Q4 Commentary (2008)

January 13, 2009

Dear Friends of Coho Partners:

In the twenty six years that I have been in this business, 2008 was the most difficult year that I have ever experienced. The Dow Jones Industrial Average posted its worst annual decline since 1931 and the S&P 500 had its worst annual decline since its inception in 1958. Although we too lost principal this year, we fared meaningfully better than all of the broader market averages.

ANNUALIZED RETURNS
		TRAILING ANNUALIZED RETURNS (ending 12/31/08)
	2008	3 YEAR	5 YEAR	7 YEAR	INCEPTION TO DATE
Coho Tax-Exempt Composite*	-17.3%	0.3%	3.1%	3.2%	4.2%
S & P 500 Index	-37.0%	-8.4%	-2.2%	1.6%	-3.8%
Russell 1000 Growth Index	-38.4%	-9.1%	-3.4%	-3.4%	-9.3%
Russell 1000 Value Index	-36.9%	-8.3%	-0.8%	0.8%	0.5%
* Tax Exempt Composite is shown net of fees and inception 9/30/00

Why was the market down so much this year? Primarily because the problems related to the housing and debt bubbles were large and persistent enough to seriously infect our banking system. This resulted in a tightening of credit and a crisis in business and consumer confidence, both here and abroad. The majority of these problems surfaced in the second half of 2008, but regrettably they are not likely to end quickly. Unemployment is rising rapidly and it is almost certainly going to go higher in 2009. It will be difficult to restore consumer confidence and get the economy on a stable growth trajectory if we can not reverse the unemployment trends and restore credit to worthy borrowers. As dour as that outlook may appear, we believe we are well positioned for the uncertain future.

Our investment philosophy has two objectives and they are in order of importance—one, to protect principal during difficult periods, and two, to post competitive returns during the rising periods. By putting greater emphasis on “downside protection”, one need not “get it all” during the up periods to actually outperform over a market cycle.

Since our founding in 1999, there have been two very different “bear market” periods. The first was the period from August of 2000 through September of 2001 and the second may still be in progress, but it began in October of 2007. Table 1 below shows performance returns over these two bear markets. In each of these elongated down periods, we outperformed meaningfully.

TABLE 1

BEAR MARKET PERFORMANCE* Downside Protection
	8/31/2000 – 9/30/2002	10/31/2007 – 12/31/2008
Coho Partners**	-9%	-22.7%
S&P 500	-45%	-40.1%
Russell 1000 Growth	-62%	-40.9%
Russell 1000 Value	-24%	-40.5%
* Returns are cumulative ** Tax Exempt Composite net of fees

During the period between these two bear markets, the broader stock averages experienced an uninterrupted advance for about five straight years. Over this period, Coho Partners captured the majority of that broad market advance. This is shown in Table 2 below.

TABLE 2

RISING MARKET PERFORMANCE* Upside Capture
	9/30/2002-10/31/2007
Coho Partners**	94%
S&P 500	108%
Russell 1000 Growth	98%
Russell 1000 Value	129%
* Returns are cumulative ** Tax Exempt Composite net of fees

By linking downside protection with upside participation, one can see the value of our philosophy as it can produce wonderful results. As of the end of 2008, the S&P 500 has had a negative rate of return over the past ten years. Although we have not been in business for a full ten years, our performance has compared well to all of the major stock averages over the nine years we have been managing money at Coho Partners. Table 3 highlights the growth of $100 since inception for our taxable composite.

TABLE 3

INCEPTION TO PERFORMANCE* Growth of $100
	9/30/2000-12/31/2008
Coho Partners**	$139.72
S&P 500	$71.72
Russell 1000 Growth	$44.57
Russell 1000 Value	$104.16
* Returns are cumulative ** Tax Exempt Composite net of fees

We believe one of the primary reasons for our investment success over this long period has been our willingness to limit our investable universe to a stable group of about 250 unique companies that have demonstrated an ability to produce consistent growth in earnings, dividends and cash flows through both good times and bad. What we call our “advantaged universe” reminds us of Goldilocks in that the growth rates are “not too hot” or “not too cold”, but just right for us. The universe has allowed us to have consistent portfolio characteristics that are greatly appreciated during challenging times and yet not fully forgotten when the broader averages move higher. This universe also allows us to build a portfolio with a very favorable risk and return pattern.

As we cogitate 2009, we are dismayed by all of the governmental intervention. The bailouts, the loan guarantees, and stimulus packages might succeed, but they will likely create another set of unintended consequences down the road. Some of the governmental actions might produce wonderful performance for those companies that benefited by this intervention, but our entire portfolio is devoid of companies in need of any help. Our companies have superior balance sheets to support their operating strategies and this allows them to have greater control over their own destiny. Therefore, we expect our portfolio to hold up well should the market continue to move down and yet, if the market were to turn and post gains, we are optimistic that we will capture the lion’s share of any advance. Our confidence lies in the fact that the portfolio P/E tends to be close to or below that of the S&P 500’s, but it should have much more consistent earnings growth than that of the market. Our companies have strong market positions and strong balance sheets. This is important because they tend to gain market share during down cycles because they can invest aggressively against their weaker competitors. Finally, our portfolio has an above average dividend yield and, more importantly, we expect our companies to increase their dividend rates in 2009. This is not likely to be true for the S&P 500 in 2009. All in all, we are well positioned for the new year and look forward to updating you on our progress as the year progresses.

Finally, I am thrilled to announce that Glenn Dever has joined Coho Partners and will serve as our President. I have known Glenn for the better part of twenty years and I can not tell you how pleased I am to have him on our team. Over his investment career, he has served as a plan sponsor, investment consultant and for the past twelve years, he distinguished himself at Turner Investments as their Chief Marketing Officer. Should you wish to discuss our services in greater detail, he can be reached at 610-834-8001 or gdever@cohopartners.com.

Wishing you all a healthy and prosperous new year.

Sincerely,

Peter A. Thompson

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