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Home My WebLink AboutDocumentation_Pension Public Safety_Tab 02_11/06/2006Village of Tequesta Public Safety Officers' Pension Fund September 30, 2006 ROCKW OOD CAPITAL ADVISORS r 1401 S. Brentwood Blvd. Suite 400 St. Louis, Missouri 63144 (888) 962-8336 (toll-free) (314) 962-1254 (fax) Doves vs. Hawks: Who will win? 1 Tequesta Public Safety Officers' Pension Fund Third Quarter 2006 Total Fund Portfolio Summary Change in Market Value Interest /Dividends Contributions Net Disbursements Net Realized & Unrealized (G/L) $23,292 $204,468 ($9,235) $91,345 Portfolio Summary Faed Income 36% Short-Term Funds 9% Equities 55% ROCgW00D CAPITAL ADVISORS Total Fund Performance 2 (Policy) 60% S8~P 500 and 40% LBIN 1 Tequesta Public Safety Officers' Pension Fund Equity -Third Quarter 2006 Market Environment • The third quarter of 2006 was a robust one for most equity investors, as stocks appreciated across all market-caps. The most popular measuring stick, the S8P 500 Index, increased 5.7% while the average diversified equity fund gained a less stellar 2.0%. Bond investors too had something to smile about as the Lehman Brothers Aggregate Bond Index jumped 3.8%. The Balanced Composite Index increased 4.9%. • Despite the positive performance of major market indices, market breadth continued to deteriorate and leadership continued to shift noticeably as summer progressed into fall, like the changing colors of trees. For the past several years, asset class leadership was predominantly confined to small to mid-capitalization stocks. In fact, small-cap funds have been Wall Street's leaders since the bear market of 2000 to 2002. While we still feel money can be made in this segment of the market, opportunities may be more limited relative to their large-cap brethren. We are responding to this leadership change by increasing core holdings within the large-cap segment of the market. • Portfolios have benefited from a decreased allocation in the "tired" energy sector, and from a buildup in holdings within the consumer staples and financials sectors over the past several months. We continue to monitor portfolios, looking to take advantage of opportunities that become evident during the upcoming months. Contravisory Research & Management Corp. is a registered investment adviser and equity sub-adviser to Rockwood Capital Advisors, LLC. Performance 16% 14% 12% 10% 8% 6% 4% 2% 0% 3rd Qtr. YTD 2006 2006 Tequesta Public Safety ROCgW OOD CAPITAL ADVISORS 3 One Since Inception Year (5/1/05) S&P 500 Equity Portfolio Third Quarter 2006 Characteristics Top Ten Holdings 1. Loews Corp. 2.8% 2. T. Rowe Price Group 2.6% 3. J2 Global Communication 2.6% 4. Ryanair Holdings 2.6% 5. Simon Property Group 2.6% 6. VCA Antech Inc. 2.5% 7. Apartment Invt. & Mgmt. 2.5% 8. Caterpillar Inc. 2.5% 9. Lockheed Martin Corp. 2.5% 10. Safeway Inc 2.5% Five Best Impact 1. T. Rowe Price +26.7% 2. Apartment Invt. & Mgmt. +26.0% 3. Lockheed Martin Corp. +19.6% 4. Safeway Inc. +15.6% 5. Hewlett-Packard +12.2% Style Box Val Cr Grw Large Cap - 35.8% Mid Cap - 59.5% Small Cap - 4.7% Average Market Cap $22.7 billion Median Market Cap $12.5 billion Sector Allocation Materials Energy Producer 3% 6% ~ Durables Health Care 8% Technobgy 11% 11% Fnance 30% Utilities 2% ADRs - 6% Transportation 7% Cons. Staples Cons. Discr. 