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Home My WebLink AboutDocumentation_Pension Public Safety_02/01/10r. ,~ } ~, r IZock~rvood Capital Advisors _ ..f~. ~- ;~~ . , -~ ~ ,ter ,~~ : ~, Strategy Review Presented By: Anthony K. Brown Senior Partner Tony@ rockwoodcapital.com ~Ilage of Tequesta Public Safety Officers' Pension Fund Fourth Quarter 2009 Review February 01, 2 010 ROCKWOOD CAPITAL ADVISORS Investment Policy .s' 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. Performance 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. PAGE 1 ROCKWOOD CAPITAL ADVISORS 4th C~uarter 1UUy ~...~~v Por~ol io Summary Tequesta Public Safety Officers' Pension Fund Beginning Market Ending Market % of Portfolio Est. Annual Income Current Yield Fixed Income $1,651,073 $1,779,866 36.3% $64,223 3.6% Equity $2,754,735 $2,945,331 59.7% $30,328 1.0% Cash & Equivalents $258,299 $199,785 4.0% $200 0.1% Accrued Income $17,343 $14,921 -- -- -- ~-„+.,I $4,681,451 $4,939,903 100% $94,751 1.9% Total Fund Performance Eixed Income 36.3 Equity 59.7 Cash & Equivalents 4.00 30 20 10 0 -10 TecRiesta Public Sa(ery 60 % S&P 500 ~ 40 % Barclays Int CJC ~~~jROCKWOOD CAPITAL ADVISORS PAGE 2 4th Quarter 2009 Quarter One Year Market Value Summary Tequesta Public Safety Officers' Pension Fund Market Value Changes _--.-_. Total $ Change this quarter ( $258,452 ; 4th Quarter Total Fund Return 4th Quarter Summary Beginning Market Balance $4,681,451 Interest /Dividends 27,221 Contributions 144,970 Net Disbursements (40,976) Net Realized & Unrealized (G/L) 127,237 Ending Market Balance $4,939,903 Fiscal Year Summary 3.2% Beginning Market Balance (9/30/2009) $4,681,451 Interest /Dividends 27,221 Contributions 144,970 Net Disbursements (40,976) Net Realized & Unrealized (G/L) 127,237 Ending Market Balance $4,939,903 _. ROCKWOOD CAPITAL ADVISORS PAGE 3 4th Quarter 2009 What's New? c ~~ • ,~ ~~ ~ r ~ r r ~ r .. a 1 ~~C ~l~j~ ''i'I~d'T'~ t~~..__ yYl""~ c • ~ III ~ i ~ ~/ • ° a+ • 0 V ~' ~. ~~~ .o ~i~. ~r~~ ~/ r a • O G _. i ~, t ~1I~ ° `w • r Q ~~jROCKWOOD CAPITAL ADVISORS PAGE 4 4th Quarter 2009 Equity ,~* ~~ 3 _ , ~, _ t ,, ' . ,, ~ . ~. ~ .t' p, r ,. ~~ ~ ~ „~r r~ .r ~ . ,~ :. t ~~ r -3 4th Quarter 2009 Tale of Two Markets Much like die "Tale of Two Cities", it was the worst of times it was the best of times. How else to summarize a year that started out so terribly bad, only to end so "terribly" well! We witnessed the S&P 500 drop 24% at the low point in March, only to end the year up a positive 26.5%. For the quarter, the S&P 500 was up 6.04%. International markets, as measured by the EAFE Index, were up 1.8% for the quarter and 27.75% for the year. As previously mentioned, the equity markets are a futures market; and as they have predicted, we are beginning to see tangible signs of economic improvement Initially it may be that "less bad" is good but we have to start somewhere! At this point, the economy is growing modestly again and initial jobless claims are beginning to taper off. Even the critically important consumer is coming out of hibernation. As transitions go, they are never pretty and the many crosscurrents cause major anxiety. We are all tempted to connect the negatives such as high unemployment, a sluggish economy, political infighting, terrorism, and high energy costs with our expectations for returns. This would be a mistake, especially during the early stages of a recovery. Historically, the equity markets advance in anticipation of good economic news and begin to mend half way through major recessions. Given that the equity market began to recover in March, we believe that by mid-2010 significant evidence of economic recovery--including job growth -should emerge. For us that would signal the real end of the recession. As Ronald Reagan once said, "A recession is when your neighbor loses his