document ISS created that `** If there are no shares listed, a proxy was voted but shares were not held at the end of the quarter. Refer to prior holdings reports. "' ~~~,ROCKWOOD CAPITAL ADVISORS PAGE 13 3rd Quarter 2 009 Fixed Income ~f. Is the Fed up do the Task? As we mentioned in our Second Quarter comments, the current environment continues to exhibit "low visibility" from an economic standpoint One can make a strong argument for both economic resurgence and continued recession. As a result, our client portfolios are rather "neutral" with respect to sector allocations and durations relative to their assigned benchmarks. While the direction of the economy and interest rates is quite uncertain over the intermediate term, we do feel that ultimately, when the economy rebounds, we are likely to see sharply higher Treasury yields and higher inflation. Investors are rightly concerned about the tremendous amount of liquidity that the Fed has injected into the banking system. The Fed, on the other hand, continually offers assurances that they have the mechanisms in place to "shrink" the Fed balance sheet and drain liquidity from the banking system in order to prevent inflationary pressures from building. We have no doubt that the Fed has the technical expertise to drain reserves in order to prevent the economy from overheating. The vital question is: does the Fed have the intestinal fortitude to drain reserves in a preemptive manner. Will the Fed take away the punch bowl in the face of howling politicians and looming elections? To be clear, if the Fed is to nip any inflationary pressures in the bud, it will have to do so before the data clearly shows that the economy is cooking again. If the Fed waits until all lights are green, it will be too late and the inflation genie will be out of the bottle. Frankly, we have grave doubts that the Fed will have the guts to make the unpopular moves required to navigate this inflationary minefield. US Treasury Yield Curves Sector Index Returns 0 ° 60% - - 5% 50% ®3Q 2009 ^ YTD 2009 4% - 40% 3% ~ 30% - ~ ' 20% - 2%- ~~ ' 9/30/2009 10% -~ 1 % - l 6/30/2009 0% - - - 9/30/2008 0% -T- _~,~_, _ -10% 3 2 5 10 30 mos yrs yrs yrs yrs Tsy Agy MBS Credit CMBS HY ~~~ROCKWOOD CAPITAL ADVISORS PAGE 14 3rd Quarter 2 009 Fixed Income In addition, given the ballooning federal budget deficit, bond investors fear the tidal wave of Treasury bond issuance that will be required to pay the bills. Many analysts expect interest rates to soar as an inducement for investors (especially foreigners) to take down this unprecedented amount of debt For the 12 quarters ended September 2008, only once