April 2005 Letter
This letter is to update you on the current market environment and the progress of our firm, as well as to reaffirm our investment philosophy. Covington’s mission is to provide unbiased, high quality investment management and competitive investment returns adjusted for the risk appropriate for each account. We believe a high level of communication and service is an important part of each relationship.
One of the most rewarding aspects of our business is working closely with our clients to provide a significant degree of confidence in their investment plans. Part of this process is to keep risk under control, yet at the same time provide competitive investment performance. At the present time, there are several issues that are cause for concern: terrorism, price of oil, trade deficits, weak dollar, level of consumer and government debt, low savings rates, possible housing price bubble, rising interest rates, etc.
On a more positive note, the overriding truth is that the U.S. enjoys a free market economy that is the envy of the world. We have a proven system of governance with effective checks and balances. This platform has led to excellent long-term stock market performance and there is every prospect, with the inevitable ups and downs, that this will continue. A list of positives influencing today’s market environment includes: strong corporate balance sheets that have led to rising dividend payouts and increased merger and acquisition activity; moderate levels of inflation and interest rates; the positive side of dollar weakness and the help it gives to U.S. exports and our multinational corporations; signs in the middle east that some countries are moving to more liberal and open societies; the seasonally strong fund flows into corporate and individual retirement plans.
No one can forecast the future, therefore, our investment philosophy must put primary emphasis on risk management. We believe capital protection on the downside is more important than upside performance. This is the bedrock of Covington’s investment philosophy. Risk management tools include asset allocation – the mix of stocks, bonds and cash equivalents; diversified portfolio holdings; security selection emphasizing quality and consistency; the absence of leverage; tax efficiency. No one can completely avoid market declines, but the above risk control mechanisms mute the downside and allow significant participation when the stock market does well. Peter Bernstein, one of Wall Street's best market strategists, says, "If you can survive the unforeseen storms, you will ultimately be successful."
We expect a trading range environment in the stock market for 2005. Valuations are full, but not excessive, and the tax structure for investing, particularly for dividends and capital gains, is the lowest since World War II. The economy and earnings continue to grow but at a slower pace. Interest rates are up, but not to the degree that they impair economic growth. It is time for patience and broad portfolio diversification as we continue to be on the lookout for investment opportunities that may be oversold for short-term reasons.
Thanks to all our new clients, Covington has quickly become a viable organization. We have a professional group of experienced people who have a depth of knowledge about financial markets, estate planning/trust administration, and taxes. We now have over $400 million of assets under management and will have a profitable first year. We strongly believe in our business model, which allows clients to work directly with their portfolio manager, who along with our investment team, makes decisions on their accounts.
As a firm owned by our employees, we can make unbiased investment decisions where the best interests of our clients will always come first. Most significantly, we appreciate your friendship and will always welcome your thoughts and comments.
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