The Economy
The U.S. economy continues
to expand. Consumer spending, business investment and
employment are all growing at decent rates. We’re also
seeing expansion in the Japanese and European economies.
They had been lagging.
Some people are concerned that interest
rates will move up. But short-term rates, which are heavily
influenced by the Federal Reserve Board, should move up.
The Fed has purposely kept these rates below the levels
indicated by inflation and economic growth. Meanwhile,
long-term rates, which are determined by market forces,
have already moved up by over 80 basis points (8/10 of
a percent) in concert with the expanding economy.
We judge current, long-term interest
rates (and therefore, bond prices) to be fair. We also
judge stock prices, on average, to be fair. Some stocks
remain underpriced and some remain overpriced but the
range in prices is much less than we’ve seen in recent
years.
What this means to us is that changes
in the prices of individual stocks and companies are likely
to be determined by the changes in revenues and earnings
of the individual companies. We are spending our time
and efforts accordingly.
Frankly, the only thing which we can
see capable of throwing the markets off the above track
would be dramatic changes in Iraq or acts of terrorism
which would upset our politics. With the recent transfer
of power to the Iraqis, we should start to see whether
the great experiment (allowing a mid-east country to choose
democracy) is working.
Proxy
Voting Policy
Since publishing our new Proxy Voting
Policy three months ago, we’ve received a number of comments
from people who believe we’re remiss in our duty to our
shareholders. To respond to that criticism, we’d quote
from our Prospectus:
“The investment objective of the
Muhlenkamp Fund is to maximize total return to its shareholders
through capital appreciation, and income from dividends
and interest, consistent with reasonable risk. To pursue
its goal, the Fund principally invests in a diversified
list of common stocks. The Fund invests primarily in companies
determined by the Fund’s adviser to be highly profitable,
yet undervalued. The adviser looks for those companies
it believes to have above average profitability, as measured
by corporate return on equity (ROE)…”
We use Return on Shareholder Equity
(ROE) because we believe it is a useful measure of how
well the management utilizes the company’s assets for
the benefit of shareholders. If we don’t believe that
management is working for the
shareholders, we have no interest in owning (shares of)
the company.
We do know that management of the companies
we invest in will make mistakes in some of their actions,
and that not all of their actions will benefit the shareholders.
But we also believe that they are in a better position
to run their companies than we are. If we didn’t think
that a management knew more about running their company
than we do, we’d have no interest in investing with that
management. So, until they demonstrate otherwise, we’re
inclined to give the management of our companies the benefit
of the doubt.
Similarly, we know that we will make
mistakes. I hope that our shareholders know that we will
make mistakes. We believe they hire us because they believe
we are working for their best interests and that we’ll
make fewer mistakes than they do. Anyone who doubts that
we’re working for their best interests shouldn’t hire
us by becoming a shareholder in the Fund.
The new proxy voting rule will require
us to keep records of our votes, and presumably, would
require us to defend those votes at a future date. To
understand the implications of this rule, I ask that you
do the following: