Insights on the Current Financial Markets
January 15, 2009 | An Ideal Environment for Absolute Returns

Navigating Financial Armageddon
Eh…What Just Happened?
Down Go The Banks
An Ideal Environment for Anchor Absolute Returns
New Absolute Return Portfolio: Terras
It’s Never Too Late for a Winning Game Plan

For me, writing about the financial markets often requires a little creativity. Opining on complicated financial structures, or providing color to market events usually means employing some hyperbole or anecdotal storytelling. The events of 2008 require no illustrations. The facts themselves are black and white, telling a story almost too wild to believe.

One brief look at a short list of all that investors had to face in 2008 makes one realize we are living through truly extraordinary times.

2008: Navigating Financial Armageddon

First, a look at the price declines.

Index Price Destruction:
S&P 500 Index for 2008: -38.5%*
Dow Jones Industrial Average for 2008: -33.8%
NASDAQ Composite Index for 2008: -34.7%

Dow Jones Industrial Average lost -33.2%, the third worst year in the history of the Dow since being inaugurated in 1896.

It gets even worse for those who were relying on traditionally "blue chip", dividend paying sectors like Financials.

Financial Stocks declined -52%*
Banks (those that survived) -69.5%*

Even trying to hide in commodities and gold didn’t help as Precious Metals Stocks declined -28.5%, and Crude Oil Futures ended 2008 with a decline -53.6%, a -73.6% decline from the highs seen in July.

The only asset class to show positive results for 2008 was U.S. Treasury bonds. The 30 Year bond surged in the fourth quarter, ending the year +18.6%.

*Source: QuotesPlus
*Source: eSignal

Eh... What Just Happened?

During the Bear Market of 2000 – 2002 it took the S&P 500 roughly two years to lose -50% of its value. Starting in October 2007, the S&P declined -51% in just 13 months. What could possibly cause such a financial catastrophe?

Here is a short list of a few of The Stories we awoke to in 2008.

Bear Sterns Shareholders Wiped out. (Full Story)
157 Year Old Investment Bank Lehman Brothers Files for Bankruptcy (Full Story)
Even Cash Isn’t Safe: Oldest Money Market Fund in the Country Collapses (Full Story)
Merrill Lynch Shares Drop -35% In a Week- Desperately Seeks Lifeline From Bank Of America (Full Story)
Federal Government Takes Over AIG in attempts to avoid a financial system collapse. (Full Story)
Freddie Mac and Fannie May Lenders Seized by US Government (Full Story)
Automakers face Bankruptcies, stocks at values not seen since 1950 (Full Story)
Congress Stumbles and Bumbles to Find a Solution the Financial Mess (Full Story)

Down Go The Banks

An incredible number of banks failed in 2008, creating further distress and panic for those who held deposits. There are few things more unsettling for Americans than news of their bank going under.

25 in all, it’s a number not seen since the 1990 Savings and Loan crisis.

The events of 2008 will be studied for years. Hundreds of companies went bankrupt. Millions of jobs were lost. Trillions in wealth were destroyed. Fortunately for Anchor Capital and our clients, our risk management and active investment strategies prevailed.

An Ideal Environment for Anchor Absolute Returns

Little did we know in 2007 how important an Absolute Return strategy would be in the coming year ahead. Of course one can never use the past to perfectly model the risk and opportunities that will be seen in the future. But our years of historical modeling and testing served us well during the financial storm of 2008.

Since first offering our flagship Stratus Absolute Return portfolio in April of 2007, Stratus has returned -2.8% net of fees versus a decline of -39.5% for the S&P 500 Index through 2008. While the majority of America now has -40% less wealth than they did a year and a half ago, our quantitative models were able to shelter our clients from the majority of the market’s malaise.

New Absolute Return Portfolio: Terras

Sometimes the best ideas come from your clients. By far the most popular requests from clients in 2008 was an equal combination of our Stratus Portfolio (mostly long/short equity) and our High Yield program. As it turns out, it’s a great idea, and a nice addition to our portfolio line up. So in response we are announcing a fourth portfolio in our Absolute Return Series: Terras. With Alpha High Yield our most conservative portfolio, Terras will represent our second most conservative portfolio, made up of roughly 50% Long/Short Equity and 50% Long/Short Fixed Income strategies.

Below are the results that would have been achieved with Terras utilizing net of fee, actual return data from both Stratus and Alpha High Yield (previously named "Long/Short High Yield").

ALPHA HIGH YIELD RESULTS, Net of fees:

	2008	Inception*
Hypothetical Terras Portfolio	-1.1%	+7.8%
Merrill Lynch High Yield Index	-38.5%	-39.5%

* Hypothetical returns for the new Terras portfolio. Returns illustrated are derived from an equal combination of actual Stratus and Alpha High portfolios, net of all management fees and expenses.

For more detailed risk return information or to inquire about Terras, click here.

It’s Never Too Late for a Winning Game Plan

After living through 2008, the single biggest challenge most investors are faced with is "What Now?" The temptation is to entertain thoughts like ...

"I'm just going to hang in there, I’m so far down now, how much more can it go?"

Or

"I’m a long term investor. In the end, everything will be fine."

Or my favorite...

"It’s only a paper loss unless I sell."

I am reminded of a favorite market quote: "Every investor is wrong at some point. The real crime is in staying wrong."

2008 is now behind us. If your investment strategy failed you in 2008, so be it. But don’t make the same mistakes in 2009. We won’t always get it right, but the current environment is ideally suited for Absolute Return managers like Anchor Capital. Just like 2008, 2009 will be filled with high volatility, high emotion and incredible opportunities to capture rising AND falling prices. It is a ripe environment for those who are prepared.

We plan on taking advantage of those opportunities, and are already prepared with the tools and the strategies to accomplish positive returns this year.

Here is to a prosperous new year.

To find out how to put Anchor Capital portfolios to work for you, click here.

Until next time,

Eric Leake
Chief Investment Officer,
Anchor Capital Management Group, Inc.
http://www.anchor-capital.com

Chief Executive Officer,
Anchor Research, LLC.
http://www.anchor-research.com

Anchor Capital Management Group, Inc., is a Securities and Exchange Commission Registered Investment Advisor. Opinions expressed are not to be construed as a solicitation to buy nor sell securities. *Anchor Capital utilizes a tiered fee schedule that offers lower management fees to accounts with higher balances. Any investment returns presented are calculated gross of fees utilizing actual accounts which represent a model strategy. Individual returns may vary substantially from those presented due to differences in the timing of contributions and withdrawals, account start dates, and actual fees paid. Past performance is not a guarantee or indication of future results. Presentation is for informational purposes only and no guarantee is made as to the accuracy of this information by Anchor Capital Management Group, Inc.