job; a depression is when you lose your job". In our opinion, we are entering the second phase of what will be a longer term recovery for the markets and eventually for the economy. This phase begins with a major dose of finger pointing. Washington points to Wall Street and Wall Street points to Washington. Democrats point to Republicans and Republicans point to Democrats. While the markets look forward, politicians look backward. Let the free markets make adjustments and in time, our financial structure and economy will mend. Freedom and the human spirit will not let them hold us back. _~ ROCKWOOD CAPITAL ADVISORS PAGE 5 Equity .~' Looking ahead, 2010 is likely to be a period of capital gain opportunities. Despite the pessimism, the financial strains, the sluggish economy, and societal "deterioration," momentum is on the upside. Yet, caution is called for. And, why not? We have been battered and bruised by a secular bear market during the first decade of this century. And the problems are well displayed. However, the stock market "animal" appears healthier and is galloping ahead. There should be little doubt that we are in the early stages of a new bull market While extremes in macro data back in March set the stage for a significant recovery, we believe we are still in the early stages of a major market transition from bear to bull. And, while areas or themes of previous leadership, such as consumer staples and health care, are being replaced as investors "appetite for risk" improves, new leadership is still emerging, i.e. information technology, financials, consumer discretionary and foreign ADR's. Therefore, despite strong absolute performance in 2009, the fact that we underperformed, though disappointing, is typical of our strategy during these periods. In our experience, it is at these inflection points that our "momentum" type, trend following process generally lags the market for a period of 3 to 6 months. While the duration of this "transition" may have been longer than typical, so too was the slide that put us here. In December, your portfolio was up approximately 5.9% vs. 1.9% for the S&P 500 Index. In our view, "the worm is fuming." Thank you for your continued support, confidence, patience, and most of all, YOUR BUSINESS! Performance 30 25 20 15 10 5 0 -5 -10 -15 28.3 i s.~ 5.1 5.9 z.a i.s -0.1 -0.5 I a:-~ ~s . tr>~•~ Y 3.9 5.4 L -10.9 -10.3 QTR One Two Years Three Four Years Inception Year Years Tequesta Public Safety ^ Russe113000 ROCKWOOD CAPITAL ADVISORS PAGE 6 4th Quarter 2009 Portfolio Summary # of Stocks 3 7 Beta 1.2 Yield 1.0% P/E 2 7.2 x Style Box Top 10 Holdings 1. Nvidia Corp 3.6% 2. Hewlett Packard Co. 3.6% 3. Salesforce Com Inc 3.5% 4. Medco Health Solutions Inc. 3.4% S.Oracle Systems Corp. 3.3% 6. Nike Inc. 3.2% 7. Ford Motor Co. 3.1 8. Int' I Business Corp. 3.1 9. Staples Inc. 3.0% 10. Ross Stores Inc. 2.9% Five Best Impact 1. Ford Motor Co. +31.6 2. Salesforce Com Inc +29.6 3. Mosaic Co +2 7.0 4. Nvidia Corp +24.3 5. CNH Global NV Five Worst Imp 1. Boston Scientific Corp. act +20.2 -23.6 2. Yahoo Inc -15.0 3. Nyse Euronext -14.5 4. UBS AG -12.6 5. Ross Stores Inc. -10.4 ROCKWOOD CAPITAL ADVISORS PAGE 7 4th Quarter 2009 a s E ui Anal sis and Attribution ~ .•:..~ q~ y -. .- 32% Staples Discretionary 30% 25% 20% 15% 10% 5% 0% Performance 30% 20% 10% 6.5% ° 71% 8.6% 8. ~ :.; 4.2 /o 0% -1.1% -10% -20% Staples Discretionary Health Care Rockwood ~ S&P 500 Materials Info Energy Industrial Tele Finance Util Tech ROCKWOOD CAPITAL ADVISORS PAGE 8 4th Quarter 2009 Sector Allocation Health Info Care Materials Tech Energy Industrial Tele Finance Util I` ,,,r H ist~ric Month iy Relative Returns ~ .y p. ~ ~ :~' 6.0% Rockwood Strategic Equity Portfolio Monthly Performance Relative to S&P 500 Index January 2005 -December 2009 4th Quarter 2009 4.0% 2.0% 50% Rate of Success 