March saw tremendous volatility caused by the unfortunate earthquake and tsunami in Japan, followed by the partial meltdown of nuclear reactors in Fukushima and concerns of spreading radiation. The Libya ‘situation’ took center stage in the global political front with the NATO forces commencing enforcement of a ‘no-fly’ zone causing oil prices to continue to skyrocket upward. Despite the initial global market reaction of falling equity prices and a flight to quality bond market rally, the domestic equity markets bounced back with tremendous strength to finish the month in positive return territory (S&P +0.04%, Dow +0.91%; and Russell 2000 +2.95% for the month of March). Equity markets were particularly buoyed by the surging merger and acquisition activity headlined by the proposed AT&T acquisition of T-Mobile and the Berkshire Hathaway acquisition of Lubrizol. 10 year US Treasury yields bounced off their lows of 3.15% mid-month to finish the month at 3.44%, just 1 basis point above where they started the month. The Barclays Aggregate Bond Index posted a +0.21% gain, bringing the total return for the 1Q11 to +0.58%.
Amidst this volatile backdrop, the Limited Risk Portfolio returned +0.03% for the month of March. A defensive posture was taken in the portfolio after the Japan earthquake and resultant tsunami given the uncertainties of the effects it would have on global economic growth and the supply chain for manufacturers that rely on parts supplied by Japanese companies. The equity exposure was scaled back significantly and reallocated to cash which led to the Limited Risk Portfolio missing some of the upside that came from the equity market bounce, but gave the portfolio a much lower risk profile for the month. Still the overall portfolio was able to attain positive returns for the month with strong performances from exposure to the Indian equity market (MINDX +10.2%), which bounced from two prior months of weak emerging market performance, and exposure to gold (GLD +1.6%) and commodity indexes (DJP +2.0%).
The Bond Portfolio returned -0.09% for the month of March as duration has been scaled back to 2.6 years which is considerably lower than the Barclays Aggregate Bond Index duration of 5.2 years. Treasury and mortgage exposure has been underweighted in the Bond Portfolio in anticipation of a rise in bond yields ahead of the June end of the QE2 Treasury bond buying program by the Fed, and inflationary pressures from the continued surge in food and energy prices. April will be an interesting month as some Fed officials have already made comments in the public about their concerns with keeping monetary policy as accommodative as it has been and the European Central Bank is expected to start raising short-term interest rates at their April 7 meeting in response to inflationary pressures in Europe.
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