Today we share with you some commentary from our Q4 letter to investors as we recap 2011 and look forward to 2012.

The year 2011 was a challenging one for your equity investors as most market indices underperformed their historical averages.  Fortunately, U.S. stocks ended the quarter on a positive note as most major indices posted double digit gains for the period. 

It seems investors continue to focus on the three-ring fiscal circus in Washington and the European sovereign debt crisis.  These uncertainties continue to weigh heavily on investors and until there is some resolution on both fronts, the markets are signaling that a more defensive posture is in order.  However, despite these two negatives, corporate earnings in the U.S. are healthy and equity valuations are considered depressed by historical standards.  Eventually, we would expect the excessive cash invested in fixed income assets to be redirected into equities once interest rates finally begin to rise.  Moreover, with low expectations for stocks, modest improvement in the above factors could produce above average gains for equities in 2012.  

Evidence of leadership change continued to evolve during the fourth quarter of 2011 for both market capitalization and sector selection.  The shift away from more volatile asset classes such as small-cap and emerging market stocks into “safer” blue chip stocks (typically offering higher dividend yields) has become more prevalent.  With this shift comes a narrower list of “theme” opportunities within sectors such as Consumer Staples, Healthcare, and Utilities.  More than usual, we expect industry and stock selection to be a key ingredient in obtaining above average results in 2012.