0.0% -2.0% -4.0% -6.0 -8.0% 1- 1 /05 6/05 11 /05 4/06 9/06 2/07 7/07 12/07 5/08 10/08 3/09 8/09 12/09 ROCKWOOD CAPITAL ADVISORS PAGE 9 Market Performance 12 Month Price Change of S&P 500 Index Relative to CR Universe January 2010 40~ 30~ S8P 500 Outperforming Contravisory Broad Market ~- 20~ ion I~ ~I o~ ~ ~ ~ -ion Contravisory Broad Market Outperforming S8P 500 -zoo -30~a _ _ __ _ _ _ ~f N r r C~ C~ b r O~ r r O~ ao r CA Of r O. O co O~ .i 0o C1 N w 01 N r N b r oe O~ O ei N r1 ~ N ~O r oa ao eo ao ao w w eo 01 O, C~ O~ CI ~ O~ p~ C~ O. O~ A OI O~ V~ O~ O~ !A O~ O~ C1 O~ C~ 01 CA 01 O. O~ O 'rl N ~+1 O O O O O O O O r O O N O O ~G O O r O O as O o O~ O O O ri O r l rl ed .~ .~ ~-I N r1 rl rl ri •i N N .i ei ~-1 rl rl .~ ei N ed rl .4 N N N N N N N N N N N N .i .-1 rl .i .-1 rl 'i ~ ei rl rl .~ •i rl ei '/ ~ .~1 •i .~ ei rl .~ '/ rl rl .~ ei ~i .i '1 N .~ e/ ei •i ei N rl ei ri N N rl ri •i 'i ei ei N 'i N rl H ~i ei rl ei 'i •i •i rl N ei ~i ~ !1 rl 'i ri •i •i '1 N ROCKWOOD CAPITAL ADVISORS PAGE 10 4th Quarter 2 009 Equity Transactions Sold Stock Oct Hewitt Associates Inc. Johnson & Johnson Landstar System Inc. ,,. Owest Communications Nov Boston Scientific Corp. Lowes Cos Inc O Reilly Automotive Qualcomm Inc. Yum Brands Inc. Dec Ericsson L M Tel Co _.-,.. Nyse Euronext St. Jude Medical Inc. ~~~~~~~ Yahoo Inc Commissions Paid 4th Quarter Fiscal 2009 Year-to-Date Lynch, Jones & Ryan $ 1,807 $ 1,807 ~} ~~ ~~,' Purchased Stock Mkt Cap Sector Industry Desc Oct Riverbed Technology SCap-Grw Info Tech Company provides wide area data services traffic mgmt solutions to enterprise customers. Sun Life Finl Services LCap-Grw Financials ADR. Toronto based company is a global financial services company providing wealth accumulation and insurance products in Canada, the U.S., the U.K. and Asia. UBS AG LCap-Bld Financials Based in Switzerland, UBS is one of the largest banking and financial services companies in the world. Varian Semiconductor MCap-Grw Info Tech Semiconductor company supply's ion implementation systems used in the fabrication of integrated circuits. Nov Cabot Oil & Gas Corp. LCap-Grw Energy Oil exploration and production company. CNH Global NV MCap-Grw I Industrials I ADR . Dutch company is one of the world's I leading ag and construction equip mfg. Ford Motor Co, ~ LCap-Val I Consumer Disc I World's third largest producer of cars and trucks. Goldman Sachs Group I LCap-Grw Financials I One of the world's leading financial companies. Google Inc. LCap-Gnv Info-Tech World's largest Internet company, specializing in online search and advertising. Dec BE Aerospace Inc. MCap-Grw Industrials Manufacturers cabin interior products for commercial aircraft and business jets. Brookfield Properties Corp. MCap-Grw I Financials I ADR. Canadian and US commercial real I estate firm. Macys Inc. LCap-Bld Consumer Disc Company operates more than 850 department stores under the Macy's and Bloomingdale's names. Stanwood Hotels & Resorts LCap-Bld Consumer Disc One of the world's largest lodging companies, with about 1000 hotels in 100 countries and nine brands. ROCKWOOD CAPITAL ADVISORS PAGE 11 4th Quarter 2 009 Equity Holdings 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 16,650 1.00 16,650 1.00 16,650 0.6 0.1 17 N/A ACV ALBERTO-CULVER CO. NEW 2,200 27.41 60,309 29.29 64,438 2.2 1.0 660 0.31 AMG AFFILIATED MANAGERS 1,000 66.90 66,903 67.35 67,350 2.3 0.0 - 0.19 AMP AMERIPRISE FINL INC 2,200 28.31 62,292 38.82 85,404 2.9 1.8 1,496 0.68 BEAV BE AEROSPACE INC. 3,100 23.40 72,536 23.50 72,850 2.5 0.0 - 0.05 BPO BROOKFIELD PROPERTIES CORP. 5,800 11.80 68,454 12.12 70,296 2.4 4.6 3,248 N/A CHH CHOICE HOTELS INT'L 2,600 28.93 75,210 31.66 82,797 2.8 2.3 1,924 0.79 CNH CNH GLOBAL NV 3,330 21.23 70,696 24.98 83,183 2.8 0.0 - N/A COG CABOT OIL & GAS CORP. 1,675 39.98 66,971 43.59 73,013 2.5 0.3 201 0.52 