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NEWPORT BEACH, California (July 18, 2005) - Prospero Capital achieved an all-time high in total assets and performance through July 15, 2005. By comparison, the S&P 500 Index is flirting with 4-year highs (meaning 0% return for the last 4 years!) and remains 15% below August 2000 peak levels. In the month of June, the power of Prospero’s hedging was most evident in the strong net returns of Beaumont (long/short) and Curan (market neutral) in a flat market. As of June 30, 2005, Prospero’s performance was consistently strong in both the short and long-term, as illustrated in the table below. Annualized net returns (through 6/30/05):
| Antenor | S&P 500 | Beaumont | Curan | |
| June '05 | 0.6% | 0.1% | 1.4% | 1.9% |
| YTD (-7/15) | 3.1% | 2.2% | 2.9% | 1.8% |
| 1-year | 7.7% | 6.3% | 6.0% | 4.6% |
| 3-year | 8.5% | 8.2% | ||
| 5-year | 7.5% | (2.4%) | ||
| Inception (1997) | 12.9% | 7.4% |
In response to investor feedback, we are changing the format of our newsletter communications: going forward, rather than focusing exclusively on reporting performance numbers, we will now begin to provide a more detailed analysis of our investment positioning and expectations for the upcoming period.
Although many investors don’t focus on it, performance attribution is one of the most crucial aspects of managing risk and understanding the quality of investment returns. How an investment manager travels from A to B is critical to evaluating whether they have managed risk appropriately. By carefully monitoring sector exposures and market sentiment between growth and value stocks, Prospero has successfully been able to produce returns for investors in many different market conditions. Because our equity selection process is rooted in finding value-by-sector, Prospero has been able to perform in both value- and growth-driven markets.
Prospero’s outperformance in 2005 has been driven almost equally by the long and short sides of the portfolio. As for sector exposures, Prospero has maintained overweight positions in Consumer Staples, Financials, and select Transports, while remaining underweight in Capital Goods and Consumer Cyclicals. Prospero maintained in-line weightings in Healthcare and Technology and small net exposures to the lower-weighted sectors of the S&P 500 Index (Basic Materials, Communications, Energy, and Utilities).
What did Prospero do well in the first half of 2005? We managed risk carefully and ended up not chasing momentum sectors, while still finding sufficient growth drivers to keep pace with more rapidly unfolding stories. Prospero played the derivative impacts of higher oil prices, shorting retail and airlines, while maintaining an average-sized long position in BP. We maintained our disproportionately large weighting in financials, despite the prospect for higher interest rates, as we disagree with Wall Street’s overly simplistic generalization on the sector, namely that financials can’t perform when rates move higher. We believe that there are some companies better positioned than others for this change in the economic landscape. As Citigroup stated in its July 18 release, the flattening yield curve certainly has impact on some parts of its business (by definition, borrowing short and lending long is less attractive in a flat yield curve environment), but not others (International in particular, but also Investment Banking). We also added to positions in AIG when adversity set in during its legal troubles, believing that its shares represent good value in the low to mid-50s. Finally, Prospero selectively positioned the Funds in the strongest components of healthcare: biotech and HMOs.
What could Prospero improve upon in the second half of the year? While still carefully monitoring overall risk and sector exposure, we could be faster to move into ideas on which we have spent substantial research effort. On two occasions during the first half of 2005, Prospero was unable to take advantage of opportunities that appreciated significantly during our research process. On the other hand, the opportunity cost of a foregone stock doesn’t LOSE OUR INVESTORS MONEY.
In the second half of the year, Prospero is cautiously optimistic about the prospects for the stock market and expects the overall market to end the year with high-single-digit returns. Why? First, we believe that the bond market is extremely overvalued, interest rates remain low by historic standards (and will not likely increase by more than 50 bps throughout the remainder of 2005), and real estate as an overall asset class is in the final stages of its massive run-up. Real estate prices are simply rising too rapidly relative to income levels and economic growth.
As for foreign equities, while less expensive than their US counterparts in many cases, they often carry with them sovereign risk, currency risk, and operational risk. Prospero occasionally invests in foreign companies, but does so through US-traded ADRs and GDRs, and carefully evaluates the currency risk associated with all of its investments. Prospero currently is invested in four non-US based companies.
Given Prospero's consistently strong track record, please consider the following facts when evaluating your current portfolio allocation:
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Prospero has produced positive, double-digit annual returns of
approximately 13% for its investors since inception 8.5 years ago
in 1997 (net of all fees and expenses);
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Prospero has generated a positive 44% net return for its investors
during the last five years, during which time the S&P 500 Index has
declined by a cumulative (11)%.
Prospero Capital Management is an investment advisory company delivering superior financial results and service to clients through detailed fundamental research and investment insight. Contact Prospero at 866.377.7677 or invest@prosperofunds.com for more information.