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02/25/2010
2010: State of the Union
By
Edward L. Snitzer
These past two years have been extraordinary. From November 9th 2007 until March 9th, 2009, the S&P 500 declined 56.8% and from March 9th until year end 2009, increased 64.8%, volatility not seen since 1942, when Japan seemed to be winning the war, and prior to that, 1932 and 1937, the events of the Great Depression. It was a time when many investors, and many supposedly sophisticated investors, such as the Ivy League universities, managed endowments to big losses by owning the wrong investments and buying and selling at the wrong time.
In 2008, when the S&P 500 declined 37.6%, no investors avoided losses. The financial markets froze. All sectors of the market, except US Treasuries, declined in lock-step. PMA client holdings declined with the market in general. In 2009, however, the S&P 500 increased 26.5% with client portfolios doing much better.
PMA:
During the above turbulence, we are happy to advise that the overwhelming response of our clients to our advice during those terrible days was to “stay the course”, accept our advice and consequently reap the benefit of the 64.8% recovery. We retained 99.8% of our clients whose trust and loyalty has given us great comfort. We currently manage about 750 million dollars and have 26 non-profits representing about 20% of our assets under management.
We have previously advised that any long-term recovery of the economy and the financial markets is going to depend significantly upon the governmental response and have commented upon that response in prior mailings.
There has been, however, significant motion already by the Securities and Exchange Commission (SEC), whose claim to fame during these times has been its failure in the Madoff case, its inability, along with Presidents, Congress and the Federal Reserve, to foresee the crises, and by spending time on such important issues as the enclosed revision of Investment Advisors’ privacy notices. It has recently adopted a new rule in response to the Madoff matter requiring every client hereafter to receive, monthly, notices from any custodian holding client assets.
PMA from the day it opened for business has advised clients that its money would be held in custody by independent, separate, large banks, and that its money was as safe as the banks. We did not think we would live to see the day when that assumption might be open to question. We report that as of 12/31/09, 25%% of client assets are held by State Street Bank on behalf of no-load mutual funds using it as its custodian, 58% by Wachovia (now Wells Fargo, mostly Vanguard funds),10% by Bank of New York and the remaining 7% by PNC, Citigroup and a few other large bank custodians. It should be noted that even during the worse time of the crises, when Wachovia failed and was absorbed by Wells Fargo, there was no risk whatsoever to client assets, since under appropriate federal law, all those assets are segregated from bank creditors and held on behalf of the underlying owner.
These events, however, and the current governmental response, the most recent of which compels every no-load fund in your portfolio to mail you monthly statements (a Madoff driven requirement enabling you independently to compare what we report with what each fund reports), compels us to consider some alternative custodian arrangement. That mailing requirement cannot be waived by you, by us, or by the no-load fund.
Our investment strategy since 1982 has been to enable our clients to benefit, as a result of our management, from techniques employed by the largest pools of invested capital: diversifying over all sectors of the financial market with specialist managers in those sectors passing our very strict, disciplined and exacting requirements that have successfully proven its merit over the last 28 years. Depending on the size of your account, that resulted in PMA portfolios “hiring” between 10 and 20 or more “experts”. PMA finds those managers. We then control the risk of the overall client portfolio, by understanding the risk of each and every individual manager, and the risk of the entire portfolio, to create the PMA portfolio “risk” choices, of high, substantial, moderate, and small.
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