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HomeMy WebLinkAboutDocumentation_Pension General_Tab 14_04/24/2006 4th Quarter Summary Bond Portfolio Characteristics Portfolio Name Average Average Average Yield to Effective Quality Coupon Maturity Maturity @ Duration Market Tequesta General EE's Pension (1087) AA+ The markets remained volatile during the 4th quarter of 2005, with the S&P 500 stock index reaching its high for the year in mid December before selling offto end the yeaz a positive 4.91%. Mid cap stocks continued to outperform lazge and small cap stocks, while value stocks continued to outperform growth stocks. Short to intermediate term interest rates continued to increase during the 4th quarter as the Federal Reserve twice raised the Fed Funds rate by .25%. These 12th and 13th consecutive rate increases put pressure on bond prices and caused intermediate govdcorp bond indexes to return l .62% for the year. Dana Investment Advisors is pleased to report our portfolios continued to perform well in the 4th quarter and 2005. Our performance highlights include our Lazge Cap Equity Strategy returning a gross return over 13%, handily outperfommng the S&P 500 index for a sixth consecutive year and our Municipal Bond Strategy with a gross tax exempt return over 3% easily outperforming its 1-7 Year Municipal Bond benchmark return ofonly 1.32%. Our Adjustable Rate Bond portfolios continued to experience increasing coupon • rates and outperformed intermediate and aggregate bond indexes with significantly less risk and volatility. As a majority of S&P 500 Companies have exceeded 4th quarter earnings estimates and the price-to-earnings ratio (P.'E) of the S&P 500 ended the year under l8 versus a 2000 year-end high of 40 and along-term average of 16, its no surprise the equity mazkets have rallied to start 2006. Strong economic growth and corporate earnings support an optimistic equity outlook, yet uncertainty over changes in the Fed's Chairman and its tightening cycle, as well as the effects of higher inflation and volatile energy markets, certainly point to continued volatility. Yield investors should also enjoy 2006, as yields on nearly all maturities exceed 4.5% and will likely move higher as we expect the Fed to continue its tightening cycle into this Spring, putting the Fed Funds rate at 4.75% - 5.00%. 5.00 ; i 4.75 =-___._._...--- 4.50 ._ ...__.~ __~ 4.9 4.1 4.8 PERFORMANCE REPORT GROSS OF FEES Portfolio Value on 09130105 ContributionsNV ithdrawal s Realized Gains & Losses 1,400.47 Unrealized Gains & Losses 21,813.81 Total Real & Unreal Gains & Losses Investment Income Total Value on 12/31/05 Average Invested Capital Total Gain before Fees Unannualized Return for the Quarter 2005 Total Return Portfolio Holdings Equdir 3.5 .00 573,084.60 23,214.28 4,096.17 600,395.05 573,084.60 27,310.45 4.77 n/a Cash and Equiv.: 4.2% xporate xids: 15.4% • Yield Curve Comparison U.S. Treasuries: 13.4 rjgencies: o.v io • Returns presented are exclusive of investment management and related fees, which would have reduced such returns. Investment advisory fees are described in Part II of Form ADV. For example, on a one million dollar account with an advisory fee of .75%, earning a 10% return, the • total compounded advisory-fee over afive-year period would be $50,368. The average annual return net of fees would therefore be 9.17%. • • • • The Equity Market After a very lackluster year in the equity mar- kets -the S&P 500 appreciated 3% and re- turned 4.91% including dividends - we can say we told you so. We are referring to the phe- nomenon of the equity markets appreciating in years that end in 5. When considering what we went through in 2005 it is amazing that we experienced any type of appreciation at all: The l3an2 Lard the price of oil topping $70, 118at tk-e Sb severe hurricanes, eight interest quarter jn 200 rate hikes, heightened threat of inflation and the sli ht inver- 26 quarters of outperformance. Once again, our top performing stock for the quar- ter was SanDisk (SNDK). An industrial name, Burlington Northern (BNI), the nation's second- largest railroad, started off the fourth quarter with a very strong earnings report and the momentum in the stock price continued throughout the year. g Sion