First Quarter 2011 Market Commentary

Despite the calamity in Japan and turmoil in the Middle East, world stock markets were resilient during the first quarter of 2011. The Tsunami in Japan serves as a powerful reminder that the impossible can and does happen!  It also reinforces that despite our wisdom, we are not very good at predicting the odds of future events.

These unforeseen events demonstrate the uncertainty we face every day.  And because we cannot predict the future, it's important to incorporate a disciplined risk control strategy into the construction of your portfolio.

Mark Twain provided some insight for all investors to heed: "It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so..." that leads to trouble. Overconfidence is a common source of investment failure. 

A risk controlled approach will rarely provide you with bragging rights at your next party but it will - in all likelihood - lead to the long-term survival of your portfolio.

One of the realities stemming from the 2007-2009 market correction is that some investors who were too heavily weighted in stocks or other risky assets pulled out of the market as the correction hit increasingly greater pain thresholds.  Many retail investors have yet to re-enter the market solidifying those losses as permanent losses.  These investors would have been better served with a more conservative portfolio that limited their downside exposure to an acceptable level; a level that would not have required that they abandon their investment strategy at what likely turned out to be the worst possible moment! 

For the first quarter of 2011, our composite gained 3.8%; the S&P 500 gained 5.9% while the Lehman Aggregate Bond Index gained 0.4% in the comparable period.

As the charts below demonstrate, the range of quarterly returns among the various equity sectors narrowed for the overall market. Energy was the stand out sector during the quarter generating a 15% return. 

Positives: Positions that added to our composite performance during the quarter included over weighting Energy stocks, Commodities including Silver, Small-Cap stocks, Mid-Cap stocks & Australian stocks.

Negatives: Positions that detracted from our quarterly performance were over weighting International stocks in general, Emerging Market stocks, Technology stocks, U.S. Long-Term Treasury bonds & Municipal bonds. 

Source: Surz Style Pure®  

Some of our defensive positions designed to control risk hurt our composite's performance in the first quarter of 2011; Treasury Bonds & Municipal bonds incurred losses during the quarter. Nonetheless, we believe these securities serve an important role within a diversified portfolio. We continue to favor preferred stocks over taxable bonds to reduce exposure to future interest rate increases. As we have stated in the past, the Federal Reserve continues to subsidize risk assets by artificially holding short-term rates at unprecedented lows. 

When the Federal Reserve reverses course, we feel that short-term rates are likely to rise sharply handing bond investors losses.  

Disclosure: Our Firm's composite return is calculated using a dollar weighted return on investment or (IRR).  It includes every client account we managed during the reporting period.  Our composite asset allocation varies in the range of 20%-40% bonds and the balance to stocks and other assets including commodities & real estate.  Our returns are reported net of all fees and include dividends and interest earned in client accounts during the reporting period. The information and statistical data contained herein have been obtained from sources we believe to be reliable.  Indices are not available for direct investment and do not include the costs of buying or selling securities or investment management fees.  Indices are unmanaged, hypothetical portfolios of securities that are often used as a benchmark in evaluating the relative performance of a particular investment.  An index should only be compared with a mandate that has a similar investment objective.  The opinions expressed are those of Century Capital, LLC as of March 31, 2011 and are subject to change.  There is no guarantee that the forecasts made will be obtained.  This material does not constitute investment advice and is not intended as an endorsement of any specific investment.  Investment involves risk.  Investing in foreign markets involves current and political risks.  Information and opinions are derived from proprietary and non-proprietary sources.  Please note that investing in the stock market involves risk and no strategy can mitigate the risk completely.