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Home My WebLink AboutDocumentation_Pension Public Safety_Tab 05_08/04/2008• • ~~~ ~ ! ~. Rock~rvood Capital Advisors . ~ ,. ~~ -~ ~~~ k ~ ~, Strategy Review Presented By: Tony Brown Senior Partner tony@ rockwoodcapital. com Village of Tequesl-a Public Safety Officers' Pension Fund Second Quarter 2008 Review August 4, 2008 _~ ROCKWOOD CAPITAL ADVISORS Investment Poli 2nd Quarter 2008 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 -commensurate with the Prudent Investor Rule and any other applicable statute. - Reasonable consistency of return and protection of assets against the inroads of inflation are paramount. However, the volatility of interest rates and securities markets make it necessary to judge results within the context of several years rather than over short periods of two years or less. - The performance of the total Fund will be measured for rolling three and five year periods and compared to the return of a portfolio comprised of 60% S&P 500 Stock Index and 40% Lehman Brothers Intermediate Government/Credit Bond Index. On a relative basis, performance for the combined portfolio over three to five year periods is expected to be in the 40% of the Mobius Universe. Additionally, on an absolute basis, performance for the combined portfolio over three to five year periods is expected to meet or exceed the actuarial earnings assumption of 8%. Authorized Investments - All investments made or held in the fund shall be limited to, obligations issued by the United States Government or guaranteed as to principal and interest by the US Govt. or by an agency of the US Govt. Additionally, stocks, commingled funds administered by national or state banks, mutual funds and bonds or other evidence of indebtedness, issued or guaranteed by a corporation organized under the laws of the United States, any state or organized territory of the United States or the District of Columbia. Fixed income securities are to be ranked Investment Grade by S & P or Moody's and 90% of the equities shall be rated by a major rating service in the top three quality grades. Not more than 5% of the Fund's assets shall be invested in the common stock, capital stock or debt of any one issuing company, nor shall the aggregate investment in any one issuing company exceed 5% of the outstanding capital stock of the company. Foreign securities shall not exceed 10% of the value at cost of the fund. ROCKWOOD CAPITAL ADVISORS PAGE 1 z. ~_ Tequesta Public .Safety Officers' Pension Fund 2nd Quarter 2 008 Portfolio Summary Beginning Market Value Ending Market Value % of Portfolio Est Annual Income Current Yield Fixed Income $1,651,402 $1,586,386 36.7% $71,961 4.5% EgUltles $2,271,683 $2,450,468 56.3% $33,907 1.4% Short-Term Funds $261,971 $304,810 7.0% $6,858 2.3% Accrued Income $13,250 $13,930 -- -- -- Total $4,198,306 $4,355,593 100% $112,726 2.6% Total Fund Performance Domestic Equities 56% "hort Term Funds 7% Fixed ncome 37% 3% ~% -3% -6% Tequesta PS ^ 60% S&P 500 40% LBIN ~~ROCKWOOD CAPITAL ADVISORS PAGE 2 2nd Qtr 2008 One Year Market Value Summary {... 2nd Quarter 2 008 Tequesta Public Safely Officers' Pension Fund Maiicet Value Changes Total $ Change this quarter $15 7 2 87 2nd Quarter Summary Beginning Market Balance $4,198,306 Interest /Dividends 27,754 Contributions 86, 53 5 Net Disbursements _17,622 Net Realized & Unrealized (G/L) 60,620 Ending Market Balance $4,355,593 ~, _~ ROCKWOOD CAPITAL ADVISORS 2nd Quarter Total Fund Return I 2.0% Fiscal Year Summary Beginning Market Balance (10/1/2007) $4,313,667 Interest /Dividends 75,194 Contributions 307,634 Net Disbursements -54,170 Net Realized & Unrealized (G/L) -286,732 Ending Market Balance $4,355,593 PAGE 3 Equity Time For Contrarian Thinking Despite a challenging market environment, we are pleased to report positive results for the second quarter of 2008. The same cannot be said for most major market indices. For the quarter, the Rockwood Strategic Equity portfolio was UP 4.7% vs. the S&P 500 Index, which slipped 2.7%. The