2006 In Review

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2006 in Review.   From the bursting of the housing bubble to the backdating ofstock options, 2006 proved to be a memorable year for investors.  War continued in the Middle East, thebalance of power shifted in Washington, and the price of oil soared to nearly$80 per barrel before falling below $60. Ben Bernanke proved to be a worthy successor to Alan Greenspan as Fedchairman and, most importantly, the majority of asset classes did well.  

  • The EAFE index of international equities rose 13.8 percent when measured in local currencies.  But, because of the weakening dollar, the EAFE index as measured in dollar terms actually returned much more.
  • Both U.S. and international small company stocks again led large company stocks, continuing their run of outperformance that began in 1999-2000.
  • Domestic real estate investment trusts (REITs) outperformed the U.S. stock market for the seventh consecutive year, again confounding the "experts", many of whom have been predicting a sell off since 2003.
  • Driven primarily by falling energy prices, commodities were the underperformers of 2006.  However, we continue to believe that this asset class offers substantial diversification benefits and enhances long term performance.

 "A Coming of Age for the Global Real Estate Market".  Vivian Marino began the above-namedarticle, which appeared in the New YorkTimes on January 7, 2007, by stating: "For investors who have been missing out on the prolonged run-up in theshares of real estate investment trusts, or maybe jumped in only recently, theend may not be in sight:  there aregrowing opportunities overseas." 

But of course, clients of Fox,Joss & Yankee have not been "missing out."  Client portfolios have incorporated domestic REITs since theearly 1990s and international REITs since 2005-2006. 

In 1994, only three countriesoutside the U.S. had public REIT markets. While the U.S. REIT market still has approximately 65 percent of theworldwide market capitalization, the rest of the globe is poised to surpass theU.S. in terms of total capitalization. Much of the new growth is being driven by REIT markets in Australia,France, Japan, Canada, the Netherlands, Singapore, and Hong Kong.  This year, Great Britain added itself tothe list of 17 countries with public REIT markets, and about a dozen othercountries have REIT legislation in place or under consideration.  For example, Germany is expected toroll more than $100 billion in properties into public markets later this year.

In Summary.  As we rebalance portfolios, we are recommendingthat clients trim the outperforming asset classes (international equities andreal estate) and add to the underperformers (fixed income and commodities/managedfutures) of 2006.  Recognizing theexpanding role of international commercial real estate in global markets, we alsorecommend trimming domestic rather than international REITs to bring realestate allocations back to target.

As always, please call if youhave questions, or if we can provide you with additional information.  All of us at Fox, Joss & Yankeewish you a healthy and prosperous 2007!