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NEWPORT BEACH, California (July 18, 2006) - The second quarter of 2006 was characterized by a mix of extreme volatility and uncertainty in the US markets, with an overlay of general pessimism. Despite this gloomy backdrop, all of Prospero's Funds outperformed the market in the second quarter, producing net returns of (0.4)% (Antenor), 3.2% (Beaumont), and 5.9% (Curan) versus a decline of (1.4)% for the S&P 500 Index. Prospero Capital’s short positions provided our investors with strong gains during these challenging times of high oil prices, rising interest rates, and geopolitical turmoil. The outperformance of our short positions was 6.1% for the first half of 2006, driving the strong returns illustrated below for Beaumont (Long/Short) and Curan (Market Neutral). Of particular note, our two hedge funds have produced returns above 14% during the last year (almost double the S&P's return), with limited market exposure in Beaumont and no net market exposure in Curan. In other words, Prospero is producing outperformance with less risk than the overall market.
Prospero's long positions, consistent outperformers over time, had a more difficult experience during the first half of 2006, but still produced net gains of 1.9%. Antenor has now outperformed the S&P 500 Index by more than 5% per year (59% cumulatively) net of all fees and expenses since inception in 1997. Furthermore, the S&P 500 remains 8% below its August 2000 peak levels (a negative return during the last six years), while Antenor has appreciated by 48% during the same interval.
Through June 30, 2006, Prospero’s performance was consistently strong in both the short and long-term, as illustrated in the table below. Annualized net returns (through 6/30/06):
| Antenor | S&P 500 | Beaumont | Curan | |
| Jun '06 | 1.6% | 0.1% | 2.0% | 2.2% |
| YTD (-6/30) | 1.9% | 2.7% | 6.0% | 6.9% |
| 1-year | 9.5% | 8.6% | 14.3% | 14.7% |
| 3-year | 9.5% | 11.2% | 6.6% | 3.7% |
| 5-year | 6.3% | 2.5% | ||
| Inception (1997) | 12.5% | 7.5% |
For nearly ten years, Prospero's investors have been rewarded by an active risk management program, coupled with superior equity selection, to produce net performance in excess of the S&P 500 Index with low volatility. The long-term success of Prospero's long-only Antenor Fund led to the formation of our hedged products (Beaumont and Curan) in 2002, which utilize risk management strategies to produce more stable returns. By combining short positions with Antenor's long-term holdings, Prospero has been able to produce positive net returns, as illustrated above, while exposing our investors to reduced levels of market risk.
During the second quarter, Prospero implemented several changes to our Fund holdings: We sold all shares of Liberty Media and its related spin-offs, having lost confidence in the speed and ability of management to create value; reduced exposure to select areas of technology; swapped out of Viacom and into Electronic Arts; and maintained our energy positions in the face of continued high oil prices. On the short side, Prospero increased its short position in specialty retailer Hot Topic, which suffers from a variety of factors that are unlikely to improve; initiated a short position in Nektar Therapeutic related to inflated expectations for its upcoming launch of Exubera (inhaled insulin) with Pfizer; and maintained short positions in the casual dining sector, particularly in shares of PF Chang's and Panera Bread, both of which face difficult same-store-sales comparisons and are struggling to maintain their growth rates as their concepts mature and consumers look for better value elsewhere. As for overall sector exposures, Prospero maintained overweight positions in Consumer Staples (particularly tobacco, reaping the benefits of a big litigation win in the Florida Engle case), Financials, and select Transports (railroads), while remaining underweight in Consumer Cyclicals. Prospero maintained in-line weightings in Healthcare, Technology, Energy and Utilities, and no net exposure to Basic Materials, Capital Goods, and Communications.
Now that our April prediction for a slowdown in the US Equity markets has occurred, Prospero is revising its forecast for the US equity markets from 10-12% to 8-10% appreciation in 2006. We continue to believe that the bond market is overvalued, interest rates remain relatively low by historic standards (and will not likely increase by more than 25 bps during the remainder of 2006), and real estate as an overall asset class does not represent good value. In contrast, please consider that Prospero has produced annual net returns of more than 12.5% for our investors since the inception of our core equity strategy more than nine years ago and also manages two Hedge Funds with reduced market exposure that have each appreciated by more than 14% on a net basis during the last twelve months.
If you would like to discuss Prospero in more depth or further explore our proprietary investment process, please call us at 949.219.0486 or visit our offices in Newport Beach. As always, we value your loyal support as we near the completion of our tenth year of dedicated service to our investors.
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.