Annual Report for 2006

In 2006 we had a total return of 6.1%. The value of a unit increased from $13.097 to $13.894. While our return was positive, it lagged behind most of the major market indices. For the first time, we are slightly behind the S&P 500 for a five year period (5.9% vs. 6.2%). Portfolio turnover was about 10%. You can find the annual report for Moose Pond Investors here.

More information about the performance of individual stocks in 2006 can be found in the diversification report and performance report.

How Are We Doing?

So how are we doing so far this year on return? The answer is OK, but not as well as we should be doing. We have an internal rate of return of 7.3% year to date. (Internal rate of return takes into account when we receive funds. It is a more accurate measure of performance.) 7.3% is in line with the Wilshire Large Growth Stock index which is up 8.5%. However, some of the broader market indices have done much better, such as the the Wilshire 5000 which reflects the total market, is up 13.2% for the year.

How we are doing depends on the index to which we compare our portfolio performance. Here is a table showing year to date return data taken from the Wall Street Journal as of Wednesday, November 22.

Note that value stocks and small stocks have out performed both large and growth stocks. This has been a trend for a number of recent years. If you want to compare investment returns by asset class (large, small, value growth, etc.) take a look at the Callan Periodic Table of Investment Returns.

As you can see from the matrix on the right, our portfolio is weighted heavily toward large growth stocks. It was only some recent purchases of GYI and VTI that improved our style balance. Large growth stocks have not done as well as the smaller stocks and the value stocks this year. We need to include more small and medium size companies in our portfolio. It may be inconsistent with an NAIC approach, but we also need some value stocks. Value stocks are generally defined as ones have lower price to earnings or low price to book ratios.

The next two graphs compare our portfolio return over the past 12 months with two Morningstar indices. The first graph compares our return to the Morningstar large growth index. Our return tracks that index fairly closely.

The second graph, below, compares our return with the Morningstar U.S. market index. This is a broad index that includes all stocks. We are not doing as well as that index.

+GYI +WAG -ACS -MMC

Based on our email discussion, we sold Affiliated Computer Services and Marsh & McClennan Companies. We took an initial position in Getty Images and Walgreen Co. (The links will take you to the stock selection guide we used.) We can purchase more of these when either of these stocks dip in price.

These two additions have raised the overall quality rating (now 70.3) and the projected average return (12.3%). See portfolio dashboard here.

Looking at portfolio diversification, we are diversified across seven sectors. We are still weighted a little too heavy in the health care sector. Here is table from Morningstar showing our actual diversification.

Walgreen Company (WAG)

SSG and PERT | Google Stocks | Company Website

We purchased an initial position in Walgreens on November 22. Here is the stock selection guide we used for the purchase decision.

Sold Getty Images, Inc. (GYI)

SSG and PERT | Google Stocks | Company Website

We sold our position in GYI on August 28, 2007. The price was $31.04. The reason for selling was declining earnings prospects. GYI is facing stiff competition from other sellers of image.

We purchased an initial position in Getty Images on November 22, 2006. Here is the stock selection guide we used for the purchase decision.

Sold Affiliated Computer Svc

Affiliated Computer Services (ACS)
SSG and PERT A (12-26-2005) | Google “Stocks: ACS” | Company Website

We sold Affiliated Computer Systems on November 11, 2006 at $29.74. We had a long term gain of $13. We originally purchased ACS in November 2003.

Rationale for sale: ACS seems unable to move forward. Click here for a SSG. As the chart below shows, it seem it has been unable to grow its revenue and earnings in any significant way over the past 4-5 quarters. It is now mired in an options pricing mess and will have to restate its earnings. ACS failed to fully report its current quarter and instead offered up instead “non-GAAP” (GAAP = generally accepted accounting principles) metrics of performance. Its TTM pre-tax margin (10.5%) is below the industry average (15.8%). Morningstar still rates ACS 4-stars but also rates it F for stewardship.