CRM SALESFORCE COM INC 1,400 45.01 63,008 73.77 103,278 3.5 0.0 - 0.12 EOIX EQUINIX INC 790 83.83 66,222 106.15 83,859 2.8 0.0 - 0.31 F FORD MOTOR CO. 9,170 7.60 69,674 10.00 91,700 3.1 0.0 0.03 GOOG GOGGLE INC. 120 550.38 66,046 619.98 74,398 2.5 0.0 0.07 GS GOLDMAN SACHS GROUP 395 172.02 67,949 168.84 66,692 2.3 0.8 553 0.44 HOT STARWOOD HOTELS & RESORTS 2,100 33.42 70,177 36.57 77,217 2.6 0.6 420 0.72 HPO HEWLETT PACKARD CO. 2,065 33.67 69,518 51.51 106,533 3.6 0.6 661 0.46 HSIC HENRY SCHEIN INC. 1,525 43.67 66,594 52.60 80,215 2.7 0.0 - 0.91 IBM INT'L BUSINESS CORP. 693 109.33 75,769 130.90 90,714 3.1 1.7 1,525 0.22 KO COCA COLA CO. 1,300 57.46 74,704 57.00 74,100 2.5 2.9 2,132 0.10 M MACYS INC. 4,300 16.04 68,989 16.76 72,283 2.4 1.2 860 0.54 MHS MEDCO HEALTH SOLUTIONS INC. 1,570 49.50 77,720 63.91 100,339 3.4 0.0 0.79 MOS MOSAIC CO 1,200 54.89 65,869 59.73 71,676 2.4 0.3 240 0.69 MS MORGAN STANLEY 2,150 30.27 65,074 29.60 63,640 2.2 0.7 430 0.19 NHP NATIONWIDE HEALTH PROPERTIE: 2,420 31.54 76,330 35.18 85,136 2.9 5.0 4,259 0.55 NKE NIKE INC. 1,420 61.18 86,871 66.07 94,203 3.2 1.6 1,534 0.05 NVDA NVIDIA CORP 5,720 10.49 59,976 18.68 106,850 3.6 0.0 - 0.42 ORCL ORACLE SYSTEMS CORP. 3,930 20.84 81,917 24.54 96,442 3.3 0.8 786 0.34 PGR PROGRESSIVE CORP. 4,675 15.90 74,353 17.99 84,103 2.8 0.0 - 0.63 ROST ROSS STORES INC. 2,010 30.41 61,119 42.71 85,847 2.9 1.0 884 0.21 RVBD RIVERBED TECHNOLOGY 3,020 22.85 68,999 22.97 69,369 2.3 0.0 0.41 SIAL SIGMA-ALDRICH CORP. 1,390 54.73 76,078 50.53 70,237 2.4 1.2 806 0.29 SLF SUN LIFE FINL SERVICES 2,270 30.24 68,639 28.72 65,194 2.2 4.8 3,102 N/A SMG SCOTTS CO 1,770 35.38 62,616 39.31 69,579 2.4 1.3 885 0.18 SNP CHINA PETE & CHEM CO 740 89.07 65,910 88.07 65,172 2.2 2.4 1,531 N/A SPLS STAPLES INC. 3,600 15.63 56,265 24.59 88,821 3.0 1.3 1,188 0.88 TJX TJX COMPANIES INC. NEW 2,090 25.41 53,100 36.55 76,390 2.6 1.3 1,003 0.93 UBS UBS AG 3,780 17.74 67,072 15.51 58,628 2.0 0.0 - N/A VSEA VARIAN SEMICONDUCTOR 2,100 32.04 67,274 35.88 75,348 2.5 0.0 0.43 Portfolio Total $2,553,852 $2,963,942 100.0 1.0 $30,345 ~~~ROCKWOOD CAPITAL ADVISORS PAGE 12 4th Quarter 2009 Meeting Mgmt Vote Shares Date Agenda Item Rec Cast China Petroleum & Chemical Corp. (SNP) 740 10/15/2009 Meeting forADR Holders None None Approve Connected Transaction with a RelatedParty For For and the Related Annual Caps Mosaic Co. (MOS) 1,200 10/8/2009 Elect Directors For For Amend Omnibus Stock Plan For For Ratify Auditors For For Oracle Corp. (ORCL) 3,930 10/7/2009 Elect Directors For For Approve Executive Incentive Bonus Plan For For Ratify Auditors For For Amend Articles/Bylaws /Charter -- Call Special Against Against Meetings Advisory Vote to Ratify Named Executive Officers' Against Against Compensation Stock Retention/Holding Period Against Against Proxy Footnote 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 frm, 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 *** 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 4th Quarter 2 009 Fixed Income Hold On To Your Matches Reviewing the various Wall Street 2010 economic forecasts, rarely have we witnessed such wide disparity in the range of expectations for the coming 12 months. This is consistent with our 2009 theme of "low visibility" with respect to the economic outlook. Analysts are looking at the same data, yet coming to very different conclusions regarding the prospects for 2010. Many see the recent improvement in economic data as signposts of the coming recovery, with inflation looming as a not-to-distant threat. Others view theses positive numbers as data tainted by the "medication" of government stimulus checks. For these prophets of doom, once the "medicine" is withdrawn, demand will collapse and the economy will once again go into cardiac arrest We are not yet convinced that indicators such as higher