Investor Letter - Third Quarter 2008
Issue #16
 October 2008
In This Issue
Hurley Capital Composite Performance
Our Investment Process
Asset Allocation: Scientific But Irrational?
What To Watch For
Dear Client/Friend,
 
We are pleased to have advised clients investment strategies that provided a safe haven for clients during the market turmoil over the past year. Recent market activity reflects (1) a decline in the intrinsic value for some companies and (2) price declines in companies with stable valuations caused by panicked or forced selling. We're spending our research time separating the former from the latter to discover the investment opportunities in today's market. Nonetheless, we remain focused on protecting our capital, while seeking new investment opportunities using our value-oriented approach.

We have received many referrals as individuals rethink investment strategies and relationships. We appreciated your referrals and thank you for your consideration.

During the third quarter, we celebrated our five-year anniversary. As discussed below, our value-oriented investment process has produced strong absolute and relative returns in up and down markets. I'd like to thank my clients for their trust and support over the first five years.
 
Sincerely,
 

Charles Goldblum, CFA
Hurley Capital Composite Exceeds Market Returns By 14% Year-To-Date

In the first nine months of 2008, the Hurley Capital Core Equity Composite of accounts managed by Hurley Capital fell 5.3% after all fees and expenses. In comparison, the S&P 500 fell 19.3%, including dividends. 

As shown below, we've added five-year returns in place of three-year returns. Over our last five years, we've provided total cumulative returns after fees of 67%, more than twice the total return of the S&P 500 at 28%. We believe this is testament to our conservative value-oriented investment approach.

Q308 performance incl. 5-year vs. S&P

Recent outperformance has been due to our in-depth research on companies including Avid and Jacada, and continuing to get the macro story right at WalMart. Avid and Jacada are two software companies that we know very well. We've spoken to key customers and have met with the management teams several times. In both cases, the investment thesis does not require the economy to do well to succeed (though it would help). Our thesis on WalMart is playing out, with consumers trading down while the company scales back on new stores and grows free cash flow. As WalMart's valuation has risen, we've pared back our position by 50%. Furthermore, we have raised cash balances in client accounts as outlooks at energy companies dimmed with reduced consumption and energy prices.
Our Investment Process

Since our founding in August 2003, our clients are outperforming the market due largely due to our investment process which can be summarized as follows:

(1) Find strong sectors.
(2) Find discounted investments in those sectors.
(3) Sell when fundamentals change or discount narrows substantially.
(4) Don't invest otherwise.

Comparison Of Change In Value
Of $10,000 Investment, Net Of Fees
Composite vs. S&P jpeg


 
Asset Allocation: Scientific But Irrational?

Asset allocation has been a main topic of discussion with clients and new referrals. Asset allocation refers to an investment methodology, where portfolios are invested in stocks and bonds across company sizes and geographies, as well as real estate, commodities, private equity funds and hedge funds. Percentage allocations are rebalanced so that winning investments don't get too big and falling investments don't get too small. Historical data shows that an asset allocation strategy outperforms stocks alone over the long-term and at less risk.

These days, investment advisors talk about "investing for the long haul" and "spreading your bets", but all investors can see is the losses. We've always had the following concerns about the asset allocation approach for individual investors:
  • Are Historical Returns Relevant? - Is a historical model valuable for predicting the future? Why should future returns repeat the past? You'll recall that earlier this year, we'd heard that U.S. home prices had never shown a year-over-year decline. We know how that turned out.

  • Can You Withstand The Volatility? - With U.S. stocks down over 20% so far this year and overseas markets down around 30%, it's only natural to become defensive and conserve capital, yet asset allocation models typically call for investing more as markets decline. Your investment advisor needs to have more justification for further investments other than, "it's worked in the past".

  • Is Your Timing Right? - Even if the asset allocation model is valid, and you're ready to buy when it seems hardest to, you've still got to get the timing right. Buying more in the 1930's or 1970's would have caused further losses, while investing in the 1990's or 2003 would have worked well.

What To Watch For

We continue to spend our time building and maintaining conservative, value-oriented portfolios for our clients; talking to companies, their suppliers, customers and competitors. We are satisfied with the results so far and look forward to providing good risk-adjusted returns for clients over the long-term. For more information on Hurley Capital, including previous newsletters, please visit our website: Hurley Capital.