did foreigners fail to purchase an amount of US Treasuries equal to 100% of all issuance. For Q1 2009, foreigners purchased only 24 percent of the Treasuries issued. In other words, domestic investors had to take down 76% of the Treasuries sold in Ql . As the volume of Treasury issuance continues to grow, the upward pressure on yields will continue to increase. In summary, the economy may indeed falter in the coming months. Housing prices continue to fall (even though sales appear to be stabilizing) and commercial real estate continues to slide. Unemployment is approaching 10%, and consumers are reluctant to spend. So, interest rates could fall in the near term. However, barring a major shift toward restraint in government spending and an unlikely resurgence in Fed fortitude, we look for interest rates to move higher sometime in the latter half of 2010 as the economy begins to rebound. In this environment, longer term fixed income securities would underperform those with shorter final maturities. Performance 15 10 5 0 -5 Tequesta Public Safety ^ Barclays Int. G/C ~~ROCKWOOD CAPITAL ADVISORS PAGE 15 3rd Quarter 2009 Quarter One Year Two Years Three Years Four Year Inception ^ ^ ^ ^ ^ ^ ^ ^ ^ A ^ ^ ^ ^ ^ ^ i ^ ^ ^ ^ ^ ^ A ^ ^ ^ ^ ^ ^ ^ Fixed Por~olio Structure Characteristics Tequesta Public Barclays Int. Safety G/C Average Maturity 3.8 yrs 4.5 yrs Effective Duration 3.3 yrs 3.9 yrs Yield to Maturity 2.5% 2.6% Effective Maturity Tequesta Public Safety Portfolio Corporates 34% Cash 11% U.S.Treasuries 34% Agencies 11% Corporates 30% Index International 4% Agencies 20% U.S. Treasuries 46% ROCKWOOD CAPITAL ADVISORS PAGE 16 3rd Quarter 2009 5 to 10 years 10+ years ^ Barclays Int. G/C Mortgages ABS/CMBS 6% 3% ^^^^^^r^r^^^^^^^^^^^^^^^^^^^^^^ Fixed Holdings Par Cusip Issuer Moody's / S8P Coupon Rate Maturity Date Market Price Original Cost Market Value % of Port YTM Eff Dur CG Grade 207 - CASH & EQUIVALENTS Aaa /AAA 0.00 10/01/2009 100.00 206,949 206,949 11.05 0.100 0.08 --- 15 009363AG AIRGAS INC GTD SR NT 4.5%14 Baa3 /BBB 4.50 09/15/2014 101.77 14,982 15,303 0.82 4.427 4.47 --- 30 0258166A AMERICAN EXPRESS CO SR NT 7.2 A3 /BBB+ 7.25 05/20/2014 112.36 31,503 34,511 1.84 4.248 3.93 B 20 06051GDX BANK AMER FDG CORP MTN-L 5.65 A2 /A 5.65 05/01/2018 98.74 18,688 20,219 1.08 5.757 6.75 C+ 40 06739FFZ BARCLAYS BK PLC SR NT 5.2%14 Aaa /AA- 5.20 07/10/2014 105.63 40,465 42,721 2.28 3.895 4.24 --- 25 07388VA6 A-2-FIXED RTBEAR STEARNS COMMER~ Aaa /AAA 5.33 01/12/2045 100.15 25,137 25,148 1.34 5.324 2.25 --- 10 12189TBA BURLINGTON NORTHN SANTA FE CP Baa1 /BBB 5.75 03/15/2018 108.63 9,843 10,888 0.58 4.512 6.94 B 15 14041NEF