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COLUMBUS, Ohio (January 2, 2002)
Dear Friends and Investors,
2001 was an exceptional year for Prospero Funds and our investors, as our core equity product produced an average return of 16.3% for the full year, net of all trading costs and management fees. Meanwhile, the broader markets struggled, with the S&P 500 declining (11.9%) and the NASDAQ dropping (21.1%) for the year. Versus our S&P benchmark, Prospero's performance produced an extra $141,000 for every $500,000 invested during 2001. These returns augment 2000's 19% outperformance versus the S&P 500. We are particularly proud to have generated substantial positive returns for our investors each of these last two years, while many other investors endured the pain of a "bear market". In fact, the NASDAQ closed the year more than 60% off its all-time highs set in 2000 and the S&P finished more than 24% lower than its historical peak. So how have we generated these returns?
WE MANAGE RISK
In addition to looking for the best investment values available for our clients, Prospero constantly evaluates the risk profiles of individual holdings and our separate account portfolios overall. Deviations from our benchmark are monitored closely and excessive sector exposure is limited. This reduces the fluctuation of our returns and provides investors with protection against rapid declines in the portfolio.
To capitalize on the strategies employed in our separate account business since 1992, Prospero is enhancing its product offerings by launching three funds during the next several months. The funds, all named after Shakespearean characters, will mirror our separate accounts in style and have the following investment objectives:
1) Antenor Fund: Invests in 20 to 30 stocks, focusing on companies trading at significant discounts to intrinsic value. Our historical track record of this style is attached (traditional equity product).
2) Beaumont Fund: Invests in the same long stocks as Antenor, but 20-30% of this fund is invested short (betting on a stock to decline in price), providing valuable hedging to protect against declining markets.
3) Curan Fund: Invests in the same long stocks as Antenor, but 100% of the dollar value invested long is matched up against an equivalent dollar value invested short. Curan Fund is therefore market neutral, meaning its returns are uncorrelated with the market. Pro forma returns for the Curan Fund strategy are available on our website, referred to as Prospero's market neutral hedge fund.
Since markets generally increase in value over time, many of our clients elect to invest in the Antenor Fund strategy. Others, particularly those who want to be more conservative or feel that the markets are overvalued, invest in the Curan Fund or if they desire some hedged market exposure, the Beaumont Fund.
Prospero's objective is to provide our investors with high annual rates of returns, primarily in the form of long-term capital gains, over an extended number of years. Prospero follows a highly differentiated investment strategy focused on growing companies with (i) strong customer loyalty, (ii) recurring revenue business models, (iii) sustainable competitive advantages, (iv) potentially high cash returns on invested capital, and (v) excellent management teams. We believe that most companies do not meet these demanding criteria, but the few that do have the potential for superior growth and value creation over many years. Prospero invests in such companies, but only when we believe the shares are trading at a discount to intrinsic value and that this intrinsic value is likely to increase significantly over the next four years.
We have continued to build our team and business in an effort to better serve our investors and generate the highest possible returns within the risk parameters of our investor base. We thank you for your support and look forward to working with you in 2002.
Kind Regards,
Ben Bornstein
President