As you know, we are always available to discuss any additional concerns you have during this volatile period.

Sincerely,

Charles Goldblum, CFA
Hurley Capital
 
Important Disclosure

The performance results presented herein reflect the performance of all actual client accounts invested in the Hurley Capital Core Equity Composite from inception (August 31, 2003) to September 30, 2008. The Hurley Capital Core Equity Composite allocates client portfolios in equity and fixed income investments, weighted according to Hurley Capital's proprietary investment strategy. Actual client accounts utilizing the Hurley Capital Core Equity Composite may have varying allocations between equities and fixed income investments based on individual investment preferences. The performance results of the Hurley Capital Core Equity Composite are net-of-fees, brokerage commissions, and other expenses and include the reinvestment of dividends.

Past performance of the Hurley Capital Core Equity Composite may not be indicative of future results and the performance of a specific individual client account may vary substantially from the composite results presented herein in part because client accounts may be allocated among several portfolios. Hurley Capital makes no representation that the results presented herein reflect the typical experience of a Hurley Capital client nor that current or prospective clients will experience similar results.Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable.

Comparison of the Hurley Capital Core Equity Composite to the S&P 500 Index is for illustrative purposes only and the volatility of the S&P 500 Index may be materially different from the volatility of the Hurley Capital Core Equity Composite due to varying degrees of diversification and/or other factors.

Reference to the specific securities stated herein are for illustrative purposes only and are not being referenced as a favored investment of Hurley Capital. Hurley Capital is under no obligation to hold any equity position for any time period and Hurley Capital's current recommendations are subject to change at any time without notice. The securities mentioned herein should not be considered as personalized investment advice and should not be construed as an endorsement, solicitation or recommendation to purchase or sell any security. A complete list of Hurley Capital's current recommendations is available upon request.

Hurley Capital, LLC ("Hurley Capital") is an SEC registered investment adviser with its principal place of business in the State of New York. Hurley Capital and its representatives are in compliance with the current registration and notice filing requirements imposed upon registered investment advisers by those states in which Hurley Capital maintains clients. Hurley Capital may only transact business in those states in which it is notice filed, or qualifies for an exemption or exclusion from notice filing requirements. Any subsequent, direct communication by Hurley Capital with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of Hurley Capital, please contact Hurley Capital or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov).

For additional information about Hurley Capital, including fees and services, send for our disclosure statement as set forth on Form ADV from Hurley Capital using the contact information herein. Please read the disclosure statement carefully before you invest or send money.
 
 Hurley Capital, LLC
Core Equity Composite
Annual Disclosure Presentation
image for GIPS disclosure
Core Equity Composite contains fully discretionary core equity accounts and for comparison purposes is measured against the S&P 500. Since inception, the minimum account size for this composite has been $50 thousand.

Hurley Capital, LLC has prepared and presented this report in compliance with the Global Investment Performance Standards (GIPSŪ).

Hurley Capital, LLC is an independent registered investment adviser with the states of New York and Connecticut. The firm maintains a complete list and description of composites, which is available upon request.

Results are based on fully discretionary accounts under management, including those accounts no longer with the firm. Prior to August, 2004, the composite had 100% non-fee paying accounts in the composite. Composite performance is presented net of foreign withholding taxes on dividends, interest income, and capital gains. Withholding taxes may vary according to the investor's domicile. Leverage/Derivatives may make up a material part of the composite strategy which includes short selling, with the short position covered by cash accounts that are marked to market on a daily basis. Past performance is not indicative of future results.

The U.S. Dollar is the currency used to express performance. Returns are presented gross and net of management fees and include the reinvestment of all income. Net of fee performance was calculated using actual management fees. The annual composite dispersion presented is an asset-weighted standard deviation calculated for the accounts in the composite the entire year. Additional information regarding the policies for calculating and reporting returns is available upon request.

The investment management fee schedule for the composite is 1.5% on the first $2 million, and negotiable thereafter, or 1% on all balances plus 10% of annual investment gains, subject to high-water marks. Actual investment advisory fees incurred by clients may vary.

The Core Equity Composite was created August 31, 2003. Hurley Capital, LLC's compliance with the GIPS standards has been verified for the period of August 31, 2003 through June 30, 2008 by Ashland Partners & Company LLP. In addition, a performance examination was conducted on Core Equity Composite beginning August 31, 2003. A copy of the verification report is available upon request.