A-FIXEDRTCAPITALONE MULTI-ASSET Aaa/AAA 4.85 04/15/2011 105.25 14,981 15,820 0.84 1.377 1.48 --- 20 161571CP A-FIXED RTCHASE ISSUANCE TRUST20 Aaa /AAA 4.65 03/15/2013 107.20 19,999 21,481 1.15 2.480 3.17 --- 15 172967ES CITIGROUP INC SR NT 6.125%18 A3 /A 6.13 05/15!2018 98.46 14,947 15,117 0.81 6.365 6.63 C 15 172967EY CITIGROUP INC SR NT 6.375%14 A3 /A 6.38 08/12/2014 103.39 15,184 15,639 0.84 5.464 4.18 --- 35 219350AT CORNING INC NT 7%051524 Baal /BBB+ 7.00 05/15/2024 107.71 34,680 38,643 2.06 6.190 9.37 B+ 25 25179MAH DEVON ENERGY CORP NEW SR NT 6 Baal /BBB+ 6.30 01/15/2019 110.33 25,240 27,915 1.49 4.902 7.27 B+ 10 2605436X DOW CHEM CO SR NT CR SENS 19 Baa3 /BBB- 8.55 05/15/2019 112.42 9,979 11,569 0.62 6.771 6.69 B+ 15 26884LAA EQT CORP SR NT 8.125%19 Baal /BBB 8.13 06/01/2019 114.14 15,208 17,581 0.94 6.160 6.89 --- 20 29379VAE ENTERPRISE PRODS OPER LLC GTD Baa3 /BBB- 4.60 08/01/2012 103.62 19,990 21,007 1.12 3.251 2.64 --- 20 30161 MAE EXELON GENERATION CO LLC SRN A3 /BBB 6.20 10/01/2017 109.14 20,089 22,447 1.20 4.811 6.36 B 100 3137EABU FEDEF:AL HOME LN MTG CORP REFR Aaa /AAA 3.13 10/25/2010 102.72 100,276 104,073 5.56 0.571 1.04 --- 9 36200EUP GNMA I POOL 599190 Aaa /AAA 6.00 03/15/2035 106.09 9,777 10,033 0.54 3.702 3.12 --- 45 36291 W7H GNMA I POOL 640896 Aaa /AAA 7.00 04/15/2035 108.05 48,721 49,249 2.63 4.298 2.67 --- 59 36291XMW GNMA I POOL 641273 Aaa /AAA 4.50 04/15!2035 102.00 57,592 60,279 3.22 4.012 3.39 --- 35 36962G4F GENERAL ELEC CAP CORP MTN BE Aa2 /AA+ 4.38 09/21/2015 99.04 34,907 34,705 1.85 4.543 5.28 --- 30 38141EA3 GOLDMAN SACHS GRP INC MTN BE Al /A 6.00 05/01/2014 108.75 31,060 33,351 1.78 3.793 3.98 B+ 30 46625HGY JPMORGAN CHASE & CO SR NT 6%0 Aaa /A+ 6.00 01/15/2018 107.33 29,864 32,580 1.74 4.831 6.67 B 25 565849AD MARATHON OIL CORP SR NT 6%17 Baal /BBB+ 6.00 10/01/2017 105.11 25,030 27,027 1.44 5.211 6.35 B 25 59217EBW METROPOLITAN LIFE GLBL FDG144A FF Aa2 /AA- 5.13 06/10/2014 105.03 25,028 26,653 1.42 4.068 4.16 --- 15 595620AD MIDAMERICAN ENERGY CO FR 4.65 A2 /A- 4.65 10/01/2014 106.31 14,073 16,295 0.87 3.273 4.45 B- 35 61747YCE MORGAN STANLEY FR 6%042815 A2 /A 6.00 04/28/2015 105.90 33,665 37,956 2.03 4.654 4.70 B+ 10 72650F;AV PLAINS ALL AMERN PIPELINE L P Baa3 /BBB- 4.25 09/01/2012 102.80 10,136 10,360 0.55 3.206 2.73 --- 100 7591 EAAB REGIONS BK ALA MTN FDIC TLGP Aaa /AAA 3.25 12/09/2011 104.03 103,813 105,042 5.61 1.376 2.11 --- 20 78010JCV ROYAL BANK OF SCOTLAND Aaa / A+ 4.88 08/25/2014 101.66 20,063 20,429 1.09 5.048 4.34 --- 15 806605AJ SCHERING PLOUGH CORP NT 6%17 Baal /A- 6.00 09/15!2017 111.56 14,994 16,773 0.90 4.272 6.57 B+ 15 816851AN SEMPRA ENERGY NT 