a. Statistics

        Details of the overall portfolio are as follows:
 

 b. COMMENTS
 
         My oft-stated aim is to achieve superior risk adjusted returns without incurring excessive risk. The target that I use is a five-year average rate of return that exceeds the five-year average rate of inflation by 5% p.a.  It is important to note that I don't expect to achieve this in any given quarter or in any given year (all the data reflects completed years). The targets that we picked were based on a careful appraisal of the long-term performance characteristics of all the major asset classes and this is discussed at greater length in the Ibbotson data elsewhere in this report.
 
        The experience of the portfolio has been as follows:

        The section that follows is a reprint of the section from the investment policy statement that explains why we chose the targets that we have for the portfolios that we manage and what to expect on a long term basis in terms of returns and in terms of volatility.
 

C.  GENERAL FRAMEWORK

 In the last 75 years the following major asset classes have achieved annualized returns as follows (Ibbotson data 1925-1998):

        In the table on the next page, I have utilized the Ibbotson data to analyze the long-term characteristics of different portfolios ranging from the aggressive “A” portfolio to the very conservative “D” portfolio. The period measured is from 1925-1998 and our portfolio is measured form 1981–2001.

(S=Stocks, B=Bonds and C=Cash)
 

 On examining the data, we can see that the most aggressive portfolio yielded 9.9% p.a. over the period, but it also had 19 years when it suffered an average loss of 10% and it was decimated in 1973-4.  The most conservative portfolio had a much lower rate of return, but it too suffered an 11% loss in 1973-4. My clients, as a group, could not tolerate a worst case loss of the magnitude suffered by portfolios A and B in the bad bear market of 1973-4. It isn’t even clear that a loss of 19% as exhibited by the balanced portfolio C would be tolerated without significant changes in the operation of the portfolio. In the conclusion, I outline what we do attempt with our portfolio and what to expect in the years ahead.  The expectations lean heavily on the historical experience.

         Using an index (where January 1981=100) the portfolio has grown in the following fashion:
 

d. Conclusions

         Our portfolio will always be risk averse and will tend to be a balanced mixture of all of the major asset classes. It might be tempting to emphasize the areas that offer the highest returns, but, unfortunately, it is only possible to identify those areas after the fact. Most observers questioned ten years ago would not have had much success in choosing the winning and losing categories. One can argue that the simple goal should always be to overemphasize stocks, indeed to concentrate on them to the exclusion of other asset categories because of their proven status as the best performing asset class in the long run. This was a very popular argument last year and is typically a very popular argument after a long bull run. It is very important to remember that in the long run, returns on common stocks have averaged 11.1% p.a., that there is consistent reversion to the mean and that the long-term returns on stocks have been made in almost entirely in two eras; 1942-1965 and 1983-1999. In two equally long periods, 1925-1942 and 1966-1982, the returns were extremely low. As an example, in 1966 as pointed out by Warren Buffett, the Dow was 1,000 and it was also 1,000 in 1982.  I concur with him that we know few people who would have the patience to sit through 17 years where the Dow stayed at the same level.

        Our portfolio goals are fairly straightforward:  

• To maintain a balanced portfolio with characteristics that would be somewhere between the “C” and “D” portfolios in the Ibbotson data. It is currently at the high end of the range and is very similar to the “C” profile. We have consistently positioned the portfolio inside these parameters and we will not increase the common stock position above 50% of the portfolio without initially seeking client approval.

 
• To earn a long term return that exceeds the rate of inflation by 5% p.a. In the past 20 years we have earned a real rate of return of 7.1% p.a. and, thus, comfortably achieved our goal.

 
• To maintain a portfolio that has muted volatility.  We attempt to have a pattern of volatility exhibited by the “D” portfolio. We have comfortably exceeded our targets by experiencing only two negative years in the life of the portfolio (10%) with our largest annual loss in 1998 of 4.5%. We would expect to have negative years about 15% of the time in the future with the worst case loss equal to the worst case loss for the “D” portfolio. On an ongoing basis the portfolio has muted volatility (i.e. it is NOT subject to violent changes in its overall value).

         I am an investment advisor registered with the SEC and I would be glad to provide SEC registration data to any interested client.  This is very similar material to the information that I provided at the start of our advisory relationship. All of this material is also available on our web site (www.oakwoodgroup.com), which is lovingly tended by Nancy.