of the yield curve in late December. We have been impressed with the resiliency of the market. The market traded in a high to low range of 12% during 2005 - a fairly tight range. The S&P 500 returned 2.09% in the fourth quar- ter, not the rally that some expected, but a posi- tive quarter nonetheless. It was an awful quar- ter for President Bush any way you slice it. Not surprisingly, his approval ratings reached new lows, and the market discounted budget recon- ciliation, tax reform, and tax rate extensions as a result. Further, the Senate publicly chided major oil executives in televised hearings, and threatened the companies with a windfall profit tax. The President did recover from the Miers nomination to nominate Samuel Alito to the Supreme Court, which seems a likely con- firmation at this point. He also nominated Ben Bernanke to succeed Alan Greenspan as Fed Chairman and the market cheered with its largest one-day increase in six months in what was being hailed as the "Bernanke Bounce." Dana Portfolios: Performance Large Cap. With the fourth quarter officially in the books, we are pleased with our perform- ance. Our large cap core product returned 13.12% for the year beating the S&P 500 by over 8%. We continued our streak of quarterly outperformance, beating the S&P 500 by 27 basis points during the fourth quarter and up- ping our batting average to 81% - or 21 out of Revenue and profits were above expectations as railroads are low- cost shipping options in an environ- ment of high energy prices and on- going economic growth. In addition, two sectors really jumped out in assessing our per- formance: Financials and Consumer Discretion- ary. Financials, as a sector, had a great quarter up 7.5%, trailing just the double digit gain of Materi- als. Our winners in the financial sector included: CIT Group (CIT) which increased its guidance and third quarter results beat expectations; Hart- ford Financial (HIG) avoided big hurricane losses and increased its dividend; Wachovia (WB) and Bank of America (BAC) had steadily rising share prices throughout the quarter; and Freddie Mac (FRE), which announced a $2 billion share buy- back. Consumer Discretionary was a challenging sector for the quarter and the year. For the quarter it was up 0.77% and for 2005 it was down 7.35%, best- ing only one other sector, Telecom. Our winners here included: Johnson Controls (JCI), Nordstrom (JWN) and Limited Brands (LTD). Small Cap. We were ahead of the Russe112000 for the year, beating it by almost 1%, but we did trail the benchmark in the fourth quarter. Two of our best performers were technology companies: Di- odes (DIOD) and OmniVision Technologies (OVTI). Diodes, a leading manufacturer and sup- plier of high quality discrete semiconductors, raised its fourth-quarter sales guidance and stated it anticipates sequential sales growth of 10% to 12%..OmniVision Technologies, maker of semi- conductor image sensor devices, soared over 20% in early December after it reported a 27% rise in quarterly profit on sharply elevated revenues. Bucking the fourth quarter downtrend in the En- Large and Small Cap Strategies Best Their Benchmarks in 2005 orgy sector was Maverick Tube Corp. (MVIQ, a maker es used in oil and gas drilling. Its shares rose to a ~ek high during the quartet, due to an analyst up• grade and a share b had a stellarvquarter asothe com- tor, Pantry (PTRI~, pany reported above expectations for revenue and earn- ings and increased its 2005 and 2006 outlook. Similar to large cap, we had a transportation stock perform extremely well, Old Dominion Freight Line (ODFL); which transports such items as consumer goods and textiles. The companyc~r fpoir~d {ullyear.ales and profits and upped its prospe change and second, the foreign demand for longer dated treasuries has kept their yield depressed, and third, economic growth and profit gr°wth is still strong but slowing. Another income statement variable to keep an eye on for 2006 is the expensing of stock options, which will finally be mandatory, as it always should have 'been. Some companies, particularly technology stocks, will have lower earnings a lace asswellhwi hl hares of G ogle hanging hands ance seems to be taking P rn u ward as it surpassed $500, at over $450. Finally, Gold keeps on chugg' g P its highest close since 1957, and has continued on to over $560/ounce. All in all, we are excited about the oppo~nities for 2006. We continue to pursue equities with increasing ROES, growing cash flow, solid growth initia- tives, strong balance sheets, and secure positions in their industries. Outlook All things considered, the market fared well in the fourth quarter. The market seems like a prize fighter at this stage of the bull market: it started off the early rounds very strong (2003), then in the middle rounds became complacent (2004), and in the late rounds took a lot of blows but still managed to win most -of the rounds 2006))after abso bing the hits andktiring oust his strong ( opponent We currently like the valuation of the market as the market multiple contracted for the second straight year. Companies are showing sturdy balance sheets, espe- cially cash balances. Firms feel pressured to use this sh hoard as it is a draig on ROE, so plan on musing ~`'er more M&A activity, dividend increases and share buybacks. The succession occurring at the F d 1 as left be smooth, even though Chairman Greenspa Mr. Bernanke some challenges. The Fed's two year tightening campaign will probably come to an end this year. Finally, economic growth and earnings growth seem to be on solid footing, despite their deceleration. EPa ar..u Rtl. Fsroaq lox ._-.~'__~_- ,mY sx - Ox Dam LL S8P 500 Of course, in full disclaimer, there are risks to our bull- ish outlook for 2006. The bear could come out in a number of different places. First, the current bull mar- ket seems to be getting a little long in the tooth.~Sec- ondly, yield levels have risen on bonds, whr ieldccurve risky than equitienslarketl pundits wllrcitee history and inverted. Many point out that the inversion of the yield curve has pre- ceded economic recessions in the past. It is hard for us to buy into this scenario at this time for three reasons: first, the curve has been flat as a pancake for most of was not much of a EPS C,n1Y Rala F,nusl 20x -18.Tx 15x ,ox 5x ox Dam SC 58P 600 Dana Large Cap Characteristics goua~ n.u ax t.~Y;,,,-; t.g°.t- z~. . rx - ox Dam LC 58P 500 Martol GP (~rarapelAVedhml rzD eo , a ~. ,,r eo ~~, ~ :: »~ ~b ~~ ;. 0 Dam Lc sw soo Actual ComOOSile (;ryaracte+ktxs as Ot pecemb+31, ZA25 Dana Small Cap Characteristics Prico to Cash Fin Ratio le , t1.t 6 w 0 Dam SC 58P 600 Dl.a.aa nau 2'iY 40% QGx ,~, Ox Dam SC 58P 600 Ph U 6n~Ilr (ff0) Ratlo s M '- f 1 a e,? r qlh o $8P 60D Dam SC Actual CamOOSite Charxtaristks as o/ pecsmbP+31, ?003 2005 and the sltght tnverston ent Advisors, lnc. is an independent federally registered inva he ant adviser providing equdy and fixed inr,Dme investment management services to a broad range of clients. he AIPo1R PPS Standards. AIMR has tradher endorsed the pre L~a(~efd1 h~ nmpos to pertermlao a rectum prieseoted. Dana Investm returns presented have been prepared and presented in accordan.e •+ith t e of firm Investment Advisors, Inc. In any way. Ali fee-paying accounts tidiimq similar invest;nant strategies to th'~S dy 9 s>w th an arnua 2004 return dispersion of .O.Kg~ tion of Danatl n estment assets for the period ending t 2-31-04 ware 52,307.600 nOP Dana t.anye G p Eq:,ity Strateg~lained in the Dana large Cap ~ eiva a con N atla CsRa~ `rdasStrPtegies were 186 an D. Tetat firm respectively. The percentage of firmassets in 2004 represantod in t . assets in 2004 represented in the Dana Small Lap Equity Stratey~: was t f°'~~ s'ith an arnuai 2004 return dispersion et ;.71"'~r. o r,c 'sor Inc.'s composites andlor a presentation that adheres ID thn AiFAR-PPS standards. contact Nick Sarch at Ta! (262? '132 ~ a ~iSA ~ f as JI Presented inlU S. Dollars. Portfolio a ah e r±ate indicated. Returns presented era ezclusiva at in~:r~stment mana9an'an~~nd ~~ni nd al 10 o return tthe totalacomad- Advl terlstics reflect Dana Equity Strategy holdings as of market close o costs. Investment management tees would reduce the returns prasanted, for ezampfe. an a Dne~mihion d^llaa Pl~rtf P"~r~~l lnd~xes snue~r. v e'z selected because they demonstrated similar eunded advisory fee cver a five year period wauld be 550 ~6¢oma and tlrlel reinva~!ment'ofjdlividentls aid a tam>t F~c u~d'haramrira