6.5%16 Baal /BBB+ 6.50 06/01/2016 110.54 14,967 16,950 0.91 4.642 5.47 B- 20 907818CZ UNION PAC CORP NT 5.75%17 Baal /BBB 5.75 11/15/2017 107.20 19,992 21,875 1.17 4.585 6.57 B- 70 912828JZ UNITED STATES TREAS NTS 1.750 Aaa /AAA 1.75 01/31/2014 98.75 68,205 69,331 3.70 2.053 4.21 --- ~~~~ROCKWOOD CAPITAL ADVISORS PAGE 17 3rd Quarter 2 OC ^ ^ ^ ^ ~ ~ ^ ^ ^ ^ ^ ^ ^ ^ ^ ~ ^ ^ ^ ^ ^ ~ f ^ ! ^ ^ ^ ^ ^ ^ ^ Fixed Holdings Par Cusip Issuer Moody's / S&P Coupon Rate Maturity Date Market Price Original Cost Market Value % of Port YTM Eff Dur CG Grade 220 912828KG UNITED STATES TREAS NTS 1.375 Aaa /AAA 1.38 03/15/2012 100.48 220,387 221,199 11.81 1.102 2.41 --- 150 912828KU UNITED STATES TREAS NTS 0.875 Aaa /AAA 0.88 05/31/2011 100.24 148,729 150,798 8.05 0.665 1.64 --- 100 912828KX UNITED STATES TREAS NTS 1.875 Aaa /AAA 1.88 06/15/2012 101.56 100,746 102,116 5.45 1.213 2.63 --- 40 912828LJ UNITED STATES TREAS NTS 3.625 Aaa /AAA 3.63 08/15/2019 102.64 40,304 41,242 2.20 3.222 8.58 --- 15 912828LM UNITED STATES TREAS NTS 1.375 Aaa /AAA 1.38 09/15/2012 99.83 14,972 14,983 0.80 1.435 2.91 --- 35 912828LW UNITED STATES TREAS NTS 1.000 Aaa / NR 1.00 09/30/2011 100.08 35,005 35,028 1.87 0.961 1.98 --- 25 92343VAJ VERIZON COMMUNICATIONS INC NT A3 /A 4.35 02/15/2013 105.13 24,971 26,422 1.41 2.746 3.16 B- 25 94974BET WELLS FARGO CO MTN BE SR NT 3 Al /AA- 3.75 10/01/2014 99.50 24,959 24,875 1.33 5.023 4.56 --- Portfolio Total $1,810,100 $1,872,581 100% -~~~,ROCKWOOD CAPITAL ADVISORS PAGE 18 3rd Quarter 2 009 With US Treasury Yields Near Historic Lows.. Concern .. . BC Int Government Index (Yield bo Maturity) 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0 0.0% 99 00 01 02 03 04 05 06 07 08 09 ff Rates Total Dollar Increase Return Loss* +5% -14.3% -$1,431,846 +4% -11.4% -$1,139,000 +3% -8.3% -$834,000 +2% -5.1 % -$511,000 +1% -1.7% -$172,000 `assumes $10,000,000 beginning portfolio value ~~~`,ROCKWOOD CAPITAL ADVISORS PAGE 19 3rd Quarter 2 009 OZ 3~dd S2IOSIAQd 'If'.LIdV~ QOOM?I~O21 ~aaidxa sutea6oad asay~ uaynn uie6e aauo aano /boa /inn Fuisnoy ~ey~ anai~aq sa~~da~s ~~ipaaa aa~(nq autoy auti~ Tsai} aye se vans suteaFoad ~eaapa~ ~(q uanup uouautouayd ~Geaoduta~ e si saaud autoy ui aaunoq aye }eye aea~ autos aanaNloH ~pauto~~oq aney o~ aeadde saaud autoH ~~u~od autos ~e ~Geuoi~e~~ui aq p~noa s~y~ aea~ ~fueut ~nq `~fwouoaa aye a~e~nuu~s o~ ~Gessaaau seM uoi~ae anissat66e ~ey~ an6ae p~noM autos ~uta~s~fs 6u-~ueq aye o~ui ysea ~o ~unoute snoutaoua ue 6ui~aa~ui `area pidea a ~e sai~unaas 6u-~fnq uaaq sey pad aye `spaoNl aay~o u~ ~papo/dxa sey anaasa~ ~eaapa~ aye ~o ~aays aaue~eq ayl Crp ~a CS V CS ~ CS Y CS w C ~j Cp ~p Q