SPENCE Asset Management

Fishing Season May 2011

With summer just around the corner, the would-be vacationer’s fishing poles are being pulled from the depths of dusty garages. Tackle boxes are being re-stocked as many plan their days on the water. The fishing season is just around the corner. Once on the water, successful fishing is all about experience, skill, and a lot of…….watching and waiting.

Although they might not be planning fishing adventures, Wall Street money managers are likely planning their summer vacations. Cool summer days in the Hamptons, cool summer nights on the Vineyard, summer’s finest produce seared at an Italian cooking school- whatever their adventures may be, trading volume during the summer months tends to dry up. And this lack of volume and scarcity of securities traders contributes to an often well-heeded mantra: “Sell in May and go away.”

We don’t plan to go away for the summer. But we have been building up some cash over the last few months. Quite frankly, we’ve felt like salmon swimming upstream as the equity markets have continued their unrelenting march upward. A look backward tells us the S&P 500 Index has advanced over 28% since the end of August, 2010 and any pull-backs have been shallow and short-lived.

Salmon live a noteworthy existence. They start out as small eggs in a stream bed. Once they hatch, they begin a journey downstream toward the ocean. They spend several years out at sea. At maturity, they swim back upstream to their original spawning grounds ever weary of bears looking for a tasty dinner. Throughout their lives, the successful salmon must adapt to sea water or fresh water accordingly. Adapting to the various environments comes naturally for salmon. However, for successful money managers, adapting to ever-changing environments is usually the greatest challenge.

In the last few years, we have had to adapt to money markets paying next to nothing, dramatic and disruptive cost cutting measures across all sectors and industries, slower growth, changing technology, a weakening dollar, polarized and partisan political sentiment, and heavy handed government regulations……not to mention rising energy costs. Given these waves of change- some more tsunami-like, “swimming” in tomorrow’s financial markets will likely result in slower going. In short, please don’t expect the go-go rates of return of the last two years to continue or you will be sorely disappointed.

All of this being said we are constantly “fishing” for viable new ideas for our stock portfolios. And as such, lately we realize just how expensive what we think are the very best ideas have become. We readily admit to being demanding. From the companies we own or follow closely, we demand possession of durable competitive advantages, strong operating histories, honest and focused management teams, and enduring financial characteristics. Unfortunately, the shares of these types of companies tend to command high multiples. And these days, they often command too high of a multiple for our tastes, particularly as enthusiasm has replaced despair in the attitudes of investors. Overall it is important to realize that enthusiasm by the markets is no friend of our next purchase. Fishing and swimming become more challenging in enthusiastic waters when compared to the murky waters of the spring of 2009 when just the opposite of enthusiasm reigned supreme in the psyche of fickle investors.

We are very much looking forward to the lower volume trading that comes with the approaching summer months and the fishing opportunity that comes with them. Seasonal patterns suggest to us that buying opportunities for the globe’s best companies often present themselves while Wall Street tycoons go for their traditional siestas in the Hamptons or on the Cape.

Fishing is all about experience, skill, and a lot of watching and waiting. We hope you enjoy your upcoming vacation season while we are fishing.

Jim Spence, Eric Walton

The information contained herein is for informational purposes only without regard to any particular user’s investment objectives, risk tolerances or financial situation and does not constitute investment advice, nor should it be considered a solicitation or offering to investors. To determine if investment in a Separately Managed Account with Spence Asset Management is an appropriate investment for you please call 1.800.230.1840.

Investment Advisory Services are offered through Spence Asset Management, a federally registered Investment Advisor. Investment Advisory Services offered through IAR’s of Spence Asset Management, a Registered Investment Advisor to all residents of the United States.

The views expressed here are those of Spence Asset Management and are subject to change with market conditions. The information contained in this newsletter is derived from sources believed to be accurate. You should discuss any legal, tax, or financial matters with the appropriate professional. Neither the information presented nor any opinion expressed constitutes investment advice or a solicitation for the purchase or sale of any security. Market forecasts cannot be guaranteed. Past performance does not guarantee future results.