13% 3% Five Worst Impact 1. Pacer Intl. Inc. -15.1 2. J2 Global Communication -14.7% 3. CIT Group Inc. -14.3% 4. IndyMac Bancorp -13.9% 5. Halliburton Co. -12.4% ROCgW00D CAPITAL ADVISORS 4 ' Equity Transactions Third Quarter 2006 Sold July Fair Isaac Corp. July Medimmune Inc. July TD Ameritrade Holding ' Aug THQ Inc. Aug Sunrise Senior Living ' Sep Halliburton Co. Sep Indymac Bancorp Inc. ' Sep CIT Group Inc. ~~ i~ Bought ~ROC)CWOOD CAPITAL ADVISORS 5 Proxy Voting Record ~ROCgF100D CAPITAL ADVISORS g Equity Holdings - Sept embe r 30 2006 1 , 1 -- Cash 301,833 1.00 301,833 14.4 4.9 14,790 1.00 301,833 NA ' AFL Aflac Inc 815 45.76 37,294 1.8 1.1 359 45.28 36,902 0.30 AIV Apartment Invt 8 Mgm 970 54.41 52,778 2.5 4.4 2,910 38.98 37,806 0.49 BA Boeing Co 570 78.85 44,944 2.2 1.5 684 58.58 33,389 0.91 BF.B Brown Forman Dst'b' 610 76.65 46,757 2.2 1.5 - 74.52 45,458 0.03 ' BRE Bre Properties Inc 795 59.73 47,485 2.3 3.4 1,590 57.15 45,433 0.96 CAT Caterpillar Inc 800 65.80 52,640 2.5 1.8 800 44.77 35,812 0.89 CHK Chesapeake Energy Co 1,790 28.98 51,874 2.5 0.8 358 20.50 36,695 0.97 CP Canadian Pac Ry Ltd 935 49.74 46,507 2.2 1.3 487 44.45 41,556 NA ' EP EI Paso Corp 3,540 13.64 48,286 2.3 1.2 566 10.38 36,745 0.77 FISV FiseN Inc 960 47.09 45,206 2.2 0.0 43.76 42,010 0.39 HCC Hcc Ins Hkigs Inc 1,305 32.88 42,908 2.1 1.2 392 28.05 36,604 0.83 HNZ Heinz H J Co 1,060 41.93 44,446 2.1 3.3 1,272 42.21 44,742 0.95 HPQ Hewlett Packard Co 1,385 36.69 50,816 2.4 0.9 443 32.33 44,770 0.83 ' HSIC Schein Henry Inc 985 50.14 49,388 2.4 0.0 45.52 44,841 0.91 JCOM J2 Global Communicat 2,010 27.17 54,612 2.6 0.0 - 23.18 46,584 0.22 KFT Kraft Foods Inc 1,350 35.66 48,141 2.3 2.8 1,242 32.61 44,021 0.53 ' LMT LSTR Lockheed Martin Corp LandstarSyslnc 610 1,100 86.06 42.70 52,497 46,970 2.5 2.2 1.4 0.3 732 110 59.24 32.79 36,136 36,069 0.51 0.38 LTR Loews Corp 1,530 37.90 57,987 2.8 0.7 306 23.82 36,449 0.24 MCK Mckesson Hboc Inc 860 52.72 45,339 2.2 0.5 206 45.92 39,489 0.64 MKC Mcx:ormick i£ Co Inc 1,250 37.98 47,475 2.3 1.9 800 35.29 44,115 0.34 NYX Nyse Group Inc 680 74.75 50,830 2.4 0.0 66.09 44,942 NA PACK Pacer Intl Inc Tenn 1,380 27.76 38,309 1.8 2.2 828 32.35 44,639 0.65 PCG PgBE Corp 1,050 41.65 43,733 2.1 3.2 1,386 34.97 36,722 0.87 PCP Preasion Castparts 760 63.16 48,002 2.3 0.2 91 37.69 28,644 0.65 ' PL Protective Life Corp 960 45.75 43,920 2.1 1.9 749 38.57 37,022 0.96 PRU Prudential Finl Inc 585 76.25 44,606 2.1 1.0 456 78.05 45,656 0.71 RYAA.Y Ryanair Hldgs Plc 845 63.29 53,480 2.6 0.0 - 55.22 46,663 NA SHLD Sears Hldgs Corp 300 156.09 47,427 2.3 0.0 - 151.84 45,552 0.20 SPG Simon Ppty Group Inc 590 90.62 53,466 2.6 3.4 1,652 62.30 36,757 0.13 ' SRCL Stericycle Inc 670 69.79 46,759 22 0.0 63.44 42,506 0.31 STX Seagate Technology 2,165 23.09 49,990 