Strategy Update Q3 2006

10/1/06

The third quarter of 2006 saw a strong recovery of large cap stocks and lackluster returns for smaller companies. The S&P 500 returned over 5% while the Russell 2000 was essentially flat for the quarter. The strongest performing sector was Telecom with a return of over 10% followed by Health Care at 7.7%. The worst performing sector was the Energy sector with a loss of over 8% followed by Industrials (-1.4%).

The third quarter, like the second quarter, was characterized by uncertainty that resulted from the apparent end of several prolonged trends. Among those trends are the boom in commodities, the housing bubble, and the fed policy of steadily raising interest rates.

Our strategies include a significant trend following component. As with all such strategies, there is a tendency to give back some gains when the trends come to an end. Our strategies tend to track their respective indices fairly well in trendless markets. They require a directional movement in at least some sectors to potentially generate above market returns.

Based on historical analogy it seem likely that the market will pick a direction once some of the current sources of uncertainty disappear. Some clarity from the Fed and knowing the results of the November elections may be a significant step in this direction.

Dynamic Value

The Dynamic Value Portfolio tracked the Russell 2000 fairly closely. For the quarter it returned -0.5% compared to +0.1% for the Russell. Exposures to the Financial sector helped offset losses in Basic Materials and Industrials.

Performance

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Current Holdings

Diversified Income

This portfolio is intended to provide tax advantaged dividend income with low volatility. The strategy underperformed the S&P 500 this quarter, returned about 2.6% compared to 5.5% for the benchmark. Our portfolio has a lower allocation to the Financial sector than the S&P 500. Since much of the S&P 500's performance this quarter was driven by this sector our portfolio lagged the index returns. In the long run our even allocation to sectors helps smooth out the returns. For example, our portfolio did not fully participate in the benchmark's draw down last quarter and it did not fully participate in the recovery this quarter.

Performance

To view detailed performance information, please click here (Requires free registration to access).

Current Holdings