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The U.S. Economy
Many negatives have affected the U.S. economy and the investment outlook in the last twelve months. They include: (1) the credit crisis has created difficult capital markets and the credit markets’ problems have spilled over into the rest of the economy, (2) oil above $100 a barrel is affecting the spending power of consumers and profits in many industries, (3) consumer confidence as measured by the Reuters/University of Michigan Survey of Consumers recently fell to its lowest level since 1982 – a 26 year low (consumer spending accounts for about 70% of every dollar of U.S. GDP), (4) declining home prices and record-high home foreclosures are affecting homeowners and financial institutions, (5) high commodity prices and other factors are causing inflation to begin creeping up both in the U.S. and in other parts of the world, (6) concern about corporate profits and forecasts for corporate profits that may be too high, (7) nonfarm employment has declined four straight months, (8) the uncertainity of who will be the next president and presidential policies, (9) some areas of the economy have too much leverage, and (10) problems in Iraq. Gross Domestic Product (GDP) increased at a 0.9% annual rate in the first quarter of 2008. An ideal rate of annual economic growth is usually about 2-3.5%.
There are many potential economic and investment positives which include: (1) the domestic economy should be helped by the Federal Reserve (“the Fed”) having lowered interest rates seven times since last August, (2) the tax rebates should help stimulate the economy, (3) stronger economies in many parts of the world are helping many multinational companies offset slower growth from their U.S. sales, (4) the efficiencies of the economy resulting from such things as technology enhancements and productivity increases are a positive, (5) the weak dollar and stronger economies in many parts of the world are helping U.S. export growth and the trade deficit is improving, (6) inventories are relatively lean, and (7) we may be approaching a point where most of the bad news is known and the stock market may begin anticipating an eventual resumption of economic growth.
GDP grew 2.2% in 2007. This was a slower rate of growth than has been the case in the last four years. However, a number of companies reported good quarterly earnings, particularly ones with higher foreign components to their business. GDP is estimated to increase 1.3% in 2008 after increasing 2.2% in calendar 2007, 2.9% in calendar 2006, 3.1% in 2005, 3.9% in 2004, 2.7% in 2003, 1.9% in 2002, 0.8% in 2001 and 3.7% in 2000.
U.S. inflation, as measured by the Consumer Price Index, increased 2.9% in 2007, 3.2% in 2006, 3.4% in 2005, 2.7% in 2004, 2.3% in 2003, 1.6% in 2002, 2.8% in 2001 and 3.4% in 2000. U.S. inflation numbers have been helped in the last few years by such factors as: (1) a slowing U.S. economy, (2) global competition, (3) advances in technology resulting in increasing productivity, and (4) technology innovations that are helping to lower production and distribution costs. Inflation is estimated to increase 3.5% in 2008. Annual inflation is and has been above the range of 1-2% that the Fed is comfortable with. In addition, higher oil and other commodity prices may result in higher overall inflation. As a result, the Fed has several main worries including: (1) a weak U.S. economy, and (2) the threat of higher inflation.
Investment Stategy
In the last six months we implemented a temporary defensive strategy by temporarily raising the cash in the Reynolds Blue Chip Growth Fund to a high level. We are continuing with this temporary defensive strategy and continue to have a high level of cash in the Blue Chip Fund. We are closely watching events unfold and will invest this cash when we believe appropriate.
Opportunistic Investing in Companies
of Various Sizes
The Reynolds Blue Chip Growth Fund usually invests in companies of various sizes as classified by their market capitalizations. The Fund usually emphasizes investments in larger companies. A company’s market capitalization is calculated by taking the number of shares the company has outstanding multiplied by its current market price. Other considerations in selecting companies for the Fund include revenue growth rates, product innovations, financial strength, management’s knowledge and experience plus the overall economic and geopolitical environments and interest rates.
The World Economy
Foreign economic growth has slowed somewhat, but remains generally positive in 2008 as macroeconomic policy generally remains supportive of good growth. Most foreign central banks have not been as aggressive as the Fed in easing policy over the last few months. However, monetary policy is not overly restrictive and globalization is helping to raise real income in many foreign companies. Strong growth in the rest of the world is helping U.S. export growth. Many countries in the world have been growing somewhat faster than the U.S. in the last few years. Their growth is also starting to slow. However, their economies are still growing faster than the U.S. For example, the average GDP growth of France, Italy, and Germany was 2.6% in 2007 and is forecast to grow at a 1.7% rate in 2008, the United Kingdom grew at a 3.1% rate in 2007 and is forecast to grow 1.8% in 2008, Brazil grew at a 5.4% rate in 2007 and is forecast to grow 5.1% in 2008, India grew at an 8.6% rate in 2007 and is forecast to grow 7.9% in 2008, and China grew at an 11.4% rate in 2007 and is forecast to grow 9.2% in 2008. Many worldwide larger multinational companies are well positioned to benefit from this worldwide growth. To the extent that these companies’ U.S. earnings are growing slower, this is somewhat offset by their stronger foreign earnings. The long-term strategy of the Reynolds Blue Chip Growth Fund is to be structured to benefit from this strong worldwide growth by investing in many of these worldwide leading multinational growth companies.
The Blue Chip Fund is normally positioned to participate in long-term worldwide growth trends through investments in multinational U.S. headquartered companies. In addition, the Fund generally has investments in leading foreign headquartered companies, whose stocks or American Depositary Receipts (ADRs) trade in the United States. These ADR’s are denominated in dollars and they must use GAAP (Generally Accepted Accounting Principles) accounting to qualify as an ADR. The Board of Directors of the Reynolds Blue Chip Growth Fund recently approved an increase in the maximum percentage of ADR’s that may be held in the Blue Chip Fund to 25% from 15%.
For more information, please download the Annual Report.
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