GDP, stabilizing employment, and higher equity prices mean that the economy is out of the woods. Nor do we necessarily anticipate adouble-dip recession. However, we do feel strongly that, barring a complete economic collapse (either domestic or overseas), the US will experience higher interest rates in 2010. It's a simply a matter of supply and demand. Specifically, the unprecedented, overwhelming supply of upcoming US Treasury issuance that will be required to finance the US government's drunken spending spree. The US Treasury must wonder who will purchase this unprecedented tidal wave of issuance in 2010, and how high interest rates will have to rise as an inducement for investors to buy? 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 fiscal 2009, however, foreigners purchased only about 20% of the Treasuries issued. In other words, domestic investors (including the Fed) had to take down about 80% of the Treasuries sold in 2009. US Treasury Yield Curves Sector Index Returns 6% 5% 4% 3% 2% 1% 0% _... ~ .... »=12/31 /09 ` 9/30/09 - - 12/31/08 3 2 5 10 30 mos yrs yrs yrs yrs 70% 60% 50% 40% 30% 20% 10% 0% -10% ^ 4Q 2009 ^ YTD 2009 Tsy Agy NBS Gedit (xv~S FI1' ROCKWOOD CAPITAL ADVISORS PAGE 14 4th Quarter 2009 Fixed Income In addition to supply concems, investors need to me mindful of the tremendous amount of liquidity that the Fed has injected into the banking system. For various reasons, this liquidity has not been transformed into business and consumer loans, but is instead sitting in the form of bank reserves. This pool of liquidity can be compared to a cloud of propane gas floating along the ground. Once the economy turns, it will be like a lit match hitting the floor, with the economy and inflation exploding due to excessive money growth. In 2010, the Fed will have its hands full attempting to drain this liquidity prior to the "match hitting the floor." This will be a delicate balancing act given the fragile state of the economy. In summary, barring a major shift toward restraint in government spending and preemptive Fed action to drain reserves, we look for interest rates to move higher in 2010. In this environment, longer term fixed income securities are likely to under perform those with shorter final maturities. In particular, it is difficult to envision US Treasuries having a good 2010 due to supply concerns. Our 2010 focus will be to underweight Treasuries while protecting the invested principal of our clients' portfolios against the effects of higher rates. Performance 10 -5 _~ °= Tequesta Public Safety ^ Barclays Int. G/C ROCKWOOD CAPITAL ADVISORS NAGE 15 4th Quarter 2 009 Quarter One Year Two Years Three Years Four Year Inception Fixed Portfolio Structure Characteristics 50 50 Tequesta Public Barclays Int. Safety G/C ao Average Maturity 4.1 yrs 4.4 yrs 30 Effective Duration 3.6 yrs 3.9 yrs 20 Yield to Maturity 2.8% 2.8% 10 0 Portfolio Cash 9% Corporates 34% U.S. Treasuries 37% Agencies 10% Corporates 29% Effective Maturity Index Agencies 19% U.S. Treasuries 48% i'~~jROCKWOOD CAPITAL ADVISORS PAGE 16 4th Quarter 2 009 1 to 3 years 3 to 5 years 5 to 10 years 10+ years !'" Tequesta Public Safety ^ Barclays Int. G/C International 4% ABS/ 3MBS Mo rtgages 6 /o 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 183 - CASH & EQUIVALENTS Aaa /AAA 0.00 01/01/2010 100.00 183,135 183,135 9.27 0.100 0.08 --- 15 009363AG AIRGAS INC GTD SR NT 4.5%14 Baa3 /BBB 4.50 09/15/2014 101.52 14,982 15,434 0.78 4.141 4.23 --- 20 0258166A AMERICAN EXPRESS CO SR NT 7.2 A3 /BBB+ 7.25 05/20/2014 112.84 21,002 22,733 1.15 4.026 3.82 B 40 06739FFZ BARCLAYS BK PLC SR NT 5.2%14 Aaa /AA- 5.20 07/10/2014 106.00 40,465 43,388 2.20 3.746 4.00 --- 25 07388VAB A-2-FIXED RTBEAR STEARNS COMMER Aaa /AAA 5.33 01/12/2045 101.87 25,137 25,580 1.29 5.317 2.03 --- 25 096630AB BOARDWALK PIPELINES LP GTD SR Baal /BBB- 