Russell 3000 Index depreciated 1.7%. Bond investors performed relatively well, although they too lost capital as the Lehman Brothers Aggregate Bond Index decreased 1.0%. The Balanced Composite Index fell 2.0%. First the bad news; the equity markets have slipped into bear market territory, declining some 20% from their recent highs in October 2007. The collapse of the housing market and subsequent impact on the credit markets have left investors reeling. It is the unknown depth of the collapse that has equity investors so nervous. Financial stocks have been decimated, declining some 44% from the June '07 top!!! In addition, commodity inflation (oil, steel, gold) has combined to hamper rescue efforts. Does the Fed cut rates to stimulate the economy or does the Fed raise rates to stem inflation? We are in the midst of a financial "catch-22". Now the good news; at this point sentiment is almost uniformly negative and there is virtually no positive news in the media. This may seem like a toxic combination but as contrarians we recommend leaning against that sentiment during extremes. Despite the correction, we think it is highly likely that the market will recover during the third and fourth quarter. It is important to remember that after a bear market stocks typically recapture losses in a matter of months. First and foremost, our results have benefited from a very limited concentration in the financial sector, which continues to feel the aftermath of the subprime crisis. Portfolio exposure to the strengthening materials and energy sectors as well as an overweighting within the defensive consumer staples sector has also contributed to our positive second quarter performance. We will continue our search for dominant themes in the market and monitor your portfolio to take advantage of any opportunities that become evident during the upcoming months. Performance 20% 10% 0% -10% -20% Tequesta PS S&P 500 ROCKWOOD CAPITAL ADVISORS PAGE 4 2nd Quarter 2 008 2nd Qtr 2008 Fiscal YTD One Year Two Years Three Years Since Inception (5/1/05) Equity Por~olio Portfolio Summary # of Stocks 3 7 Beta 0.9 Yield 1.4% P/E 18.9x Style Box Val Cr Grw ~ ~ Large Cap - 68.5% Mid Cap - 31.5% Small Cap - 0% Average Market Cap $50.9 billion Median Market Cap $29.4 billion Top 10 Holdings 1. United States Steel 4.4% 2. Praxair Inc. 3.6% 3. Bayer AG 3.2% 4. PPL Corp 3.0% 5. Verisign Inc. 3.0% 6. Anheuser Busch Companies 2.9% 7. Stericycle Inc. 2.8% 8. Agnico Eagle Mines 2.8% 9. InYI Business Machine 2.8% 10. T. Rowe Price Group 2.7% Five Best Impact 1. United States Steel Co. +45.9% 2. Anheuser Busch Companies +31.7% 3. Loews Corp. +25.6% 4. Schlumberger Ltd. +23.7% 5. 1. Freeport-McMoran Five Worst Impact Archer Daniels Midland +22.3% -23.2% 2. Smith & Nephew Plc. -16.5% 3. Coca Cola Co. -14.0% 4. Unilever N V -13.9% 5. Energizer Holdings Inc. -12.1% ROCKWOOD CAPITAL ADVISORS PAGE 5 2nd Quarter 2 008 ~ • . ,r U r ~ r ~ ~ ~ q~ y ~. .~ r- ~ ~, ~ ~,- f,. E ui Anal sis and Attribution ~~ . ~. ~, _ 2nd Quarter 2 008 Secl~r Allocation 24% 20% 16% 12% 8% 4% 0% 30% 20% 10% 1.5 0% -10% -1.5 _5.3 -5.8 -4. -20% -11.0 Staples Discretionary Health Care Performance 27.5 ~:;~:~4<~ ' 20.5 19.9 7.2 5.2 ~ 1~~ Materials Info Tech 5.2 3.6 13.4 -2.2 ~ . -7.2 -15.! Energy Industrial TeUUtil Finance Rockwood ~ Russell 3000 <. ~~~ROCKWOOD CAPITAL ADVISORS PAGE 6 t Health Info Staples Discretionary Care Materials Tech Energy Industrial TeVUtil Finance 40% 35% 30% 25% 20% 15% 10% 5% 0% Rockwood ~ Russell 3000 KOCKWOOD CAPITAL ADVISORS PAGE 7 2~d Quarter 2008 Style Distribution Large Cad Mid Cap Small Cap Value Core Growth Value Core Growth Value Core Growth -: Equity Transactions Sold Stock April VCA Antech Inc. Waters Corp. May Aetna Inc. Cigna Corp. Precision Castparts Rockwell Collins Inc. June Energizer Holdings Inc. Loews Corp. EBay Inc. Stock Mkt Cap Sector Description April Costco Wholesale Corp. LCap -Blend Cons Staples Super center warehouse retailer Entergy Corp. LCap -Val Utilities Southern US electric utility May Archer Daniels Midland LCap -Blend Cons