Yesterday we ran performance reports for our portfolios¹.  Our composite return across all portfolios was 18.11%.  For comparison, our aggressive portfolio’s aggregate return was 35.95%.  Annualized, these figures would exceed 35% and 50%, respectively.  We started tracking performance in this format in July of this year.  Please note that we have maintained a fairly large allocation to cash throughout the year in these portfolios.

The investment climate for the New Year is being molded nowadays, and it seems that it may turn out to be a watershed moment in the investment world.  Let us clarify:

• The fate of the Eurozone will be played out. If the Euro collapses (we do not see – as we have written before – the probability of just few countries being dropped), things will be totally different a few months from now. Our goal is to prepare for any possible outcome, no matter how remote that probability.
• The fate of the financial system may be at risk, given the existence of toxic assets in the system and in the balance sheets of banks (including central banks).
• Assuming that the global financial system survives and that the Eurozone survives too, then a return to more normalized conditions is anticipated. We will be cautious for the first quarter.

Assuming then a return to the more normalized conditions, we estimate that events may unfold as follows, and hence the structure of portfolios will strategically be shaped accordingly:

• Hard assets (precious metals, rare earth elements, etc.) will continue their appreciation, given the demand for safety, the new asset classes that are being formulated, the restructuring of portfolios, the risks in the financial environment, and the role of emerging economies.
• Bonds will be underweighted by institutional investors and will not be a promising place to park funds, especially as QE continues, state and local budgets come under pressure, and fears of default increase.
• Real Estate including farmland (especially in the second half of the year) will be a promising sector in terms of total returns.
• Emerging (e.g. Turkey, Romania, Indonesia, Malaysia, Latin America) and frontier economies (e.g. Africa, Mongolia, Sri Lanka) will continue to outpace developed economies.
• Given risk premiums, valuations, P/E multiples, cash positions, and anticipated M&As, we expect medium and small cap companies to outpace large caps.
• Companies with strong exports should do well.
• Among economic sectors, our three favorable sectors are energy (including MLPs), information technology, and industrials, and we anticipate greater exposure to all the three.
• Cash cushions will be shifting in greater percentages into commodity-based currencies (Canadian, Australian and New Zealand dollars, as well as Nordic currencies).
• Opportunities will appear for shorting particular sectors and/or countries. Any shorting position should be hedged with appropriate tools.
• Leverage tactics will be employed as in the past (e.g. in precious metals) and will continue to be monitored closely.

Feel free to call or email us if we could be of any assistance.

Happy New Year!

¹Composite performance results for our portfolios represent actual total returns for all full discretion accounts since 7/22/10 through 12/28/10.  The inception date is when we began tracking our strategies on a composite basis.  This performance is net-of-fee composite returns are calculated on a time weighted basis and include transaction costs, management fee and investment of dividends. Past performance is no guarantee of future results. Further information on performance is available upon request.

Performance data quoted represents historically achieved results and is no guarantee of future performance. Future investments may be made under different economic conditions, in different securities and using different investment strategies. The value of an investment may fall as well as rise. Please note that different types of investments involve varying degrees of risk and there can be no assurance that any specific investment will either be suitable or profitable for a client or prospective client’s investment portfolio. Investor principal is not guaranteed and investors may not receive the full amount of their investment at the time of redemption if asset values have fallen.

Performance is expressed in US dollars. Actual performance may differ from composite returns, depending on the size of the account, brokerage commissions, investment guidelines and/or restrictions, inception date and other factors. Care should be used when comparing these results to those published by other investment advisors, other investment vehicles and unmanaged indices due to possible differences in calculation methods.