Y P j O O m ~ y ~ O ~ U ~ ~ A W W N ~ Or s %Ol- - / %OL %SL- r %4L- %oeel- %OL- wIYJl C1d %OL- %9• %9- ACl L- ~ 8Q'lCJ! I ~__ ~~ '"_ ~ x9 %ss~c a6ueu~ ~ x9 6m'u'lfi~! aauen p-aano-aauen p %a %oL a6uey~ %~ aea~,-aano aea,~ %sL O % Z %OZ xapul a~~d awoH OZ'a~sodwo~ ~all!4S ase~ ayl W sa6uey~ [wJ _ IJ I~ p~p O O O~ ~ ~ 'o 8~ to' N UI {a N rn N ~ N fp' O o rn ~ 'o Ln ~ Lo l {tWDp A ~LJp (ttpOD (~~T (~~ipJ ~ J ~ ~ V ~ la W N O tm0 ~ A ~ ~ ~ ~V pW~ ~fi ~i (O N A N w+ O ~ OOZ 0 OOZ 004 004 009 009 BZB99 008 9002/OL/6 008 ~00' L 000' L COOZ'L OOZ'L Q 0 ~004'L 0 004'L oos'L oos'L 008'L 008'L oao'z ooa'z b L 90 LZ 'fi00Z/bL/OL ooz'z ooz'z bL-CS22 'BOOZ/L L/Z l ' 4' 004 Z 00 Z (3aa4S a~uele9 S,Pa~ a41) ;!pa~~ ~ue8 an~asab ~e~apa~ le;ol 600 Z aa~~nb pa £ •~ , 'r ~~ ' ~. ~•~ I`• ~ jL } tr ..1~.~ ~uisnoH ~ ~aa~s a~u~~~g ~` :- - . ~, P3~ a41 r ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ IZ 3J!/d S2IOSIAQ~1 'Id,Lldd,~ QOOM?I~021~~ s~ana~ ~uaaano ~e „an~suadxa„ ~ey~v-awos aq o~ aeadde ~fay~ `aanaMOy `saa~enb Z used aye aano ~~aM auop aney sa6e6~oW •yoae/N aouis ~(~~ei~ue~sgns paMOaaeu sey saunseaal •sn sai~~anoas y6noay}-ssed a6e6~ow ~o peaads p~a-~f aul N N V U A iJi C`1 (~(~~ V V ~D O N +_ + 13 N N N N ~ N N N ~ ~ ~ {i ~ Y SC ~ ~ Q SZ ~ N ~ j N Q? sss~s~ssg~~~~~~~w~~~~~~~~ OZ"0 04"0 09'0 08 0 00 L OZ' t 04'L 09 t 09't 00'Z OZ Z O4' Z 09'Z O8 Z OZ 0 04 0 09'0 08 0 00"L OZ L 06 t 09 L 09"L 00 Z OZ'Z 04 Z 09 Z O8 Z sp!a!A a6e6~LOpy WIHj ~ea,~-pg puy tinsee~l ~ea,~-p L uaennlag aoua~a~!Q e41 •po~aad LOOZ-ti00Z auk o~ ani~e/aa an~~oea~~e uieuaaa ~~l~s spuoq a~eaodaoo `saunseaal aano %9'Z ~o peaads p~ai~f a6eaane ue ~d '8002 aaquaaoaa aouis ~(~~ea snopuau~aa~ a pa6e~s aney spuoq a~eaodaoo apea6 ~uaua~sanu~ a se'imu~ se'samrmrc 69'866U9'JS OOL OOL o<<'sa~s~rs OGL ' OGL 11 l 966ti7lL L G~ ~ mZ'Om7/9'Z l OR OCl asa • m~,n va ~ ooe aLe'amu~ ooe M OGE OC£ N a' a' 003 ODb 09b WD W4 004 044 ~4 OOD 004 sss ~m OL'm~f 044 159 ' WD:I"~lLt ~( ODL xa D4 i~W grrodo0 aDriO wawisanul l!uaW ~{!o CSVO) DradS P;snfyy uo!340 wl sprsldg apY~ ~uaugsanW sp~aads ~ipaa~ 600 Z aa~~nb pa £ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ w ^ ^ ~ Wil Foreigners Finance our Deficit? Percentage Of Treasury Issuance Bought By Foreigners 300% 300% 250% Blue =All Foreigners seP-oT Red=China zso% 250% 200% 200% 150% 150% 109% 100 % ~ 100% 50% Mar-07 42% ~% 27 23°/ 24 % 21% 0% ei 0% -50 -50 % N N M M M M ~y a V p N ~ N N O N r r r m m W W O W m Q Q Q Q O O O O Q O Q Q O 4 4 O O O O O Q O 4 O O O O ~ n _ ~ U ~ _ _ d - G: N 5 k ._ <. _ ~ ,. to C ~ U O ~ _ .. ~ One of the problems of increased US Treasury issuance is finding "homes" for all this