Staples Food & agricultural products Medco Health Solution LCap -Blend Health Care Largest US pharmacy benefit manager Oracle Systems Corp. LCap - Grw Info Tech Leading supplier of software systems Suncor Energy Inc. LCap -Blend Energy Canadian oil & gas producer June Nike Inc. LCap - Grw Cons Disc Worlds leading high-quality athletic footwear Sigma Aldrich Corp. MCap - Grw Materials Specialty Chemicals Agnico Eagle Mines MCap - Grw Materials Canadian gold mining Commissions Paid 2nd rlti. `1 Fiscal 200 8 Year-to-Date Lynch, Jones & Ryan $432 $1 411 Purchased ~~jROCKWOOD CAPITAL ADVISORS PAGE 8 2nd QUdt"fet' 2~~$ E ui Holdin s q ~ ~ 2nd QUdI~eC 2~~8 Exchange Avg Total Market Percent of Current Annual ISS Ticker Com an Name Shares Cost Cost Price Value Mkt Val /° Yield % Income CGQ - Cash 160,469 1.00 160,469 1.00 160,469 6.1 2.3 3,_611 NA AEM AGNICO EAGLE MINES 980 66.70 65,366 74.37 72,883 2.8 0.2 176 - BUD ANHEUSER BUSCH COS 1,200 46.99 56,762 62.12 74,544 2.9 __ 2.1 1,584 0.75 ADM ARCHER DANIELS MID 1,500 _ _. 44.11 66,170 33.75 50,625 1.9 1.5 780 0.87 T AT&T INC 1,700 33.60 58,146 33.69 57,273 2.2 4.8 2,720 0.78 BAX BAXTER INTL INC 1,100 58.90 64,791 63.94 70,573 2.7 1.4 957 0.35 BAYRY BAYER A G 1,000 52.86 55,318 84.04 84,040 3.2 1.9 1,634 -- CVX CHEVRON CORP 620 85.34 52,910 99.13 61,461 2.4 2.6 1,612 0.69 KO COCA COLA CO 1,000 61.91 61,906 51.98 52,360 2.0 2.9 1,520 0.68 COST COSTCO WHSL CORP N 980 66.91 65,575 70.14 68,737 2.6 0.9 627 0.40 EIX EDISON INTL 1,120 56.72 63,527 51.38 57,887 2.2 2.4 1,366 0.81 ETR ENTERGY CORP NEW 580 111.76 64,818 120.48 69,878 2.7 2.5 1,740 0.92 FCX FREEPORT-MCMORAN C 550 97.34 53,536 117.19 64,455 2.5 1.5 963 0.24 HNZ HEINZ H J CO 1,160 42.21 49,367 47.85 _ 55,987 2.1 _ _- 3.5 1,926 0.85 HPO HEWLETT PACKARD CO 1,485 32.33 _ 49,682 44.21 65,771 2.5 0.7 475 0.53 IBM INTL BUSINESS MCHN 613 109.00 67,575 118.53 72,659 2.8 1.7 1,226 0.24 AHONY KONINKLIJKE AHOLD 4,260 16.13 68,543 13.46 57,318 2.2 1.5 839 -- LMT LOCKHEED MARTIN CO 710 63.22 46,095 98.66 70,049 2.7 1.7 1,193 0.12 MDR MCDERMOTT INTL 970 49.79 48,297 61.89 60,033 2.3 0.0 - -- MCD -- MCDONALDS CORP 950 __ 52.86 _ _ ... 50,213 _ 56.22 _ 53,409 2.0 _ - 2.7 - 1,425 0.56 MHS MEDCO HEALTH SOLUT 1,330 50.05 66,563 47.20 62,776 2.4 0.0 - 0.27 MTD METTLERTOLEDOINT 632 102.87 65,012 94.86 59,952 2.3 0.0 - 0.77 NKE NIKE INC 980 67.83 66,472 59.61 58,643 2.2 1.5 902 0.30 ORCL ORACLE SYSTEMS COR 3,100 21.59 66,920 21.00 65,100 2.5 0.0 - 0.45 PEP PEPSICOINC 700 70.14 49,099 63.59 44,513 1.7 2.7 1,190 0.92 PPL PPL CORP 1,500 33.44 51,752 52.27 78,908 3.0 2.6 2,010 0.55 PX PRAXAIR INC 1,000 62.52 63,700 94.24 94,240 3.6 1.6 1,500 0.75 HSIC SCHEIN HENRY INC 1,085 45.52 50,753 51.57 55,953 2.1 0.0 - 0.77 SLB SCHLUMBERGER LTD 620 98.10 60,822 107.43 66,737 2.6 0.8 521 - SIAL SIGMAALDRICHCORP 1,150 58.39 67,150 53.86 61,939 2.4 1.0 598 0.31 SNN SMITH & NEPHEW PLC 1,062 59.42 62,970 54.75 58,145 2.2 1.1 631 -- SRCL STERICYCLE INC 1,440 _. 31.72 47,713 51.70 74,448 2.8 0.0 - 0.40 SU SUNCOR INC 1,180 57.37 67,691 58.12 68,582 2.6 0.3 234 - TROW T.ROWE PRICE GROUP 1,250 36.33 44,130 56.47 70,588 2.7 1.7 1,200 0.54 TMO THERMO FISHER SCIE 1,219 48.42 59,827 55.73 67,935 2.6 0.0 - 0.31 UN UNILEVER N V 1,800 34.22 61,600 28.40 51,120 2.0 3.4 1,737 - X UNITED STATES STL 622 104.30 64,872 184.76 114,933 4.4 0.5 622 0.63 VRSN VERISIGN INC 2,075 28.88 60,161 37.80 78,435 3.0 0.0 - 0.20 Portfolio Total $2,346,292 $ 2,613,356 100.0 1.4 $37,519 ROCKWOOD CAPITAL ADVISORS PAGE 9 ~ Proxy Voting Record Company Shares Meeting Date Agenda Item Mgmt Vote Voted Rec Cast Aetna Inc. (AET) 1,090 5/30/2008 Elect Direcors For For Ratify Audiors For For Provide for Cumulative Voting Against Against Require Direck~r Nominee Qualifications Against Against Ahold Kon Nv (AHONY) 4,260 4/23/2008 Approve Financial StatQmenis and Staturory For For Reports Approve Dividends of EUR 0.16 Per Share For For Approve Discharge of Corporate Executive For For Board Approve Discharge of Supervisory Board For For Elect K. Ross ~ the Corporate Executive Board For For Elect