5.75 09/15/2019 98.60 24,798 25,169 1.27 5.940 7.45 --- 10 10112F2A0 BOSTON PPTYS LTD PARTNERSHIP Baal /A- 5.88 10/15/2019 100.31 9,993 10,165 0.51 5.831 7.54 --- 10 12189TBA BURLINGTON NORTHN SANTA FE CP Baa1 /BBB 5.75 03/15/2018 106.23 9,843 10,792 0.55 4.821 6.66 B 15 14041 NEF A-FIXED RTCAPITAL ONE MULTI-ASSET Aaa /AAA 4.85 04/15/2011 104.37 14,981 15,688 0.79 1.421 1.25 --- 20 161571CP A-FIXEDRTCHASEISSUANCETRUST20 Aaa/AAA 4.65 03/15/2013 106.08 19,999 21,257 1.08 2.717 2.96 --- 15 172967EY CITIGROUP INC SR NT 6.375%14 A3 /A 6.38 08/12/2014 104.69 15,184 16,073 0.81 5.216 3.95 --- 35 219350AT CORNING INC NT 7%051524 Baal /BBB+ 7.00 05/15/2024 104.42 34,680 36,860 1.87 6.520 9.37 B+ 20 244199BC DEERE & CO NT 4.375%19 A2 /A 4.38 10/16/2019 99.88 20,075 20,157 1.02 4.390 8.15 --- 25 25179MAH DEVON ENERGY CORP NEW SR NT 6 Baal /BBB+ 6.30 01/15/2019 111.35 25,240 28,563 1.45 4.742 7.05 B+ 10 260543BX DOW CHEM CO SR NT CR SENS 19 Baa3 /BBB- 8.55 05/15/2019 119.31 9,979 12,041 0.61 5.843 6.84 B+ 15 26884LAA EOT CORP SR NT 8.125%19 Baal /BBB 8.13 06/01/2019 115.54 15,208 17,432 0.88 5.945 6.94 --- 20 29379VAE ENTERPRISE PRODS OPER LLC GTD Baa3 /BBB- 4.60 08/01/2012 105.61 19,990 21,635 1.09 2.349 2.40 --- 20 30161 MAE EXELON GENERATION CO LLC SRN A3 /BBB 6.20 10/01/2017 107.19 20,089 21,749 1.10 5.065 6.28 B 100 3137EABU FEDERAL HOME LN MTG CORP REFR Aaa /AAA 3.13 10/25/2010 102.06 100,276 102,636 5.19 0.588 0.81 --- 9 36200EUP GNMA I POOL 599190 Aaa /AAA 6.00 03/15/2035 106.16 9,739 10,000 0.51 4.065 3.75 --- 45 36291W7H GNMA I POOL 640896 Aaa /AAA 7.00 04/15/2035 108.81 48,512 49,381 2.50 4.148 2.61 --- 59 36291XMW GNMA I POOL 641273 Aaa /AAA 4.50 04/15/2035 100.49 57,258 59,047 2.99 4.367 4.42 --- 24 36962G4F GENERAL ELEC CAP CORP MTN BE Aa2 /AA+ 4.38 09/21/2015 101.24 23,936 24,590 1.24 4.128 5.08 --- 21 38141EA3 GOLDMAN SACHS GRP INC MTN BE Al /A 6.00 05/01/2014 109.38 21,742 23,179 1.17 3.640 3.86 B+ 15 46625HGY JPMORGAN CHASE & CO SR NT 6%0 Aaa /A+ 6.00 01/15/2018 107.50 14,932 16,540 0.84 4.861 6.45 B 25 565849AD MARATHON OIL CORP SR NT 6%17 Baal /BBB+ 6.00 10/01/2017 105.78 25,030 26,820 1.36 5.087 6.31 B 18 59217EBW METROPOLITAN LIFE GLBL FDG144A FF Aa2 /AA- 5.13 06/10/2014 105.83 18,020 19,103 0.97 3.689 4.02 --- 15 595620AD MIDAMERICAN ENERGY CO FR 4.65 A2 /A- 4.65 10/01/2014 105.45 14,073 15,992 0.81 3.396 4.29 B- 22 61747YCE MORGAN STANLEY FR 6%042815 A2 /A 6.00 04/28/2015 106.52 20,792 23,666 1.20 4.603 4.60 B+ 20 651639AL NEWMONT MINING CORP GTD NT 5. Baal /BBB+ 5.13 10/01/2019 100.05 20,023 20,303 1.03 5.117 7.79 --- 10 72650RAV PLAINS ALL AMERN PIPELINE L P Baa3 /BBB- 4.25 09/01/2012 103.20 10,136 10,506 0.53 2.991 2.49 --- 100 7591 EAAB REGIONS BK ALA MTN FDIC TLGP Aaa /AAA 3.25 12/09/2011 103.77 103,813 103,968 5.26 1.275 1.89 --- 25 7591 EPAF REGIONS FINANCIAL CORP NEW SR Baa3 /BBB 7.75 11/10/2014 98.62 25,000 24,930 1.26 7.746 4.01 --- 15 78010JCV ROYAL BANK OF SCOTLAND Aaa /A+ 4.88 08/25/2014 101.37 15,077 15,461 0.78 5.056 4.11 --- 15 806605AJ SCHERING PLOUGH CORP NT 6%17 Aaa /AA- 6.00 09/15/2017 111.07 14,994 16,926 0.86 4.295 6.33 B+ 15 816851AN SEMPRA ENERGY NT 6.5%16 Baal /BBB+ 6.50 06/01/2016 108.45 14,967 16,349 0.83 4.946 5.37 B- ROCKWOOD CAPITAL ADVISORS PAGE 17 4th Quarter 2 009 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 20 88320380 TEXTRON INC NT 7.25%19 Baa3 /BBB- 7.25 10/01/2019 103.51 20,001 21,120 1.07 6.750 7.06 --- 25 89346DAD TRANSALTA CORP SR NT 4.75%15 Baal /BBB 4.75 01/15/2015 100.70 24,946 25,332 1.28 4.589 4.50 --- 20 907818CZ UNION PAC CORP NT 5.75%17 Baal /BBB 5.75 11/15/2017 105.51 19,992 21,249 1.08 4.897 6.49 8- 60 912828JZ UNITED STATES TREAS NTS 1.750 Aaa /AAA 1.75 01/31/2014 98.10 59,134 59,301 3.00 2.239 3.95 --- 220 912828KG UNITED STATES TREAS NTS 1.375 Aaa /AAA 1.38 03/15/2012 100.23 220,387 221,402 11.20 1.270 2.17 --- 105 912828K0 UNITED STATES TREAS NTS 03.12 Aaa /AAA 3.13 05/15/2019 94.70 104,375 99,864 5.05 3.802 8.32 -- 30 912828KU UNITED STATES TREAS NTS 0.875 Aaa /AAA 0.88 05/31!2011 100.12 29,746 30,059 1.52 0.789 1.40 --- 100 912828KK UNITED STATES TREAS NTS 1.875 Aaa /AAA 1.88 06/15/2012 101.09 100,746 101,182 5.12 1.420 2.41 --- 15 912828LM UNITED STATES TREAS NTS 1.375 Aaa /AAA 1.38 09/15/2012 99.53 14,972 14,991 0.76 1.553 2.66 --- 10 912828LP UNITED STATES TREAS NTS 3% 09 Aaa /AAA 3.00 09/30/2016 98.15 10,073 9,891 0.50 3.308 6.20 --- 35 912828LW UNITED STATES TREAS NTS 1.000 Aaa /AAA 1.00 09/30!2011 99.97 35,005 35,080 1.78 1.015 1.73 --- 160 912828MB UNITED STATES TREAS NTS 1.125 Aaa /AAA 1.13 12115!2012 98.40 158,319 157,521 7.97 1.683 2.91 --- 25 92343VAJ VERIZON COMMUNICATIONS INC NT A3 /A 4.35 02/15/2013 104.60 24,971 26,561 1.34 2.799 2.90 B- 25 94974BET WELLS FARGO CO MTN BE SR NT 3 Al /AA- 3.75 10/01/2014 99.71 24,959 25,161 1.27 3.817 4.35 --- Portfolio Total $1,930,727 $1,975,961 100% ROCKWOOD CAPITAL ADVISORS PAGE 18 4th Quarter 2 009 With US Treasury Yields Near H i ~,, concern .. . gc ~~, coV~~~ ~r,dex (Yrefd in NSabaitji) 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 10 ~ Rates Total Dollar jr1GCE~aSt; RBb IR1 L055~` +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 510,000,000 beginning portfolio value a° ~~,ROCKWOOD CAPITAL ADVISORS PAGE l9 4th Quarter 2009 ` a r e ! s a The Fed is in a Tou h S t ~ .~ -~ :~ g ~ ~ ,~ The Fed Balance Sheet & the Housing Sector aoo 2 Total Federal Reserve Bank Credk (fhe Fed's Balance Sheet) aoo z , 12/172008. 2253 74 , 2,200 2,200 10!14!2009, 2106.14 2,000 2,000 1,800 1,800 1,600 1,600 m 1,400 1,400 ~ 1,200 1,20Cb c m 1,000 ~ 1.000 B00 800 9/10/2008 600 88828 600 aoo 400 200 200 0 0 ~ m m o~i ~i ~ m rn ~ rn gi ~ ~ i3'i ~ o g 8 0 8 25 25 0 ~ a a ~ ~ a i ~ ~ as ~ ~ a a ~ ~~ a a~ ~ ~ a~ ~ ~ ~ ~ ~ ~ ~ m ~ a n o a~ a a The balance sheet of the Federal Reserve has exploded. In other words, the Fed has been buying securities at a rapid rate, injecting an enormous amount of cash into the banking system. If the economy starts to gain traction, the Fed will need to shrink its balance sheet or inflation will surely follow. ClnnSes In Th• Caso Shipsr Compost-20 Homo Prieo Index zox zox +sx Year over-Year -' +5x Change 10% 'p'X Quarter-over-~ uarter 5% Change 6x J/ \ ~ ~% \'~ f ,nr,rm ~ Tl31A8 ~ 1.53 Y -2.7JR -5% 10AtrAm -t.3SY -6% .+~ -+ox -+5x •+ax trflrmm, -79.01Y -2ox -~ $ g $ g ~ ~ a "s $ $ ~ $ t g s ~ ~ ~ ~ - 4tf~ Quarter 2009 Home prices appear to have bottomed. However some fear that the bounce in home prices is a temporary phenomenon driven by federal programs such as the first time home buyer credit and the Fed's $1.25 billion mortgage purchase program. Skeptics believe that housing will roll over when these programs expire. Can the Fed afford to end its purchases and risk another housing collapse? ~~~~~jROCKWOOD CAPITAL ADVISORS PAGE 20 ,.- - . ~.: ., z ~, Fixed Income Relative Value r ~ .~ ~- :-~y _ ",~ ~- o ~~ . !~ V ~. "r i t #' Corporate Bonds & Mortgages 4t~1 Quarter 2009 Investment grade corporate bonds have staged a tremendous rally since December 2008. At an average yield spread of 1.75% over Treasuries, corporate bonds still remain attractive relative to the 2004-2007 period. Thy Dlffwnc~ Batw~ri 10-Y~arTr~asuryAnd 30-Year F'NNM1 Morb~ape Yklds zno z.ao ' eaer~aea zao z.ao aenooe 220 220 200 2.00 180 1.80 t DO 1.C0 1 AO 1.40 120 120 100 1.00 080 0.80 ODO 5Q1NGG2 11l25200G y Z% ~ ~ ~ ~ QQ y Q 8 ~$j Qr gg $ Q $ g ~ Zb ~ 2f g p ~ ~ ~ gg 0.80 ~ ~ ~ q & ~ a3 ~ d ~ S ~8 ~ S a ~ ~ = b a c$>, dd ~ 5 ~l7 ~ ~i i3 ~ The yield spreads of mortgage pass-throughs vs. Treasuries has narrowed substantially since March 2009 largely driven by Fed purchases. Mortgages did very well in 2009, however, the Fed purchase program is due to expire in March 2010. Mortgage yields could rise substantially without government support ~~;ROCKWOOD CAPITAL ADVISORS PAGE 21 ~ US Budget ` r. tii * ~ ~ a• F ti +d a'" ya A BIG Problem ~ fi ` ~ i • ~, ,,, .