debt. In recent years, the US has relied heavily on countries such as China and Japan to finance our deficit. However, foreigners have been purchasing a decreasing percentage of our debt, which will eventually force interest rates higher to entice investors. Due to the ballooning federal budget deficit, the increase in issuance of US Treasury securities (federal borrowing) has been astounding. ~~~,ROCKWOOD CAPITAL ADVISORS PAGE 22 3rd Quarter 2009 Total Treasury Gross issuance (Amount Offered) For The Week Atl Treasury Bilk, Notes And Bonds Credit Spreads The yield spread of mortgage pass-through securities vs. Treasuries has narrowed substantially since March. Mortgages have done well over the past 2 quarters, however, they appear to be somewhat "expensive" at current levels. Investrnent Glade Spreads Tha OptionAdjusted Sprud (OAS) drie Menil hres4neri Orade Corp orate Master Index 700 700 i vs mm, Esl 6eo a~onoo9~ s9e eoo eoo 660 '~ 600 '~ 460 4~ 400 4X1 M 3a0 r ~ m m 300 ~nma, aic 300 r on n gym, a>t 260 '~ r zsrmo, zm 200 200 X60 1 7lY1996, t U 1~ srismns. iio 100 100 $f16l1 Sea, E9 3~tOtd1~,T9 zr~nmt, as 6p ',A Investment grade corporate bonds have staged a tremendous rally since December 2008. At an average yield spread of 2.5% over Treasuries, corporate bonds still remain attractive relative to the 2004-2007 period. ROCKWOOD CAPITAL ADVISORS PAGE 21 3rd Quarter 2009 Will Percentage Of Treasury Issuance Bought By Foreigners 300% 300% 250% Blue =All Foreigners Sep-07 250% Red =China zso% 200% 200% 150% 150% 109 100% 100°/ 50% Mar-07 42% ~% 27 23% 24 % 21 % 0% 6~ 0% 50 -50 % - N N M M th M O 1C1 ~ h~ (O ~Q r r r r m N W n c~y 4 4 ~ °O}1 ~ ~ p~~~p R 4 ry~ {RJ1 ~ R (~~ly YVy R °~ n tS Q t ~d ~ C Foreigners Finance our Deficit? One of the problems of increased US Treasury issuance is finding "homes" for all this debt. In recent years, the US has relied heavily on countries such as Ch;na and Japan to finance our deficit. However, foreigners have been purchasing a decreasing percentage of our debt, which will eventually force interest rates higher to entice investors. Total Treasury Gross ksuance (Amount Offered] For The Week RI Treaslry Bic, Notes And Bonds i326 1325 7300 1300 iZ76 1275 S2S0 1250 5226 8226 ~ Y1D0 1200 a a o 5776 1176 0 o e 0 17,'90 5160 0 ® i123 5126 m i100 2G'JVeekAverage 8100 i76 i76 S60 S60 S26 W eeky 825 io io a ~ s s °s ~ g "s s s s s ~ ~ ~ ~ ~ ~ C C C C C C C C C C G C ~ ~ ~ ~ ~ ~ ? o ~ ~ ~ o ~ m ~ Due to the ballooning federal budget deficit, the increase in issuance of US Treasury securities (federal borrowing) has been astounding. ROCKWOOD CAPITAL ADVISORS PAGE 22 3rd Quarter 2009