P.N. Wakkie m the Corporate For For Executive Board Elect R. Dahan to Supervisory Board For For Elect K.M.A. de Segundo to Supervisory for For Board Elect M.G. McGrath ~ Supervisory Board For For Ratify Deloit~ Accountants as Audi~rs For For Amend Articles Re: New Legislation and Technical Amendments For For Approve Preparation of Regulated Information in "English" For For Grant Board Authority to Issue Shares Up To 10% of Issued Capital For For Auth Board ~ Exclude Preemptive Rights from Issuance (I~m 16) For For Auth Repurchase of Shares of Issued Share Capital For For Anheuser-Busch 1,200 412312008 Elect Directors For For (BUD) Approve Omnibus Stock Plan For For Ratify Auditors For For Report on Charitable Contributions Against Against Amend Articles/Bylaws/Charter -- Call Special Meetings Against Against Advisory Vote to Ratify Named Executive Officers' Compensation Against Against Company Shares Meeting Date Agenda Item Mgmt Vote Voted Rec Cast AT&T Inc (T) 1,700 4/2512008 Elect Directors i For For Ratify Auditors For For ReportonPoliticalContributions Against Against Exclude Pension Credits from Earnings Against Against Performance Measure Require Independent Lead Director Against Against Establish SERP Policy Against Against Advisory Vote to Ratify Named Executive Against Against Oficers' Compensation Baxter InYI Inc. (BAX) 1,100 5/6/2008 Elect Direcors For For Ratify Auditors For For Bayer AG (BAYRY) 1,000 4/25/2008 Rec Finl StrnlslStat Reports; Approve Alloc For For of Inc & Div for Fiscal 07 Approve Discharge of Management Board for Fiscal 2007 For For Approve Discharge of Supervisory Board for Fiscal 2007 For For Auth Share Repurchase Prog & Reissue or CnclofShares For For Appr Issuance of Warrants/Bonds For For w/Warrants Aftached/Conv Bonds Appr Creation of EUR 195.6M Pool of Capital to Guar Conv Rights For For Appr Issuance of Warrants/Bonds w/Warrants Atlached/Conv Bonds For For Appr Creation of EUR 195.6M Pool of Capital m Guar Conv Rights For For Appr Agreements with Subs Fuenfte Bayer W GmbH, Sechste Bayer W GmbH, and For For Erste Bayer W Aktiengesellschaft Ratify PricewaterhouseCoopers AG as I Auditors for Fiscal 2008 For For Chevron Corp. (CVX) 620 5128/2008 Elect Directors For For Ratify Audiors For Far Increase Authorized Common Stock For For Require Independent Board Chairman Against Against Adopt Human Rights Policy Against Against KOCKWOOD CAPITAL ADVISORS PAGE 10 2nd QUdrC2C 2~~8 Company Shares Voted Meeting Date Agenda Item Mgmt Rec Vote Cast Chevron Corp. (CVX) 620 512812008 Report on Environmental Impact of0il Sands Operations in Canada Against Against Adopt Quantitative GHG Goals for Products and Operations Against Against Adopt Guidelines for Country Selection Against Against Report on Market Specific Environmental Laws Against Against CIGNACorp.(CI) 1,160 4/2312008 Elect Directors For For Ratify Audibrs For For Eliminab Class of Preferred Stock For For Reduce Supermajoriry Vob Requirement For For eBay Inc. (EBAY) 1,791 6/19/2008 EleclDirecbrs ~ For For Approve Omnibus Sbck Plan For For Ratity Auditors For For Edison InCI (EIX) 1,120 4/2412008 Elect Direcbrs For For Ratify Auditors For For Advisory Vote b Ratify Named Executive Officers' Compensation Against Against Henry Schein, Inc. 1,085 5/14/2008 Elect Direcbrs For For (HSIC) Ratify Audibrs For For InYI Business Machines 613 412912008 Elect Direcbrs For For (IBM) Ratify Auditors For For Resbre or Provide for Cumulative Voting Against Against Review Executive Compensation Against Against Amend Bylaws b Establish a Board Commit~e on Human Rights Against Against Amend Bylaw -- Call Special Meetings Against Against Advisory Vote b Ratify Named Executive Officers' Compensation Against Against Lockheed Martin 710 412412008 Elect Direcbrs For For (LMT) ~ Ratify Audibrs For For Provide br Simple Majority Voting For For AmendArticleslBylaws/Charter-Non- Routine For For Amend Omnibus Stock Plan For For Approve Non-Employee Director Stock Option Plan For For Company ~ Shares ( Voted Meeting Date Agenda Item Mgmt Rec Vote Cast Lockheed Martin (LMT) 710 412412008 Increase Disclosure of Executive Compensation Against Against Report on Nuclear Weapons ~ Against Against Advisory Vol to Ratify Named Executive Officers' Compensation Against Against Loews Corp. (LTR) 1,630 5/1312008 Elect Direcbrs For For Ratify Auditors For For Provide br Cumulative Voting Against Against Pay For Superior Performance Against Against Adopt Principles for Health Care Reform Against Against ! Amend Tobacco Marketing Strategies ' Against Against McDermott InYI, Inc. ! 