November 2010 Client Letter

In the early 1980s, the stock market’s tank was fueled up and ready to roll. Short-term interest rates had topped 19% by January 1981. In October 1981, 30-year mortgages were 18%. As interest rates began a two-decade secular decline, the stock market exploded. From August 1982 through March 2000, the S&P 500 returned an amazing 19% a year, nearly double what it had returned the previous five decades. A whole generation of investors grew accustomed to a seemingly endless run of asset growth.

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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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