Monthly Portfolio Commentary
There are no changes to our model portfolios this month.

It has been a very difficult market environment since the onset more than a year ago of the housing meltdown and ensuing credit crunch. The overall stock market is down sharply from its highs last October, but the degree of damage has varied widely across the financial markets. This has created a lot of pain, but it is also creating opportunities. These are coming in a number of forms. At the individual stock level many managers we talk to are reporting finding exceptional opportunities—in some cases as good as they’ve ever seen. At the asset class level, we are seeing some areas getting more attractive on a relative basis, and are keeping a close eye on these.  

Fund Reports

Brandywine and Brandywine Blue: Trade checks is the term Friess uses to describe their interviews with a company’s management, customers, suppliers, competitors, industry experts, or anyone else who might offer valuable insights into a company’s earnings over the team’s forecast period (usually 12 to 18 months). Our recent contact with the team focused entirely on trade checks. Our objective was to revisit the trade-check process, dig into the nuances, and ensure that we understand how trade checks impact decision making. As a result, we gleaned some positive new insights, and remain convinced that the team is able to gain an information edge, which we believe is very difficult to achieve.  

Harbor International: Ducrest and Appleby consider rising inflation in many parts of the globe to be a risk to equities. However, they point to two mitigating factors. First, the huge labor pool of China and India should continue to act as a deflationary force on wages globally (relatively high wage inflation generally indicates that inflation expectations are taking hold in an economy). Second, the risk of wage inflation spiraling out of control in developed international markets continues to be low in their opinion.

Oakmark Fund and Oakmark Select: While the daily volatility can be taxing even for long-term investors like the Oakmark team, it has also created some opportunities. Nygren thinks the stock market as a whole is inexpensive, with price multiples below their long-term averages. Additionally, he says that valuation spreads have widened substantially and that “it takes very little in incremental news to make a huge swing in a stock price.” As a result, Nygren believes this is a better-than-normal stock-picking environment and he is finding ideas particularly in areas like financials and consumer discretionary, as well as some technology companies.

Emerging-Markets Inflation: Over the past several months, many emerging-market countries have seen a significant increase in inflation, mostly due to rising food and commodity prices. While the developed world is seeing inflationary pressures for similar reasons, the magnitude of inflation increases in many emerging-market countries is much larger and it has prompted us to take an in-depth look at this issue. As part of our research, we recently spoke to PIMCO’s Curtis Mewbourne, who is a member of the firm’s emerging markets team that manages PIMCO Developing Local Markets, a fund we currently use in our balanced models to manage the risk of a gradual but significant decline in the U.S. dollar versus emerging-market currencies.

Assessment of PIMCO’s Counterparty Risk: In light of widely publicized concerns about the possible failure of large investment banks amidst the continuing credit crisis, we recently revisited the issue of counterparty and credit risk with PIMCO. Most of the investment-grade bond allocation in our balanced model portfolios is devoted to PIMCO Total Return and we also currently have a tactical allocation to short-term emerging-markets local-currency debt through PIMCO Developing Local Markets.