970 5/9/2008 Elect Directors For For (MDR) I Appr amndlb articles of inc ~ chg period which brd sets record dt For For Ratify appt of independent reg public acctg firm for the y r end 12108. For For McDonald'sCorp. 950 512212008 Elect Direcbrs For For (MCD) Ratify Audibrs For For Mettler-Toledo InYI 632 4124/2008 Elect Directors For For (MTD) Ratify Audibrs For For Pepsico Inc. (PEP) 700 51712008 ElectDirecfors For For Ratify Audibrs For For Report on Recycling Against Against Report on Genetically Engineered Products Against Against Report on Human Rights Policies Relating b Water Use Against Against Report on Global Warming Against Against Advisory Vol b Ratiy Named Executive Officers' Compensation Against Against PPLCorp.(PPL) 1,500 5/21/2008 Elect Directors For For Eliminate Supermajority Vofe Requirement For For ~ Ratify Audibrs For For Praxair, Inc. (PX) 1,000 4122/2008 Elect Direcbrs For For Require Majority Vol br Non-Con~s~d ( Election For For Ratify Audibrs For For ROCKWOOD CAPITAL ADVISORS PAGE 11 2 ~d Quarter 2 008 ~; Pro~cy Voting Record (con't) Shares Mgmt Vote Company Meeting Date Agenda Item Voted Rec Cast Schlumberger Ltd. 620 4/9/2008 Elect Directors For For (SLB) Adoption and approval of financials and For For dividends Approval of adoption of the Schlumberger For For 2008 Sock Incentive Plan Approval of independent regisffired public For For accounting firm Smith & Nephew plc 1,062 511/2008 To adopt the report and accounts For For (SNN) To approve the remuneration report For for To confirm the in~rim dividends For For To re-elect directors For For Ratty Audi>Drs For For Auth the direcmrs to de~rmine the For For remuneration of the audimrs To renew fhe direcmrs authority b allot For For shares Renew direcmrs authority Tor the For For disapplication of pre-emption rights Renew direcmrs ltd auth m make mkt purch For For of Company own shares To adopt the revised articles of association For For Appr the inc of initial mkt value of awards For For under the pert sh plan StEricycle, Inc. (SRCL) 1,440 5129/2008 Elect Direc~rs For For Approve Omnibus Stock Plan For For Ratify AudiA~rs For For T. Rowe Price Grp. 1,250 4/10/2008 Elect Directors For For (TROW) Increase Authored Common Stock For For Ratty Audibrs For For Other Business For For The Coca-Cola Co. 1,000 411612008 Elect Direcors For For (KO) Ratty Auditors For For Approve Sock Option Plan Fw For Advisory Vote m Ratty Named Executive Against Against Oficers' Compensation ROCKWOOD CAPITAL ADVISORS Shares Mgmt Vote Company Voted Meeting Date Agenda Item Rec Cast The Coca-Cola Co. 1,000 4/16/2008 Require Independent Board Chairman Against Against (KO) Amend Bylaws tD Establish a Board Against Against Commitlee on Human Right, Unilever N.V. (UN) 1,800 5/1512008 Adopt annual accts 8 appropriation of profit For For for 2007 Discharge Exec Dir's in office in 07 for the For For fulfilment of their task. Discharge the non-Exec Dir's off in 07 br the For For fulfilment of their task. To re-appoint executive direcors For For To appoint Mr. J A Lawrence as an For For ex ecutiv a direcbr To increase GSIP Award and bonus limits For For for Mr. J A Lawrence Tore-appoint non-executive directors For For Ratify Audiors For For To approve the proposal to change the For For reporting language. Designate the board as company body auth For For to issue shs in company Authorise board tD purch shs & depositary For For receipts in the company. Approve proposal m reduce the capital For For through cancellation of shs. US Steel Corp. (X) 622 4/29/2008 