a dal ~onst area pat W ae lzaractenst cs and eturns that total return basis. Performance does include the arzruai at me • p characteristics to the Dana strategy to which they were compared, During varic:ss market cycles. the stratagia~ d+acussaa ha v been both more and less volatile than that of the comparab'6 index `Ntnle data =ontaired herein has gathered frt?m c_ourr.e~ deemed reh?bie, the aeeuracY of the data presence Cann tw e be guaranteed. Pasi performance is nct indiratPre of future raturr s • US Treasury YleldS At 12(31/05 6 month 4.31 °k 2 year 4.36°~ 5 Year 4.31%° 10 Year 4.35% 30 Year 4,51% • 2005 Fixed Income Index Pertormance Ticker Total Duration Return Dana Limited Volatility 2.61.% 85 Merrill Lynch 1 Year Treasury Index GC03 2.35 % 97 Merrill Lynch 1-3 Corporate & Gov't B1A0 1.75% 1.76 Merrill Lynch 1-5 Treasury & Agency GVAO 1.45°/ 2.28 Merrill Lynch 1-10 Corp & Gov't no BAA 8510 1.72 % 3.49 Merrill Lynch 3-5 Corp & Gov't A or Better B2B0 1.00% 3.48 Merrill Lynch 1-10 Year Master D5A0 2.01% 4.02 Merrill Lynch 1-30 Yr Domestic Master DOAO 2.55% 5.02 No Room For Error Conventional wisdom suggests that credit spreads should widen, credit curves should steepen, and volatilities should increase as yield curves flatten or invert. This is not acounter-intuitive notion to mar- ket participants. In an environment where investing in risk-free cash becomes an increasingly appealing alternative, rational investors should demand greater compensation for investing in risky assets. But this has not been the case over the past year. As short rates rose more than 200 basis points, long rates remained range-bound, volatilities declined, and spreads remained at historical tight levels. What has been especially surprising is that, apart from rate excep- tions, this dynamic continued as the Treasury curve became extremely flat to inverted (Figure 1 J. This yield environment has created a bifurcated market response. Some market partici- pants remain conservatively positioned, staying in short- duration spread products, waiting for more clarity with respect to the direction of the economy and markets. This path is bound to lead to lower yield and alpha, but that is viewed as the price to pay for tactical flexibility. Meanwhile, other market participants, unwilling to accept lower returns, took on more risk either via the down-in-credit quality trade, or via greater lever- age. Bond Strategy Relative to the Fed Funds Rate, short term yields are rich based on the most probable eco- nomic outcomes. At year-end, the 2-year Treas- ury note yielded 4.40%. At only a 15 basis point spread to a 4.25% Fed Funds Rate, this suggests the market is anticipating that the Fed will dra- matically over-correct and need to cut rates in the near future. Such a reversal would jeopardize a lot of hard-won creditability -for anticipating the economy, for anticipating the effects of pol- icy, and for guiding the market with "transparency." A more subtle but ultimately more important mis-pricing exists in short rates relative to the long end of the curve. Unexpected inflation has a greater impact on the value of a 2-year note than a 10•year note. Because inflation is likely to be more volatile over the short run, the short end of the curve should trade with a much big- ger inflation risk premium than it does today. Band Investors Shape Yield Curve In Their Own Image Figure 1: Annual Change in US Treasury yield curve. Source: Bloomberg An investor in a L0-year note has a chance of benefiting from shortening duration. Adjustable Rate Mortgage (ARMS) provide en- • "'an inflation fighting Fed, while the holder of the 2-year is hanced yields over comparable short duration securities without the unlikely to experience the reduced inflation expectation be- Price volatility as their coupons will adjust higher with increasing fore maturity. For now, short and long rates seem to trade Fed Funds rate. Below is the Dana Limited Volatility Strategyxersus with basically the same inflation-risk premium. The spread Traditional Fixed Income Benchmarks: between TIPS and Treasury notes in the 3, 5, and 10-year part of the curve all imply inflation of approximately 2.35%. But y['p Duration the volatility of inflation should be higher in the