2.4 1.4 - 18.97 41,070 NA SWY Safeway Inc 1,720 30.35 52,202 2.5 0.8 344 22.29 38,342 0.81 TROW T.Rowe Price Group I 1,150 47.85 55,027 2.6 1.2 644 33.76 38,819 0.05 TXN Texas Instrs Inc 1,265 33.25 42,061 2.0 0.5 152 33.58 42,484 0.52 VOLV VolvoAktiebolaget 850 59.70 50,745 2.4 3.1 1,901 43.66 37,111 NA WOOF Vca Antech Inc 1,470 36.06 53,008 2.5 0.0 - 28.86 42,429 0.06 •. .. r r•• rr r r I ROCgW00D CAPITAL ADVISORS 7 1 Tequesta Public Safety Officers' Pension Fund Fixed Income -Third Quarter 2006 Market Environment • For the first time in over two years, the Fed refrained from hiking the funds rate this quarter. The federal funds rate target remains at 5.25%. A couple of weak employment reports gave the Fed the opening they needed to pause after seventeen consecutive rate hikes. • The Fed's decision to pause sent yields tumbling in the third quarter of 2006. Treasury yields in the 3- to 10- year range fell more than 0.5%. The Treasury yield curve remains flat, with 2-year and 30-year yields both near 4.7% at quarter end. • The Lehman Aggregate Index had its best quarter since the third quarter of 2002, returning 3.8%. Year to date, the Aggregate is up 3.1 %. Yield spreads on Corporate bonds narrowed in the quarter, resulting in a robust 4.5% return. The Mortgage sector has been the leading fixed income sector YTD, returning 3.6%. • As we go to press in early October, both the Dow Industrials and S&P 500 have soared to record highs. This highlights an interesting contrast. Treasury yields tumbled in the third quarter based on expectations of Fed easing in response to anticipated economic weakness, pefiaps even recession. Yet, stock prices continue to climb based on strong earnings growth. Will stocks or bonds turn out to be correct? One of these markets is due for a correction. Sector Index Returns U.S. Treasury Yield Curves 5% 4% 3.1 % 3.2% 3% 2% 1% 0% 3rd Qtr. 2006 7% 6% 5% 4% 1% 0% Fixed 3.1% 3.0% s°i° 5% ~ i 3% 1% 0% 3 2 5 mos yrs yrs Performance 3.9% ~ 3.6% • *~~ 9/30/2006 6/30/2006 - • - - - 9!30/2005 10 30 Y~ Y~ 3.3% 3.1 YTD One Since Inception 2006 Year (5/1 /05) ~ Tequesta Public Safety Lehman Int. Gov't/Credit ROCgW00D CAPITAL ADVISORS 8 Tsy Agy NBS Credit FIY Fixed Income Portfolio Structure September 30, 2006 Effective Maturity Tequesta Public Safety u.s. Cash Treasuries 0 1 to 3 yrs 3 to 5 yrs ~ Tequesta Pub. Safety Lehman Int. G/C 5 to 10 yrs , a~ =„ ~ a's 10+ 0% 20% 40% 60% Lehman Int. Gov't/Credit ' $O/O 27 /0 Corporate 5"/° Agencies 27% Corporate ~encies Mortgages 37% 22% 33% 0% i 1 ~ROCgW00D CAPITAL ADVISORS 9 Characteristics u.s. Treasuries ADO/_ 1'~ Bond Holdings -September 30, 2006 ~ 1 ROCgW OOD CAPITAL ADVISORS 10 Economic Environment & Outlook Third Quarter 2006 ~ For the first time in over two years, the Fed refrained from hiking the funds rate this quarter. The federal funds rate target remains at 5.25%. A couple of weak employment reports gave the Fed the opening they needed to pause after seventeen consecutive rate hikes. ~ Employment growth has slowed from an average of 176,000 jobs per