Elect Direcors For For Ratify Auditors For For VeriSign, Inc. (VRSN) 2,075 5/29/2008 Elect Directors For For Ratify Auditors For For Waters Corp. (WAT) 1,037 511412008 Elect Direcmrs For For Ratty Auditors For For PAGE 12 2~d Quarter 2008 Fixed Income The Fed: Pouring Gasoline on the Fire? As we peer into the future, it's probably worthwhile to review how our economy/financial system got into the current quandary In the midst of the housing boom, it seemed like a good idea to encourage policies to broaden home ownership. Believing home prices would continue to soar, loan underwriting standards and government oversight of lending went out the window. Growth in subprime lending and teaser rate ARMs positioned the housing market for a fall, and fall it did. Since the vast majority of these loans were wrapped into mortgage-backed securities, large investors (like banks and insurance companies) who held these bonds sustained heavy losses. The Fed rushed in and opened wide the monetary spigots. Unfortunately, the funds rate is a blunt instrument, and the Fed soon learned that more targeted remedies were required. Equally unfortunate was the impact that loose monetary policy had on the value of the US Dollar (can you say "crushed"?). A weak dollar has all sorts of nasty implications including higher inflation. Guess what investors do when the fear of inflation ravages the value of their investment portfolios? They buy lots of gold and commodities, including oil, and commodity prices soar. Thus, our financial system has been pounded with multiple body blows: plummeting home prices, a weak dollar, higher inflation, and sky-rocketing commodity prices. The Fed is finally concerned about inflation, and the market is beginning to price in future Fed tightenings. Currently, the yield on the 10 year Treasury is lower than CPI inflation. This is only the second time since 1979 this has occurred. This tells us that there is very little value in holding US Treasuries, and that Treasury yields are likely to move higher. In summary, the economy has been resilient despite the many headwinds. Monetary policy is too loose, which is hurting the dollar and sparking inflation. We feel that US Treasuries offer little value at current yields, and that interest rates are poised to move higher. Thus, we are positioned defensively from a duration standpoint and are looking to selectively add high quality, non-government bonds that offer compelling value. Performance 1 o°ro 5% 0% -5% Tequesta PS Lehman Int Gov't/Credit U.S. Treasury Yield Curves - ---- 6/30/2008 3/3Y2008 - • - - -6/30/2007 6% 5% 4% 3% 2% 1% 3 2 5 10 30 mos yrs yrs yrs yrs Sector Index Returns 12% ^ 2Q Zoos 8% ^ 2007 4% 0% -4% Tsy Agy MBS Credit HY ROCKWOOD CAPITAL ADVISORS PAGE 13 2nd Quarter 2008 2nd Qtr 2008 Fiscal YTD One Year Tvvo Years Three Years Since Inception (5/1 /05) Fixed Portfolio Structure Characteristics Tequesta PS Lehman Int Gov't/Credit Average Maturity 3.8 yrs 4.6 yrs Effective Duration 3.2 yrs 3.8 yrs Yield to Maturity 4.2% 4.2% POI'1f0~ 10 u.s. Treasuries 8% .~ Cash 10% Agencies 39% 60% 40% 20% 0% Effective Maturity 1 to 3 yrs 3 to 5 yrs 5 to 10 yrs 10+ yrs Tequesta PS ~ Lehman Int Gov't/Credit Lehman Int CJC U.S. Treasuries 41% Agencies - 23% 2nd Quarter 2008 Fixed Holdings 2~d Quarter 2008 PAR CG COUPON ORG CURRENT MKTVAL °/ OF EFF 000 CUSIP ISSUER MDYS Grade % MATURITY COST PRICE 000 PORT YTMIC DUR 144 OOOOOOCM CASH & EQUIVALENTS Aaa -- 0.00 711/2008 144,341 100.000 144,341 8.29 2.160 0.08 25 07388VAB A-2-FIXED RTBEAR STE Aaa -- 5.33 1/12/2045 25,137 97.545 24,497 1.41 5.993 3.28 15 OB6516AG BEST BUY CO Baa B 6.75 7/15/2013 15,060 101.109 15,186 0.87 6.785 4.24 15 14041NEF A-FIXEDRTCAPITALON __ Aaa _ -- __.. 