Quarterly Newsletter: March 2007

Click here to view the Index Returns for 1st Quarter 2007
 (PDF, 237kb)

Markets Up in Spite of Single Day Drop
All major asset classes delivered modest but positive returns in the first quarter. Equity markets took a tumble in late February, the Dow giving up nearly 5% in value on a single day. Most analysts cited problems with Chinese markets (a 9% single day decline) as the triggering event for that fall. But by quarter-end, markets had rebounded and the drop seemed a distant memory.

Small Cap US equities and International stocks continued their outperformance over Large Cap. Real Estate Investment Trusts continued to post solid gains. Bonds provided just-positive returns.

Arbor's Evolving Tool Box
2008 will mark ten years of business for Arbor Investment Advisors. It's both gratifying and incredible to us that we've been in business that long. Assets under management now approach $200 million while client relationships total over 130.

We have experienced a wide range of markets during this period-up, down and sideways. Through it all, our investment philosophy has not changed: Construct an asset mix appropriate to each client, invest in low cost/tax-efficient vehicles, and maintain the discipline through rebalancing to targets.

However, we are constantly on the lookout for new and better securities and investment vehicles in a dynamic market. While we avoid investment fads, there have been several enhancements in the investment menu we utilize for clients:

• Multi-Manager Funds – When we began our business, we contracted with the Frank Russell Company to access their multi-manager fund complex. Russell is a pioneer in selecting and combining managers for institutional investors. Using this same discipline, they have constructed actively managed mutual funds in which independent firms selected by Russell are responsible for a portion of the portfolio.

  These funds give our clients access to top institutional managers that are diversified by investment style, coving the major asset classes. Russell monitors and occasionally replaces these managers.

• Traditional Index Funds – Early on, we recognized the value of utilizing passive investments, noting that many large institutional investors utilize this strategy for a least a portion of the portfolio. The rationale is to access exposure to each asset class while reducing expenses and avoiding taxes through active trading. Traditional funds such as the Vanguard 500 Index fund have been extremely popular for this purpose.

• Exchange Traded Funds – Investment firms improved upon the traditional index fund with ETFs, which are simply a basket of securities that trades as one. The key benefits are intra-day liquidity, generally lower expenses and improved tax efficiency. By their construction, ETFs help avoid capital gain distributions common in mutual funds when other investors redeem their holdings. The Barclays Investment Group has been very active in building these funds through their iShares products.

• Floating Rate Securities – When the Fed initiated its campaign to raise short term interest rates in June of 2004, we began investing in floating rate securities (non-investment grade bank loans). Counter to investors in a traditional fixed rate bond portfolio, investors in floating rate securities applaud increases in short term interest rates. Clients have indeed benefited from rising yields in this portion of their portfolios as the Fed increased rates 425 basis points (4.25%). Given their attractive yields, low volatility and low correlation to other asset classes, non-investment grade bank loans are a compelling long term holding in most portfolios.

• Fundamental Index Funds – Last year, we began investing in funds that track a fundamental index rather than the traditional cap-weighted index. Robert Arnott and his colleagues at Research Affiliates created this alternative approach which is now available via ETFs (see our October 2006 newsletter). We believe these funds will provide clients attractive returns over the long term.

Summary – The more things change, the more they stay the same. The investment philosophy must be constant: Asset Allocation is key. Investment firms will continue to offer new and enhanced investment vehicles for our review and possible use. Our job is to stay on the steady course, while accessing the best opportunities available for our clients.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this newsletter, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Arbor Investment Advisors, LLC. Please remember to contact Arbor Investment Advisors, LLC if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. Please also advise us if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. A copy of our current written disclosure statement discussing our advisory services and fees remains available for your review upon request.

Return to Newsletter page