Individually Managed Portfolios

CBIS administered 36 individually managed portfolios (IMPs) at the end of 2009, with $692 million in total assets. This represents a 6% increase in assets over year-end 2008, due mostly to market appreciation. There were several IMP closures and conversions into Funds. Nearly 62% of IMP assets result from bond mandates; balanced portfolios represent 27% and equity IMPs the remaining 11%.

Dodge & Cox has managed IMPs for CBIS since 1992 and administers 80% of total IMP assets. Fixed-income accounts returned 10.2% to 16.2% in 2009, net of fees, depending on specific participant guidelines, benchmarks and cash flows. These results were well above the Barclays Aggregate Index’s 5.9% return. The primary contributor to outperformance was a focus on BBB- and lower-rated corporate issues. Also beneficial was the generally good performance by mortgage holdings and a shorter effective duration for the portfolio versus that of the benchmark given the year’s rising longer-term interest rates. An underweight exposure to the Treasury sector was also helpful, as all non-Treasury sectors exceeded government returns for the year. Net-of-fee results for equity IMPs ranged from 31.6% to 32.4%, substantially above the S&P 500 Index’s 26.4% return and the Russell 1000 Value Index’s 19.7% return.

Equity portfolios benefitted from stock selection and sector weighting. Stock selection was strong in a number of sectors, including energy (Occidental Petroleum, +38%; Schlumberger, +56%), telecommunication services (Sprint Nextel, +100%), materials (Dow Chemical, +89%) and industrials (FedEx, +31%). Higher-than-benchmark exposure to the consumer discretionary and information technology sectors was additive, as they were particularly strong for the year. Beneficial holdings in these sectors included News Corp. (+53%), Time Warner (+45%), Hewlett-Packard (+43%), Motorola (+75%) and eBay (+68%). Below-benchmark exposure to consumer staples and utilities had a positive impact, as these sectors produced relatively weak returns.

Balanced IMPs produced returns ranging from 20.4% to 30.4%, net of fees, for 2009 compared to an 18.4% return from a blended 60% S&P 500 Index / 40% Barclays Aggregate Index benchmark portfolio. As noted above, both bond and equity active management contributed to the strong relative returns for Dodge & Cox’s balanced IMPs during the year.

Jennison Associates managed $125 million at year-end composed of four separate bond portfolios. Returns for the year, net of fees, ranged from 10.1% to 11.1%, well in excess of the Barclays Aggregate Index’s 5.9% return. Significant underexposure to U.S. Treasury and Agency debt benefitted the portfolios, as investors shifted out of Treasuries in favor of riskier assets as credit market conditions improved. The portfolios’ significant overweight in high-grade credit was rewarded as spreads over Treasuries tightened dramatically (the Barclays Credit Index tightened by over 300 basis points from historic highs). While maintaining an overweight in corporates throughout the year, Jennison selectively sold longer-dated issues, particularly during the second quarter, in favor of intermediate issues that appeared to offer greater value. Issue selection within the sector was additive. Jennison took profits in selected asset-backed securities (ABS), but maintained a sector overweight given that spreads still appeared historically cheap, especially compared to agency mortgage-backed securities (MBS). As mortgage spreads narrowed further during the fourth quarter, driven tighter by government buying, the manager increased its sector underweight. Jennison maintained a close to neutral position along the yield curve and a neutral duration position relative to the benchmark. A modest yield advantage over the benchmark early in the year was additive. As the economy stabilizes and the market’s focus returns to underlying economic conditions and relative value among sectors, Jennison believes that high-quality corporate and asset-backed bonds offer attractive return potential versus expensive Treasury and MBS securities, which have benefitted from massive Treasury intervention.

RhumbLine Advisers managed one indexed IMP at year-end, with $14.5 million in assets, benchmarked against the S&P 500. The IMP returned 26.9% for the year, slightly outperforming the Index’s 26.46% return. Companies excluded by Principled Purchasing underperformed unrestricted issues. Names excluded under life ethics criteria had the largest positive impact, while tobacco and defense restrictions were beneficial to a lesser degree. However, reweighting among other holdings during the volatile market conditions that characterized the year offset a portion of the advantage. Within healthcare, incremental overweighting in biotech limited relative return as did the reweighting of allowable names in consumer staples, energy and finance.