High Grade Core Intermediate 1st Quarter 2010

The first quarter of 2010 was a challenging time  for a value manager oriented towards high quality investments.  We continue to generate a healthy positive return highly correlated with the broad investment grade market.  Yet, our purchasing power protection focus (with a bias towards owning TIPS) and our emphasis on quality and risk aversion underperformed the broader benchmarks during a time when risk taking was back in favor and inflation concerns were falling. The data to the right highlights the challenges we faced as a conservative bond manager.  The best performing segments of the investment grade universe were the lower quality, structured securities we do not buy: BBB’s and Commercial Mortgage Backed Securities.  Furthermore, corporate bonds (which we view as overvalued) continue to perform better than expected as many investors reach for yield at the expense of quality.