• 1 . `~ Exploding Deficit + Massive Treasury Issuance =Higher Rates in 2010 Federal Budget Defick/Surplus (RoXinp 72-Mordh Sum) apwl 300 ti fd 300 160 ~ 60 0 ~- 0 ''~ ~ -150 -300 -,inn, ~~- a -300 ~ 450 s pr t: -a:.W wF ~ e -450 ~ 0 -+;r 0 ~ -000 .600 e y E •750 m .700 ~ -aoo .~ •1050 .1050 •1200 .1200 Blue =Actual •1360 Red = CB 0's Aug un f orecaM "003 .1350 -1,43.04 -1500 .1000 p }~ y~ ~Rq }y pq~ 5~ a m ano m a ~ ~ ~ ~ ~ L6 ~ S S S ~ b 25 ~ ~ o N N N N The US budget deficit exploded to $1.4 trillion in 2009, forcing the US Treasury to sell an unprecedented amount of new debt (notes and bonds). 5000 9600 5400 e s3oo 0 ~ 5200 s m f 100 So -slop Treasury eorrowkigs ("Net N6lrketable") By Quarter 4th Quarter 2009 ~~+ IE~1 A97 pu ~ ¢r6 •5200 4D 1020 30 40 1~2D 30 40 1020 30 40 1020 30 40 1~2D 3Q 401~2030401~ 2004 2006 2006 2007 2008 2000 2010 CaMrdar Ouartaa 5600 r 5500 5400 ~~ tl s 0 5200 ~ p s: m sloo So ~ -5100 -7000 The Treasury sold $2.1 trillion in note and bonds in 2009, more than 2007 and 2008 combined. In 2010, issuance is expected to approach $2.6 trillion! ii 91 §1l6 E1ll 5150 ras ~3 ~E ~7 ~~fET I s' se» sw~ sp~i r ~~jROCKWOOD CAPITAL ADVISORS PAGE 22 ~ 2010 Treasury Issuance A Tsunami of Treasury Debt is About to Wash Ashore Total Treasury Gross ~suance (Amount l)ffere~ ForThe Week N Trenury Bik, Notes AnA Bonds 7326 s3oo 1276 :250 7716 ,~ s2oo a a 7176 a 7160 a 7126 7100 ~6'o"JeakAverage 776 , 760 rk 726 >~ _q ~~pp aapp ee S O P O Q S S S S C C C G C C_ C C i ~ ~ ~ ~ ~ ~i =Z ~ w 5323 7300 s276 7260 7226 s2oo ,~ a 7176 0 `e 7160 w °# 7126 7100 776 760 W eeky 7z6 Q$ 70 ~ V ~ ~ Due to the ballooning federal budget deficit, the increase in issuance of US Treasury securities (federal borrowing) has been astounding. Percerrtage Of Treasury Issuance Bought By Foreigners 300% 300% Blue =All Foreigners saa-o7 250% Red=China zso% 250% 200% zoo% 150% 150 109 % 100% 100 r~% Mar-07 42% r~o~ 27% 23 % 24°/, zi% 0% 5~ 0% -50 % -50% g N ~ ~ ~°s ~ ~ ~ ~ ~ ~ °~ 9 ~ 4 ~ ~ 4 j ~ 4 ~ ~ a 4 ~ g? u,~~ mt5~ ~,~~ ~i~~ ~~ ~ ~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. ~~jROCKVI'OOD CAPITAL ADVISORS PAGE 23 4~ Quarter 2 009 Laur, Betty From: McWilliams, Lori Sent: Wednesday, March 11, 2009 9:23 AM To: Laur, Betty Subject: RE: Investment Manager's Report for Village of Tequesta Categories: Red Category Betty, Please include a copy of this email with the imaged Rockwood Report so that if anyone looks at this report a year from now they have the correct date. Thanks. From: Laur, Betty Sent: Wednesday, March 11, 2009 9:21 AM To: esabin @3implant.com; David Cooper; Giblin, Raymond; RYoung @ThePensionGroup.Biz; kenNielson @aol.com Cc: Lori McWilliams (Imcwilliams @tequesta.org); Rahim, Monica Subject: FW: Investment Manager's Report for Village of Tequesta Board Members: At the February 2, 2009 meeting, Ken Nielson noted on page 3 of the report from Rockwood Capital Advisors, LLC the beginning Market Balance was shown as of 10/1/2007, which he believed should be 10/1/2008. I contacted Mr. Brown regarding this —his response is below. Betty Laur Recording Secretary Village of Tequesta 561- 575 -6249 From: Anthony Brown [ mailto :Abrown @rockwoodcapital.com] Sent: Tuesday, March 10, 2009 3:26 PM To: Laur, Betty Subject: Investment Manager's Report for Village of Tequesta Betty, There was a tying error on page 3 of the fourth quarter investment management report. The fiscal year beginning Market Balance date was stated as 10/01/2007; it should have read 10/01/2008. We offer our apology to the board and staff for any inconvenience this error caused. Tony Brown Rockwood Capital 314- 962 -6143 1