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| LETTER FROM THE CIO
Equity markets closed out a tumultuous 2009 year with a third straight quarter of positive returns. The Russell 2000® Index rose 3.9%, while the Russell Midcap® Index increased 5.9% during the fourth quarter of 2009. Larger stocks were the best performers during the quarter with a gain of 6.1% as measured by the Russell 1000® Index. For the full year, the Russell Midcap® Index led the pack with a gain of 40.5%, while the Russell 2000® Index gained 27.2%. The Russell 1000® Index gained 28.4% for the year. Despite a strong finish, the end of 2009 brought to a close the first decade of negative performance for equities since the 1930’s. As 2008 ended, it seemed a bottom to equity markets was nowhere in sight. Economic measures continued to deteriorate, and we were experiencing a forced deleveraging throughout financial markets. Investors began 2009 with a high aversion to risk, and markets continued their precipitous decline. While corporate performance had clearly been declining since its peak in the summer of 2008, the concurrent increase in the risk premium demanded by investors explained a significant portion of the market decline in our view. Extraordinary efforts were undertaken on the part of the Federal Reserve and the Treasury Department to inject liquidity into the banking system and restore faith in financial markets. Coupled with the unprecedented fiscal and monetary stimulus programs implemented by the US and foreign governments, the efforts clearly have had a stabilizing effect on global economies and financial markets. Confidence has been restored in public markets-- evidenced by the significant number of debt and equity deals completed in the latter half of 2009. We are also now seeing stabilization in corporate performance, albeit well below the pre-recessionary levels. Correspondingly, risk premiums have returned to more normal levels, evidenced in part by our often-cited proxy: the decline in the spread between high-yield corporate bonds and Treasuries. We believe much of the rally in equities from the March 2009 low is thus explained by equity risk premiums returning to historical levels. Looking forward to 2010, we believe equity markets will now need evidence of recovery in corporate performance to sustain their current rally. On this front, we are optimistic that management actions taken in response to the downturn in 2009 will provide the basis for strong operating leverage as the economy recovers in 2010. I want to personally thank our clients for continuing to give us the opportunity to manage your account. We recognize the past year has been a tumultuous period of time for our clients, and we greatly appreciate your trust in Kennedy Capital Management. Be assured that our focus has not changed during the recent financial turmoil. As an employee-owned firm, we recognize our success is dependent on the success of our clients. We remain committed to a research-intensive, bottom-up approach to investing. We will continue to focus on companies with long-term competitive advantages that we believe will enable them to achieve superior returns on invested capital, and ultimately create value for shareholders. As always, I welcome any comments or questions you may have regarding Kennedy Capital Management. We greatly appreciate the opportunity you have given us to manage your account. Sincerely, *Please note that the performance information provided herein is preliminary, unaudited and subject to change without notice, although it is considered to be accurate as of the date of this letter. A complete performance presentation is an integral part of this letter and, if not attached, is available upon request. Past performance is not indicative of future results. Although the statements of fact and data in this report have been obtained from, and are based upon, sources that the Firm believes to be reliable, we do not guarantee their accuracy, and any such information may be incomplete or condensed. All opinions included in this report constitute the Firm's judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results. The information provided in this letter should not be considered a recommendation to purchase or sell any particular security. There is no assurance that any securities discussed herein will remain in a Kennedy Capital Management, Inc. (“KCM”) portfolio at the time you receive this letter or that securities sold have not been repurchased. Allocations among industries, sectors and securities may vary and are subject to change without notice. Any securities discussed do not represent an account’s entire portfolio and in the aggregate may represent only a small percentage of an account’s portfolio holdings. It should not be assumed that any of the industry or sector allocation decisions mentioned or securities transactions or holdings discussed were or will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the industries, sectors or securities discussed herein. A complete list of all securities recommended by KCM in the preceding year is available upon request by writing to KCM, 10829 Olive Boulevard, St. Louis, MO 63141. |
St. Louis, Fourth Quarter, 2009—