4.85 _ 4/1512011 14,981 100.440 15,098 0.87 4.730 2.56 20 161571CH A-FIXED RTCHASE ISSU Aaa -- 5.12 10/15/2014 20,000 101.062 20,258 1.16 4.896 3.77 20 161571 CP A-FIXED RTCHASE ISSU Aaa -- 4.65 3/15/2013 19,999 98.890 19,819 1.14 4.968 4.13 11 _ 17275RAC CISCO SYS INC SR NT __.. - Al C+ 5.50 2/22J2016 11,015 100.891 11,315 0.65 5.355 6.17 15 172967ES CITIGROUP INC SR NT Aaa C 6.13 _ 5/15/2018 14,947 95.697 14,480 0.83 6.977 7.33 20 30161MAE __._ EXELON GENERATION CO A3 B 6.20 10/112017 20,089 97.400 19,790 1.14 6.578 6.97 145 3128M5Z0 FHLM POOL G04051 Aaa - 6.00 2/1/2038 148,237 101.123 147,215 8.45 5.713 3.71 25 3133MLT8 FEDERAL HOME LN BKS Aaa -- 5.25 2/13/2009 25,940 101.500 25,871 1.49 2.785 0.60 50 3133X15Y FEDERAL HOME LN BKS Aaa -- 4.10 3/3012009 49,725 100.938 50,987 2.93 2.822 0.73 200 3133XRN2 _ FEDERAL HOME LOAN BA _ Agy -- 3.50 _ _ 7/16/2010 _ -_ 199,T/0 100.469 201,171 11.55 3.261 1.96 20 3134A3EM FEDERAL HOME LN MTG Aaa - 5.75 3/15/2009 _ 20,866 102.031 20,745 1.19 2.827 0.68 25 31359MH8 FEDERAL NATL MTG ASS Aaa -- 5.00 3/15/2016 24,199 102.063 25,884 1.49 4.677 6.38 105 31359MHK FEDERAL NATL MTG ASS Aaa - _ 5.50 _. 3/15/2011 110,959 105.063 112,017 6.43 3.521 2.49 100 3137EABA FEDERAL HOME LN MTG Aaa - 5.13 1111712017 106,780 102.750 103,376 5.93 4.757 7.56 150 3137EABH FEDERAL HOME LN MTG Aaa -- 2.38 5/2812010 148,532 98.531 148,655 8.54 3.169 1.84 24 31413GN7 FNMA POOL 945114 Aaa -- 5.75 811/2037 24,218 100.000 24,198 1.39 5.093 1.86 10 36200EUP GNMA I POOL 599190 Aaa -- 6.00 3/15/2035 9,957 101.711 9,798 0.56 5.539 4.43 46 36291W7H GNMA I POOL640896 Aaa -- 7.00 4/15/2035 49,708 105.237 48,946 2.81 5.562 2.61 61 36291XMW GNMA I POOL641273 Aaa -- 4.50 4/15/2035 59,233 93.311 56,735 3.26 5.817 5.82 20 38144LAC GOLDMAN SACHS GROUP Aaa N/A 5.45 11/1/2012 20,135 99.749 20,131 1.16 5.514 3.81 15 428236A0 HEWLETT-PACKARD A2 B- 4.50 3/1/2013 15,040 99.042 15,078 0.87 4.439 4.14 20 46625HHB JPMORGAN & CHASE & C Aa2 N/A 4.75 5/1/2013 19,937 97.186 19,603 1.13 4.822 4.27 20 46625YNC A-4-FIXED RTJP MORGA Aaa -- 4.74 7/15/2042 19,095 94.785 19,036 1.09 5.937 5.73 30 52108HU5 A-4-FIXED RTLB-UBS C Aaa -- 4.51 12/15/2029 29,388 97.040 29,187 1.68 5.955 3.12 25 565849AD MARATHON OIL CORP SR Baal NIA 6.00 10/1/2017 25,030 99.429 25,232 1.45 6.080 7.07 20 58013MEB MCDONALDS CORP MED T -_ A3 N/A 5.80 10115/2017 20,416 102.076 20,660 1.19 5.510 7 22 15 595620AD MIDAMERICANENERGYC A2 B- 4.65 10/1/2014 14,073 97.206 14,755 0.85 5.177 5.35 20 61166WAF MONSANTO CO NEW SRN -_ A2 B+ 5.13 4/15/2018 20,002 98.072 19,831 1.14 5.380 7.71 20 61747YCE MORGAN STANLEY FR 6% Aaa B+ 6.00 4/28/2015 _ 19,806 _ 95.602 19,330 1.11 6.021 5.54 15 7134488E PEPSICO INC SR NT 5. Aa2 NIA 5.15 5/15/2012 14,993 104.007 15,700 0.90 4.022 __ 3.50 10 742718DA __ PROCTER & GAMBLE CO __ Aaa B+ 4.95 8/15/2014 9,792 103.276 10,515 0.60 4.334 5.23 10 78387GAP SBC COMMUNICATIONS I A2 B+ 5.10 9/15/2014 9,621 98.027 9,953 0.57 5.478 5.23 15 806605AJ SCHERING PLOUGH CORP Baal B+ 6.00 9/1512017 14,994 98.754 15,078 0.87 6.178 7.01 20 907818CZ UNION PAC CORP NT 5. Baal N/A 5.75 11 /1512017 19,992 98.360 19,819 1.14 5.980 7.26 150 912828HX UNITED STATES TREAS Aaa -- 2.13 413012010 14$822 99.273 149,447 8.58 2.532 1.78 25 92343VAJ VERIZON COMMUNICATIO A3 B- __ 4.35 2/15/2013 24,971 96.205 24,471 1.41 5.284 4.08 35 929766X2 A-5-FIXED RTWACHOVIA Aaa -- 4.66 5/15/2044 34,103 96.267 33,829 1.94 6.059 3.59 ROCKWOOD CAPITAL ADVISORS PAGE 15 1731 ~ Total ~ ~ ~ ~ ~ $1,743,905 ~ ~ $1,742,237 ~ 100.0 ~: Spreads =Opportunity?? The yield spread between virtually all non-gov't fixed income securities and US Treasuries exploded to historic wides in March of 2008, around the time of the Bear Stearns rescue. While spreads have narrowed since March, renewed fears of financial system stress (especially FNMA/FHLMC bailout speculation) have pushed spreads wider. From a historical perspective, "spread product" (non-gov't debt) offers compelling value. 2 60 Fannie Mae 30-Year Mortgage Spreads 240 3/6/2008 2.60 2 40 2 20 2.20 2.00 2.00 tvzonoD7 1 Bo 1.fio 1 60 8'16/2007 'I 60 SB2008 140 1.40 1.20 I,(•,r, ~ J-J '1i ~ 1.20 1.D0 -/ / 1.00 0.80 0 BO `~ `8 0 0 0 0 o a o $ ~" °~y ~ rv S S C C CC C 0 H ~, 0 ° v ~ ~ n a m ~ a~~ a~ ~^ m m e a ~ ~ L 1 ~~ Investment Grade Spreads The Option-Adjus[etl Spreatl (OAS) of the Merrill Investment Gratle Corporate Master Intlex 325 3202008, J05 325 300 300 ~ Fed Hikes from 1.00%to 1.25% 2]5 2]5 250 250 225 225 m 200 200 °~~, m 1]5 1]5 m 150 5i1~r.001' 150 125 0I~5@JJ~ ` 125 100 S,rB.