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First Quarter 2005 Client Letter

 

April 12, 2005

 

 

Dear  Client:

 

First quarter:   Major stock indexes took it on the chin in the first quarter.  For US stocks the Dow Jones Industrial Average (DJIA)  and the S&P 500 were both down 2.6% and the Nasdaq Composite (Small Cap Stocks) was down 8.1%.  In our US Dimensional Funds (DFA) five of the sixteen US funds held their own with tiny gains while eleven lost ground.  International Equity portfolios was the place to be so far this year.  Fifteen of the sixteen DFA international funds were up.  DFA’s Japanese Small Co. portfolio was up 8.01% and DFA’s International Small Cap Value portfolio was up 6.65%.  The results of the last three months continue to convince us that we are on the right track.  We continue our role of educating and advising our clients about two important factors in successful investing:  use high quality Dimensional Funds and build a portfolio on several asset classes using Modern Portfolio Theory. 

 

Inflation:  Gas costs over $2.25 a gallon!  Heating oil is at $2.25 a gallon!  Adjusted for inflation, it is more than the gas price during the oil embargo of the 1970’s.  The latest news articles suggest that gas will be even more expensive.  China is printing money like it is going out of style and the rest of the world is awash in currency liquidity.  The United States has also printed tons of money in order to “reinflate” the US economy after the last recession.  It looks like inflation at some level.  What are we to do?  We are reminded of an ancient Chinese curse: “May you live in interesting times.”

 

Investments:  The big players in the investment banking business are being accused of wrong-doing.  Even the eponymous Warren Buffet has been summoned for questioning by the SEC about questionable insurance transactions.  One newspaper article asked if the American Insurance Group (AIG), the biggest insurance company in the US,  would be the next Enron.  It seems that many big corporations are having “accounting problems” again.  There is still much turmoil in the financial and investment business.

 

Long Term:  There are major changes going on in the US economy at the present time.  Ohio, which has lost more jobs than any other state since the year 2000, is experiencing a pile up of unsold entry level and moderately priced homes.  Michigan and other auto assembly states will soon experience the turmoil that comes when the big auto makers shrink their factories to meet falling sales of US cars and pickups.  Foreign competition and out-of-control medical costs are cited as major culprits.  Each GM vehicle has $1,525 of health care costs in it.  I think we can expect more change.

 

Good News:  If you have gotten this far in our client letter, there are good things happening: 1) Job creation, while not robust, continues with over 100,000 new jobs added last month; 2) Consumer confidence is holding firm; 3) Home mortgage rates fell during the past week to 5.48% for a 15-year fixed-rate loan; 4) First-time jobless claims plunged last week pointing to a busy Summer.

 

Our Outlook:  In spite of all of the current news, our course of action remains unchanged.  We believe in investing for the long term and we will not focus on the short term climate that we are in.

 

Following is a representative sample, as of March 31, 2005, of DFA funds in the asset classes covered by DFA and currently recommended for use in our client portfolios. This is not a complete list of all DFA funds, and your portfolio may or may not contain all of these funds.

 

 

Fund Name/Ticker

First Quarter

One-Year

Five-Year

Ten-Year

US Large Co. Institutional Index (DFUSX)

-2.12

6.59

–3.27

 N/A

Tax-Managed US Equity (DTMEX)

-2.00

6.85

N/A

N/A

US Large Cap Value III (DFUVX)

0.22

14.15

10.09

13.60

Tax-Managed US Mktwide Value II (DFMVX)

0.58

14.02

6.49

N/A

US Micro Cap (DFSCX)

-6.43

4.06

8.58

14.85

Tax-Managed US Small Cap (DFTSX)

-4.45

5.85

6.13

N/A

US Small Cap Value (DFSVX)

-2.90

13.39

16.70

17.04

Tax-Managed US Small Cap Value (DTMVX)

-2.95

10.76

13.64

N/A

Real Estate Securities (DFREX)

-6.93

9.72

19.69

14.28

International Value III (DFVIX)

0.14

20.73

9.77

8.87

Tax-Managed International Value (DTMIX)

0.91

19.64

8.95

N/A

International Small Company (DFISX)

5.02

21.55

12.48

N/A

International Small Cap Value (DISVX)

6.65

26.17

18.43

8.54

Emerging Markets (DFEMX)

0.85

22.45

5.32

6.55

Emerging Markets Value (DFEVX)

2.80

29.49

10.98

N/A

One-Year Fixed  Income Portfolio (DFIHX)

0.18

0.52

3.51

4.64

Notes: Returns for more than one year are annualized. “N/A” appears where returns data did not exist for the entire period. We hope you will find the above information of interest, and that you will use it in the spirit it is provided. While not meant to serve as a basis for your portfolio assessment, results from one year or less are useful as a tool to better understand how frequently such short-term market fluctuations occur, and yet how unpredictable they are. Likewise, three- and five-year returns demonstrate that different asset classes can be in or out of favor for longer periods, but again without a reliable basis for prediction. This in turn provides further evidence that clients should build entire portfolios and focus on their portfolio’s total return rather than on individual asset classes.

 

 

Best wishes for a fun-filled Spring,

 

 

 

 

Coston and McIsaac Investment Advisers, LLC


 

 

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