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Edgewood Management Company

VIEW FROM EDGEWOOD



ECONOMENTS

Edgewood Management Company
January 5, 2006

The View from Edgewood

We are very excited to announce the addition of two portfolio managers to the Edgewood team. Alex Farman-Farmaian and Peter Jennison come to us with over fifteen years of experience managing growth stock portfolios at W.P. Stewart & Co. While there they were senior portfolio managers as well as sitting on W.P. Stewart’s investment committee. Alex and Peter have been well known to many of us at Edgewood for well over ten years. They will be adding to our collective investment knowledge in managing Edgewood’s portfolios and growing the firm’s business. We look forward to many years of productive partnership with them. You may also notice from the bottom of this letter that we have changed the name of the firm. This is for a variety of legal reasons having to do with the expansion of our investment team, but none of these will affect in any way the service we bring to our clients.

2005 was a very eventful year in many places except the equity markets. The Dow Jones Industrial Average, thanks largely to General Motors, was actually down slightly for the year. Broader indices, like the S&P 500 or the Russell 1000 growth index gained approximately 5%. In the face of: a major tsunami, several terrorist bombings, a major hurricane that badly damaged our Gulf Coast Region which led to a sudden spike in energy prices, and an unprecedented decline in the President’s approval ratings, the market did relatively little. It could be argued that all of these things as well as the Federal Reserve raising its target interest rate a quarter of one percent at every meeting of the year put a lid on the market, but a positive return may be an accomplishment in itself given the headwinds the market was fighting.

While the Federal Reserve has continued its rate increases, the inflation worries of the autumn seem to have declined with a couple of favorable inflation reports and a very strong productivity gain for November. The Fed’s December 13th meeting minutes released on January 3rd seemed to indicate that the string of rate increases is just about done. Yet we still have Alan Greenspan’s conundrum: long term interest rates peaked in the spring and are still lower than they were when the Federal Reserve started raising rates in June 2004. It looks like the housing boom will take the winter off, but the recent decline in long-term rates may get things going again in the spring.

The unexciting market results of the past two years in the face of strong earnings growth have produced one benefit: the overall market P/E has declined since the beginning of 2004. While our portfolios have outperformed the market since the bottom in 2002, the market’s gains have not kept pace with the gains in earnings. We strongly feel that this decline in valuation along with an end to the Fed’s interest rate increases will produce an excellent atmosphere for growth stocks, which have dramatically underperformed value stocks, real estate and commodities over the last five years. That is a long time for any asset group to lag other groups, and we feel that the turn will come in 2006.


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