October 2010 Client Letter

One of the more surprising developments this year has been the relatively strong performance of most bonds and bond funds. One of our firm’s largest holdings, Vanguard GNMA, has a year-to-date total return of 6.5%.  This return comes on the heels of steady performances in 2009 (up 5.29%) and 2008     (up 7.22%).

We invest in Vanguard GNMA expecting the fund’s total return to approximate the fund’s current yield.  By example, if Vanguard GNMA’s SEC yield is 3.5%, we would expect its year-end total return to be approximately 3.5%. This year, the fund has exceeded our expectations by posting a total return several percentage points higher than its yield.  The pickup in appreciation has been an especially welcome development in today’s low-yield environment.

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