2009 proved to be a stellar calendar year in the investment world.  Even after the Q1 plunge in stocks, the broad market returned over 25% to investors by year end.  Measured from the March lows, the market returned over 67%!  FSG client portfolios had similar returns.  We suffered heavily the first 2 months of the year as we were (predictably) early and continued to buy into a falling market.  By early March when the market bottomed, we were heavily invested in financials, technology, and high yield bonds.  These positions gave us a double digit lead over the market for most of the year.  As the market approached fair value (at and above S&P 1000), we pared our total exposure which allowed the market to catch up as it continued to advance another 10%.  The end result was moderate outperformance (1.5-2% net to clients after all fees).  We are currently positioned for a market that we expect to bounce around in a narrow trading range for some time.  We now hold core equity positions of about 50% of portfolio and are tactically trading around those using ETFs to take advantage of the recent volatility. 
 
Fixed Income client portfolios had similar returns of 23% after all fees (tax-deferred accounts fared even better accruing gains near 28%).  Our core Fixed Income strategy involved overweighting high yield corporate bonds.  The fear of total economic collapse had caused the yield levels in this space to skyrocket.  When our analysis concluded that the world, in fact, was NOT going to end, we took advantage of a risk-reward ratio that may have been a once-in-a-lifetime opportunity.  Though we may not see near 25% real returns in the fixed income world anytime soon, over the last 10 years, this portfolio has proven to be our true star.  The primary reason is the limitation of losses.  Although our Diversified client portfolios suffered significantly less than the market in 2008 and are currently within 10% of their all time highs, our Fixed Income portfolios lost almost nothing.  This allowed clients in these portfolios to currently be well above their all time highs.  I've included the chart below to illustrate the importance of defense.

"Getting back to even" seems to be the catch phrase du jour.  For most, I suspect "even" to mean 'all-time highs.'  Just as I suspect the investor who indexed their portfolio to the S&P 500 10 years ago and now has a 0% return to show for it would argue that "getting back to even" is not the long term goal of investing.  Fortunately, our job does not end when our clients "get back to even."  Instead, we continue through all the noise to do our best to consistently deliver risk adjusted returns that (net after all fees) outperform our benchmarks over the long term.  Unless we can do this, our clients would be better off indexing to the S&P 500 and not have to overcome the "fee hurdle."  We are proud that we have been able to offer clients more than a "Lost Decade."
 
All returns presented are net to clients after all fees as of 12/31/2009

Longtime readers know that we prefer to present our results over a full market cycle to minimize distortion with respect to investment style and reporting period.  Here we have presented the standard 10yr report which encompasses multiple bull and bear periods.  Considering this was a decade where stocks went nowhere, we thought it an interesting comparison.  That said, we have not forgotten our own sermon; beginning and ending dates of reporting periods can greatly distort the apparent skill of any particular money manager.  The "Oracle of Omaha" made similar remarks in his most recent letter to shareholders concerning distortions in reporting which prompted me to perform another comparison just for fun.  I've used Berkshire's Class A shares as a proxy for performance.  (Those who read his letter may argue that Mr. Buffet uses book value which looks better during this period.  Unfortunately, our  chance to get a piece lies in stock.)

What a difference a year makes! 
 
We hope this letter finds you well.  It is hard to believe we are already into March.  
 
-Christopher Kendzierski