We anticipate that you may be concerned about recent market volatility, events in the global economy and the impact this may have on your investment portfolio. Below you can find some information about the LOM Equity Growth Fund and the LOM Fixed Income Fund and how the funds have reacted during recent events.
For 2011, the LOM Fixed Income Fund is up 2.1%. Heightened stock market volatility and the consequent ‘flight to safety’ over the past two weeks has generally benefitted fixed income investments. U.S. Treasury debt and the highest quality industrial bonds have been the best performers as interest rates declined across the curve. Since the end of July, the benchmark 10 year U.S. Treasury yield has fallen to 2.2% from 3%. Falling yields equates to rising prices on bonds and with the portfolio’s average credit quality well above an ‘A’ rating most securities have had price gains so far this quarter. Amid the market turmoil, we find it encouraging that despite S&P’s downgrade of U.S. debt, investors chose U.S. Treasuries as one of the primary ‘safe haven’ investments this month bidding up prices. In addition to the rally in Treasuries, high-grade corporate bonds also performed well as investors continue to favor the strongest industrial credits as the result of an increasing awareness that many of the largest multi-national corporations possess very strong and improving balance sheets. We are looking to selectively add to high grade bond positions as opportunities arise.
Mortgage-backed securities and financial credits have so far modestly lagged the rally on concern over the possibility of a ‘double-dip’ recession and the potential impact this scenario might have on these more ‘cyclical’ fixed income sub-sectors. We, on the other hand, view the largest U.S. banks’ bonds as an attractive investment opportunity on a selective basis. For example, most of the major U.S. banks have made significant increases in their core capitalization ratios since the depths of the credit crisis, written off a substantial portion of their non-performing mortgage debt (albeit some still exists), have begun to see loan growth again in selected markets and have restructured and/or merged with other banks to create efficiencies. We remain positioned in the top tier financial credits and are opportunistically adding more. On mortgages, we are generally holding our existing positions which continue to contribute some of the highest current income yield to the portfolio. All of our mortgage-backed securities are paying on time and generally in line with the expected payment assumptions. We are avoiding lower grade credits in all sub-sectors and specifically in the financial sector as the best performing companies are presently offering excellent value without having to step down in quality.
Although the LOM Equity Growth Fund has continued to outperform its benchmark, the Fund has suffered losses as a result of recent market conditions. For 2011, the LOM Equity Growth Fund is down 5.2% while the benchmark is down over 6.7%. The LOM Fund’s focus on high quality companies has helped the Fund’s performance relative to the benchmark. For the trailing twelve month period, the picture is more attractive. The LOM Equity Growth Fund is up 4.3%, while the benchmark is up only 3.6%.
Times such as this reinforce the need to have a well thought-out asset allocation, and a diversified portfolio of high quality companies. The LOM Equity Growth Fund invests in quality companies because they typically perform better during times of economic and market distress. These companies have been able to grow their earnings and dividends in all types of economic environments and we expect this time to be no different. During the past quarter, one in which the U.S. economy grew at less than a 2% annualized rate, earnings growth for companies in the LOM Equity Growth Fund were strong, approximately 20%. We continually look for ways to upgrade and reposition the portfolio based on company fundamentals and our market expectations. To this end, we have been paring back cyclical exposure in the Fund for the better part of the last year, adding to more predictable companies.
We believe the LOM Equity Growth Fund is well positioned, diversified, and most importantly, invested in some of the best-managed and most profitable companies in the world. Companies in the portfolio like McDonald’s, Coca-Cola, and DuPont – to name a few – have positioned themselves over the past decade in such a way as to profit during times of economic uncertainty. It is with this knowledge that we can look forward with the belief that these companies will be earning greater profits over the next several years, paying larger dividends, and rewarding their shareholders.