month in the first quarter of 2006 to 120,000 in Q3. However, other labor market indicators are painting a different picture. The unemployment rate, for example, dropped to 4.6% in September, a level not seen since mid-2001. ~ To complicate matters, the Bureau of Labor Statistics just released benchmark payroll revisions for the 12 months ended March 2006. An astounding 810,000 jobs were added, an average of 67,000 per month. This is the largest revision ever, pushing job growth 45% higher than previously reported. ~ The Fed must remain on guard against the prospect of rising inflation expectations. The core CPI has risen 2.8% over the past 12 months, its highest level since 2001. A tightening labor market has put upward pressure on wages. In September 2005, average hourly earnings were rising at a modest 2.7% year- over-year rate; but by September 2006 the rate had climbed to 4.0%. ~ With the recent slowing in housing and monthly job growth, some analysts have discussed the possibility of the Fed reducing the funds rate in the near future. However, can the Fed really begin to ease with the unemployment rate at multi- year lows, while inflation and wage growth are at multi-year highs? ~ Most of those predicting a near term Fed ease are basing their argument on a substantial housing slowdown. However, we are skeptical that this down shift in housing alone will be sufficient to derail the economy. Former Fed Chairman Greenspan shares our pessimism. Greenspan very recently stated that the "worst may well be over" for the U.S. housing industry. ~ We have become less defensive from a duration standpoint, and our portfolios maintain durations near their respective benchmarks. Market sentiment has changed dramatically, with many analysts anticipating a Fed ease in 2007. We feel that the economy maintains a good deal of vigor, while inflation remains above the upper bound of the Fed's comfort zone. ROCgW00D CAPITAL ADVISORS 11 Monetary Policy Fed Funds Target Rate 8% 6% 4% 2% 10% 8% 6% 4% 2% 0% -2% -4% 0% 6/00 12/00 6/01 12/01 6/02 12/02 6/03 12/03 6/04 12/04 6/05 12/05 6/06 Real GDP Growth (Quarterly Growth at Annualized Rate) 2002 2003 2004 2005 2006 7.2 5.6 4.3 4.0 3.8 4.2 3.7 3.6 3.5 3.3 3.3 2.7 2.6 2.5' 2.2 2.4 1.8 1.7 0.2 Q1 Q2 Q3 Q4 'Q1 Q2 Q3 Q4, Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Qi Q2 Q3 Q4 " Bloomberg Median Estimate ROCgW00D CAPITAL ADVISORS Inflation Pressures Building Capacity Utilization 86 72 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 1 1 1 ROCKW OOD CAPITAL ADVISORS 84 U a 82 c~ U ~' 80 .` w 78 :° c m ~ 76 0 0 74 13 Labor Market Keeps Tightening Unemployment Rate 9% 8% 7% 6% 5% 4% 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 ROCgWOOD CAPITAL ADVISORS 14 ---------------------------- 1 Can the Fed Pause? 1 1 1 ' 7% ' 6% 5% 0 4% c p 3% ~ 2% 0 1% ' 0% 88 90 92 94 96 98 00 02 04 06 1 i 1 i 'ROCgW00D CAPITAL ADVISORS 15 Wages Are Rising 5.0% 4.5% rn •~ 4.0% L ~ 3.5% = 3.0% rn Q 2.5% 0 } 2.0% 1.5% 1.0% 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 ROCgWOOD CAPITAL ADVISORS 16