The Mailey Rogers Group has returned from a two day due diligence trip to the worldwide headquarters of Russell Investments in Tacoma Washington. We met with a number of high ranking executives and strategists within the firm. Our visit reaffirmed our confidence that your assets are being actively managed and monitored to take advantage of opportunities and minimize risk.

Please find below some of the information we took away from our visit.

The individual we met with that may have the most relevance to your questions was Russell’s Chief Investment Strategist, Dr. Ernie Ankrim. He is a frequent guest on CNBC, Bloomberg TV and PBS and is often quoted in the Wall Street Journal, New York Times and Los Angeles Times. As a previous economics professor, he is understated in his delivery – not like many of the sensationalist media personalities that are featured these days.

Dr. Ernie Ankrim, Chief Investment Strategist with Kim Mailey

Dr. Ankrim’s comments on the current investment climate were that the excesses of the past must be paid for, just like in other market corrections. The lax regulations in the US financial services industry are the major culprit. He does feel that the right people (Bernanke and Paulson) are guiding the steps to correct these issues.

In Dr. Ankrim’s opinion, there are four issues that need to be addressed before the current crisis will begin to fade:

Kim Mailey meets with Irshad Ahmaad, President of Russell Investments Canada

Dr Ankrim also spent some time discussing human behavior. He says that many individuals require a rate of return on their savings that is higher than Canada Savings Bonds or current GIC rates to meet their retirement needs. Historically, a well-diversified global pension portfolio has provided clients with long-term average rates of return of about 7% to 8%. To achieve this return however, exposure to global equity markets is required. History has shown that one year out of every four to five years, investors will experience a decline. The average decline, going back to 1926, is about 12%. Averages however, are just that. Some of the market declines will be less than 12% and others will be significantly greater than 12%. Dr. Ankrim pointed out how short term our memories can be. With world markets being down, on average, by about 30% year-to-date, it was just 6 years ago that we were coming out of another serious bear market that saw declines of over 40%. During the 2000 to 2002 bear market, many pundits were claiming that “this time is different” and we would never recover. We did.

Russell Investments trading floor monitoring their global managers

So is this time different? Dr. Ankrim was of the belief that many of the core building blocks were now addressed through Government intervention. He warned that other initiatives were likely to be needed. Mr. Bernanke’s comments following passage of the rescue package should be kept in mind: “We will continue to use all of the powers at our disposal to mitigate credit market disruptions and to foster a strong, vibrant economy.” Translated, that means the Fed will throw everything into generating a recovery in money, credit, and stock markets.

Although the market environment remains highly unsettled, Dr. Ankrim thinks investors are best served by sticking with portfolios that are well diversified across asset classes, sectors and countries. Markets that go down hard are often followed by markets that rebound strongly. Selling into weak markets to hide in cash is often a recipe for locking in losses and missing the benefits of market recoveries. Sources say there are higher levels of cash on the sidelines than have been seen in 30 years. They say that cash has built up to the incredible level of 30% of the market’s capitalization! That cash is earning next to no return and is waiting for the opportunity to be invested for better returns. We are obviously not sure when this will happen, but the resulting rebound could be significant.

We should also point out that the political angle being played, as both Canada and the US prepare for an election, is likely exacerbating the hyperbole. It seems in both countries each party is pointing at the other and predicting doom if they are elected.

Since returning from last week’s visit we have seen coordinated interest rate decreases by many Central Banks around the world. The UK government has partially nationalized many of the banks to bring confidence regarding the safety of their citizen’s deposits.

We will conclude with two quotes from Warren Buffett from an interview he gave last week:

The Lehman bankruptcy was a game changer, which clearly intensified the recessionary tendencies that already existed in the global economy. But by creating the conditions for the financial rescue package, it has created an energizing event that has focused policymakers around the world on strategies to generate market recoveries and restore growth to the global economy over the course of 2009. While some pundits may criticize the rescue package as the “end of capitalism,” the world has successfully weathered many financial crises in modern times through supportive government measures that set the stage for a resumption of private-sector initiatives – which is the key to long-term wealth creation. This time is likely to be no exception.

As you bear witness to how this downturn and more specifically the month of September have impacted your account values, please know that The Mailey Rogers Group truly understands your disappointment and perhaps fear. As we own many of the same securities that you own, we experience what you experience.

Our clients have been incredible to work with during this difficult time. Not one of our valued clients to date has “thrown in the towel” to this dramatic downturn. We believe your patience will be rewarded.