Q4 Commentary (2009)

                                                                                                            January 15, 2010

Dear Friends of Coho Partners:

The market continued its rise in the final quarter of 2009, climbing another 6%, putting the total return for the full year in the top quartile of all years since 1928. It certainly did not start out that way. If you recall, the S&P 500 fell over 25% from the beginning of January into early March. Then, the market, if not the economy as a whole, seemed to turn on a dime as the S&P 500 has since increased over 65% from those intra-day lows in March to finish the year up a rather robust 26.5%. This recovery was marked by a distinct preference for the downtrodden: low quality, lower dividend yields, smaller market capitalizations, high beta and high cyclicality. These characteristics that performed so well this year were the same ones that caused so much pain in 2008. As you know, Coho Partners avoids the characteristics that were rewarded this year and prefers to invest in high quality companies with strong and growing dividends, mid to larger market capitalizations, low betas and low business cyclicality. Table 1 illustrates the dramatic correlations and extreme differentials of returns for these factors in 2009.

TABLE 1

Therefore, since we focus our efforts on the top two quintiles of the above table, the market such as we have experienced over the last 9 months could be viewed as the perfect storm against Coho Partners on a relative basis as compared to the market as a whole. This is actually a fairly typical pattern for markets emerging out of a steep downtrend. We can argue all day as to whether the markets should have rallied the way they did given the economic issues still facing us; the point is that they have, and they have done so in a manner very consistent with history. Although we did lag our benchmark this year, given the above headwinds to our style, we are pleased with our relative performance and are very content with the absolute numbers. Even more critically, when you link 2009’s returns with our strong relative returns in 2008, you will see the value of downside protection and upside participation.

TABLE 2

Some have called the period of 2000 to 2009 the “lost decade” for investing, since cumulative returns were nearly non-existent. This decade saw two distinctly different bear markets, with a “growth bear market” being felt in the 2000 to 2002 period and then a “value bear market” in 2008 and early 2009. Our investment philosophy of preserving principal during down periods and staying competitive during the rising times was effective over this period. Our tax exempt composite began on September 30th, 2000, and from that date through the remainder of the decade, our returns were quite favorable when compared to the S&P 500.

 TABLE 3

Over the past ten years, our portfolios have maintained an over-weighted position in consumer goods and staples companies because they make simple, low cost but high utility products that are purchased by a growing portion of the world’s consuming public. Hence, global population growth is good, but rising income levels in portions of the world where current consumption per capita is small is an increasingly large investment theme. These companies are becoming even more adroit at marketing their products to the developing and emerging countries which is where so much of the world’s population resides. The following table shows population and per capita GDP figures for the developed and less developed BRICIT (Brazil, Russia, India, China, Indonesia and Turkey) economies as of 2008.

TABLE 4

With 46% of the world’s population residing in these six BRICIT countries, the opportunity for world class consumer goods and staples companies continues to be substantial. The weighted average per capita income of the BRICIT countries is nearly 14 times smaller than the weighted average income found in the developed countries. This gap will slowly close and this will be very beneficial to the types of companies we include in our portfolios for a long, long time to come. By 2014, about 700 million people currently living in these BRICIT countries will move from a rural setting to an urban setting because they can afford a higher standard of living. As this occurs, these consumers will be increasing their demand for “simple creature comforts” made by many of our companies that have well established supply lines and distribution systems already in place to meet this growing demand.

Looking back on 2009, it was a year with many milestones for Coho Partners.

We begin this new decade with a new set of challenges and concerns. Our economy remains sluggish and many global economies remain equally slow. Higher taxes, more regulation and rising interest rates will all pose challenges for higher valuations. Nevertheless, we remain confident that our philosophy, investment process and disciplines will serve us well in 2010 and well beyond.

When we started Coho Partners ten years ago, we had no idea that the ensuing ten-year period would be the worse decade for domestic equity returns since the 1930s. Now is a great time to start a new decade, which will inevitably have its own bumps in the road, but we feel that this new decade should provide better returns than the one that just ended.

Wishing you all the best in 2010.

Sincerely,

Peter A. Thompson

Back