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First Quarter 2010 Quarterly Newsletter

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Picking Winners

When your TV shows a skier shooting a rifle, and there are no police involved, you know it is once again time for the Winter Olympics. Team USA performed remarkably well this year. Few expected that. Attempting to predict just which athletes would win their events proved difficult, if not impossible. Some examples:

Bode Miller
In 2002's Olympics, Miller won 2 Silver medals in alpine skiing. In 2005, he won the overall World Cup title, the first American to do that in decades. He was the Gold medal favorite in the 2006 Olympics. What happened? Nothing. He didn't place in any of the 5 races he entered. He did, apparently, enjoy the Olympic nightlife, and appeared unfazed when media criticized him for his unprofessional behavior. In 2007, Miller quit the US Team, and slowly sank in both fame and wins until 2009 when he completed his worst season on record, with no wins on the World Cup circuit. He was quoted: "The fire goes out after a while," and hinted at retirement. In early 2010 Bode asked to rejoin the US Team, and despite spraining his ankle, was granted a spot. But he was old (31), had gained several pounds, and was clearly out of shape. His 2010 Olympic result? He won the "full circuit" - a gold, silver and bronze medal - all despite his age, conditioning, and a double chin. Few would have predicted this outcome.

Sven Kramer
[No relation to our Chief Investment Officer (darn!)] This Dutch skater is the current world record holder in the 10,000 meter speed skating event, had not been beaten in three years, and was voted "Skater of the Year" two years in a row. He appeared to have won another 10,000 meter Gold medal in Vancouver, until it was learned that his coach had erroneously directed Sven to change lanes at the wrong time. He was disqualified.

Lindsey Jacobson
This US woman is the most successful snowboard cross rider in the sport's history, regardless of gender. She is a two-time World Champion, a five-time X-Games Champion, and a two-time SBX World Cup Champion. The only reason she didn't win the Gold medal in 2006 was because she had such a huge lead that she performed a "hot dog" move on the last jump by grabbing her board in the air. She fell but still managed to win the Silver. She was the odds on favorite to win Gold in Vancouver. Result? She fell in the semi's and never even got the chance to race for a medal.

As you can see, trying to pick Olympic winners is no cakewalk. But it still may be a lot easier than trying to pick a winning, actively-managed mutual fund. As wealth advisors, we are often asked by prospective clients why we don't use ratings services to pick winning mutual funds. After all, what could be easier than picking all 5-star Morningstar-rated mutual funds? That should be as easy as shooting those circular metal targets, 50 meters away, while lying on the snowy ground and trying to control your breathing and heart rate while squeezing the trigger. Picking winning funds is apparently harder than that. If one was to research the past and future performance of the top-rated funds, they would see that there is clearly no foolproof method of choosing which funds will be the winners of tomorrow. Want proof? Check out the charts below:

In both charts, the top 25% (1st quartile) of best performing funds from 2006-08 are reviewed. The left sides of the charts show that the winners in '06-'08 were from all four quartiles in the pervious three years' performance. In other words, there was no way to see in advance which funds had a better chance of being winners in the future. And what's worse, the right side of the charts show that picking the winners in '03-'05 gave you little chance of ending up with the winners for the next three years. This was the case in all asset classes tested. The bottom line of the study is clear. If you are picking mutual funds based on recent performance, you have more chance of underperforming the averages than having your "picks" continue to lead the way.

As you already know, we don't attempt to guess which actively managed mutual funds will win the gold medals of tomorrow. Rather, our clients own exclusive, pure no-load institutional mutual funds that allow for ownership of complete asset classes. We use these vehicles as building blocks to construct scientifically diversified portfolios which increase the ability to generate an excellent return consistent with the risk level chosen for your portfolio.

Trying to pick the winner of an Olympic event, and losing, may end up hurting your ego or perhaps your national pride. But trying to pick a winning mutual fund is as crazy as perhaps....trying to ski and shoot rifles at the same time. You might get lucky once in a while, but most of the time someone is going to get hurt.

New Office Opens in Charleston, WV

Speaking of picking winners, we are delighted to announce the arrival of our new financial advisor at Dixon Hughes's Charleston, West Virginia office. After searching for the right person for over a year, we found him. Jason Lunsford is a lifelong native of Charleston, and has over 10 years of experience as an investment professional. He received his BA from Concord College, his MBA from Marshall University, and has earned his Chartered Retirement Plans Specialist (CRPS®) & Accredited Asset Management Specialist (AAMS®) designations. Jason and his wife Stormy have a son and newborn little girl, and are both active in their church. Jason also gives his time to the Union Mission, Habitat for Humanity, and the Fellowship of Christian Athletes. Please tell your friends and colleagues in West Virginia that they now have a premier investment firm and advisor they can use for their wealth management needs.

First Quarter 2010 Asset Class Returns

The bull market, which started in March of 2009, roared past its one year anniversary date and showed no signs of fatigue. In spite of the obvious concerns of lingering unemployment, hyper deficit spending, healthcare bickering and other worries, improving economic fundamentals generated positive returns in virtually all equity asset classes. Consumers are spending money, and business spending also appears to be ramping up in the intermediate future. Clearly risks remain, but more important is the fact that the economy appears to be poised for a self-sustaining recovery.

The attractiveness of using a Modern Portfolio Theory investment approach was clearly seen this quarter. As can be seen in the table below, there were meaningful differences in returns of various asset classes. Generally speaking, during this quarter, Small beat Large, Value beat Growth, and Domestic beat International. Look at the Real Estate performances. International broke even, but domestic Real Estate hit double digits. Had we not owned pieces of some of these typically less popular asset classes, our clients would have not received the attractive returns they have experienced during both the last quarter and this bull market to date. This is the beauty of MPT, because while the total returns during full market cycles can be superior, the risk experienced in producing that return can actually be lower than a portfolio with less diversification.

Certainly, these heady market times will come to an end. Even in bull markets, one can expect multiple weeks, months and quarters of consolidation, and no doubt that will occur with the current bull market. The trick to attractive long term returns is to focus on the big picture and the long term investment goals that are the objective of your portfolio.

Springtime is upon us, and we hope you spend some time outdoors enjoying its beauty. But remember -- stick to picking flowers, and don't try to pick "winning" stocks or funds.


Frederick F. Kramer IV, JD
Chief Investment Officer