short rates. In recent weeks, softer economic data and relatively dovish Dana Limited Volatility 2.61% .85 years FOMC minutes suggest that the FOMC might be ready to Lehman 3-5 Gov't/Credit 0.92% 3.49 years stop sooner rather than later. But equities may bolster the hawkish case, with the SAP 500 having risen 10% since Octo- Lehman Inter. Aggregate 2.01% 3.67 years bet. The composition of the equity rally suggests that investors have sharply revised up their expectations of economic growth. Furthermore, the rally has contributed to a significant p wel--diversified portfolio containing an allocation to ARMS should loosening of financial conditions, which will help to bring continue to provide investors a high level of income coupled with a about that stronger growth. Therefore, with a flat yield curve higher confidence level of principal preservation. and further rate increases from the FOMC, we recommend Dana Composite Characteristics Dana Composite Average Average Current Average Effective Quality Coupon Yield YTM Duration (at market) • Dana Intermediate AA+ 4.8 4.8% 4.85% 2.87 Dana Limited Volatility I AGY 4.8 4.7% 5.09% 0.67 Dana Limited Volatility II AGY 4.4 4.4% 4.84% 0.85 Dana Municipal AA+ 4.6 4.6% 4.32% 2.92 Data reflects composites as of market close December 31, 2005 Dana investment Advisors, inc. is an independent federally registered im•estment adviser providing eyuity and fixed income investment manage- ment sen~ices to a broad range of clients. The returns presented have been prepared and presented in accordance with the AIMR PPS Standards. AIh1R has neidter endorsed the presented performance, nor is AIMR affiliated with Dana Invesunent Advisors, Inc. in any way. All tee-paying ac- counts utilising similar investment strategies to those discussed herein were included in the composite performance returns presented. Total firm assets fur the period ending iZ-.31-04 were $2,307,600,i~00. The number of portfolios contained in the Dana. Limited Volatility 1 and Limited Vola- tiliry Il Strategies were 39 and 61 respectively. The number of portfolios contained in the Dana intermediate and Municipal Bond Strategies were 23 and 35 respectively. The percentage of firm assets in 2004 represented in d1e Dana Limited Volatility 15tratetry was 14.4",4.; with an annual 2004 return dispersion of 0.33°jo. The percenctge of firm assets in 2004 represented in the Dana Limited Volatility II Strategy was 32.4"/0; with an annual 20t'14 rearm dispersion of 0.31"4,. The percentage of firm assets in 2004 represented in the Dana [nrennediate Bond Srrttery was 3.90%; with an annual 2004 return dispersion of 0.49ib. The percentage of firm assets in 2004 represented in the Dana Municipal. Bond Strategy was 3.7%; with an annual 2104 return dispersion of 0.66°,4.. To receive a complete list and description of Dana Investment Advisor, lnc.'s composites and/or a presentation that adheres to the AIMR-PPS standards, contact Nick Berich at Tel.-1262) 782-363 L All data is presented in LJ.S. Dollars. Portfolio Characteristics retlect the respective Dana Fixed income Strategy holdings as of market close nn the date indicated. Returns presented are exclusive of investment management and cttstudial tees, and net of transaction costs. Im•estment management tees would reduce the return, presented, for example: on none-million dollar portfolio with an ach•isury fee of .7540 earning a 1044r rentrn, the total a~mpounded advisory tee over a five year All returns were calculated on a time period would be' $50,368. The resulting average annual return for the period would therefore be 9.17"ro. . weighted total rentrn basis. Performance does include rice accrual of income and the reinvestment of dividends and interest received. indexes shown were selected because they demonstrated similar characteristics to the Dana stratetry to which they were compared. During various market cycles, the strategies discussed herein have demonstrated portt~dio characteristics and returns that have been both more and less volatile than that of the com- • parable index. While data contained herein wits gathered from sources deemed reliable, the acatrnc~ of the data presented cannot be guaranteed. Rtsc perform:+nce is not indicative of fixture returns.