^JO ....t , 100 Ins .o0*. ee 75 3~t rno5 » ~ r r r m 0 8 c c c R° 8 R R R R ]5 ~ ~ M~ a m a~ ~ a a~~~ m m The Merrill Lynch ABS Master Index Option-Pdjusted Spread 600 600 500 500 N 400 400 m n $ 300 300 ~ 200 200 ~ Merrill Lynch ABS Master lntlez 100 0 100 0 ~ t $ e o o ~ ~ t $ ~ o < ROCKWOOD CAPITAL ADVISORS PAGE 16 2~d Quarter 2008 Proxy Footnote 2nd Quarter 2 008 Rockwood Capital Advisors, through our equity sub-adviser, Contravisory Research & Management Co., has retained Institutional Shareholder Services ("ISS") to coordinate and vote proxies with respect to client securities. Proxy voting is an important right of shareholders and reasonable care and diligence must be undertaken to ensure that such rights are properly and timely exercised. When the Adviser has discretion to vote the proxies of its clients, they will be voted by ISS in accordance with their Proxy Voting Guidelines in effect from time to time. The Adviser believes that having proxies voted by a professional proxy voting service which has the staff and resources to carefully evaluate voting issues is in the best interests of its clients and will remove the possibility of encountering conflicts of interest on the part of the Adviser with respect to the voting of proxies. The Compliance Officer has reviewed the most recent ISS Proxy Voting Guidelines and believes that having proxies voted in accordance with such guidelines is consistent with the best interests of the Adviser's clients. The Chief Compliance Officer has also determined that ISS, as a leading proxy voting firm, has the capacity and competency to adequately analyze proxy issues. The Compliance Officer has also received information from ISS demonstrating to the satisfaction of the Compliance Officer that ISS has adopted procedures to ensure that it is independent with respect to its proxy voting decisions, including using "Chinese wall" and other procedures to segregate its proxy voting operations from its corporate servicing operations. ISS has agreed to notify the Adviser if it believes ISS faces a material conflict of interest with respect to voting the proxies of a particular issuer. The Compliance Officer will monitor ISS to ensure that all proxies are being properly voted by periodically engaging in "spot reviews" of votes made by ISS. The Compliance Officer will also have ISS confirm annually that it is maintaining appropriate records as set forth below. Client quarterly reports contain information with respect to each voted proxy about which the client portfolio held during the period, including (a) the name of the issuer, (b) the proposal voted upon, and (c) how ISS voted the client's proxy. Additionally, the Compliance Officer will maintain files relating to the Adviser's proxy voting procedures in an easily accessible place. Records will be maintained and preserved for five years from the end of the fiscal year during which the last entry was made on a record, with records for the first two years kept in the offices of the Adviser. Records of the following will be included in the files: • Copies of this proxy voting policy and procedures, and any amendments thereto. • A copy of each written client request for information on how ISS voted such client's proxies, and a copy of any written response to any (written or oral) client request for information on how ISS voted its proxies. The Adviser has arranged with ISS to have ISS maintain and make available promptly upon request (i) copies of each proxy statement that is received for one of Adviser's clients, provided however that ISS and the Adviser may rely on obtaining a copy of proxy statements from the SEC's EDGAR system for those proxy statements that are so available, (ii) a record of each vote that ISS casts for one of Adviser's clients and (iii) a copy of any document ISS created that was material to making a decision how to vote proxies, or that memorializes that decision. ROCKWOOD CAPITAL ADVISORS PAGE 17