Investment Update

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2005 First Quarter Review 

Pantheon's primary goal of preserving capital was again put to the test during the first quarter.  The S&P 500 was down 2.1% while Pantheon lost a modest 1.0% gross of fees and 1.1% net of fees.  (For those clients wishing to know our performance through yesterday, April 15^th, Pantheon is down 2.0% net of fees versus 5.0% for the S&P 500.)  Since inception in November 2000, Pantheon has now generated a positive 43.3% return after fees, outperforming the S&P 500 by 47.2 percentage points.  Assuming a client had invested $1,000,000 at inception, their account would be worth $1,432,965 under Pantheon's care versus $960,825 for the S&P 500 or a difference of $472,139. 

I am still quite pleased with our risk / return profile:  Pantheon has captured 90% of the returns in an up-market while only losing 42% in down-markets.  This favorable profile speaks volumes to the appropriateness of my “defensively-aggressive” theme since inception.  I am also pleased that our tax-efficiency is superb as evidenced by our annualized turnover ratio of 13.7% of which 76% was classified as long-term.

Friends and clients should remember that Pantheon does not have multiple equity “composites” like many managers that report the performance of this year's best composite and ignore the laggards.   Rather we have one and only one equity service comprised of all clients for which we report.  Just like we desire full and fair disclosure from our corporations, we believe in giving full and fair disclosure to investors. 

Investment Outlook 

The markets are clearly forecasting a deceleration of growth as evidenced by negative stock returns and declining long-term bond yields.  Hopefully clients are well aware of my cautious outlook regarding the U.S. economy due to the many structural imbalances currently in play.  Foremost of these is as a nation we are consuming and investing roughly 6% more than we are saving.  Today the U.S. has to borrow roughly $2 billion every working day to sustain this imbalance.  What cannot go on indefinitely, won’t!  Consequently, investors should expect the U.S. economy to slow as savings rise and/or consumption slows.  This is and has been at the heart of Pantheon’s economic outlook.

Investors should be much more concerned about the course of events that ultimately improves the U.S. debt problem.  For instance, can we slowly increase our domestic savings while maintaining good economic growth over the next decade?  Or will a financial crisis ensue whereby we have to raise rates dramatically to entice foreigners to continue funding our debt?  For me, the answer to this question is most important.  If we can slowly grow our way out of debt, then financial assets should offer reasonable returns over the next decade.  If however, we continue to ignore the problem then the likelihood of a financial crisis increases and financial assets will perform poorly. 

Today I am slightly more optimistic than last quarter because I believe that the Federal Reserve is becoming acutely aware of our predicament and will be very tepid in increasing rates above 3%.  Consumers and investors will be able to adjust their habits modestly which should be supportive of economic growth and long-term stability.  A reduction in oil prices would also be very welcomed since any decrease could go directly toward U.S. savings and away from oil rich states.  Last quarter I worried that the Fed might be too aggressive; now I am more confident that the U.S. can work its way through our imbalances.

Consequently, the portfolio remains structured for a modestly slowing economy.  We remain overweight defensive industries, notably healthcare.  The aging of the industrialized world’s population should support healthcare demand over the coming decade and give us a favorable risk/reward profile.  We are also invested in companies that cater to the lower income.  Again, these companies perform better in a slowing economy and demographics support this group as well.  The main threat remains higher oil prices since this has a disproportionate affect on their consumers. 

While I am more optimistic on the coming quarters, I will still be vigilant in assessing the probability that a financial crisis might increase.  Should I sense this possibility, I would quickly move our investments to cash, gold or whatever would protect our purchasing power.  For now, we will stay the course.  If you have any questions, please feel free to call me at any time.

Tague R. Goodhue, CFA