Dear Client,

Enclosed please find a Summary Report detailing the performance of your account(s) since inception and from the beginning of the year through the end of the third quarter.

Capitulation?

There’s no hiding from the numbers.  So far, it has been a bad year for the U.S. and global economies, for the equity markets, and for Mullaney Management & Trust investors.  No matter when you invested with MM&T, or which portfolio strategy you selected, you are down considerably from the 2011 highs.

Through the end of the 3^rd quarter, the Dow has dropped 14.81% from its high for the year, the S&P 500 is off 17.03%, and the S&P/TSX Venture Composite Index (a more relevant benchmark for our Canadian micro-cap holdings) is down 39.87% from the high reached in March of this year.  Certainly some of the companies included in these indices were over-valued, but some are fundamentally solid companies whose stock prices have been trampled by waves of fear, uncertainty, and unreasoned selling.

The masses are seldom right.  They rush to buy at the top and rush to sell in every market bottom.  This is a time for disappointment, but not a time to act on emotion or panic.  Our investment strategy and portfolios are built upon acting logically and recognizing opportunity where, and when, others don’t.

All that glitters is not gold… but industrialization needs copper and nickel

As the widely covered price of gold and other metals fell over the past month, the price of any stock that looks or smells like a mining company has been pummeled; as you know, the majority of our Discovery selections are in the minerals & metals exploration sector. In the current panic selling environment there are several key factors to remember:

1. Our Discovery investments are in mineral exploration companies rather than mining companies.  A successful discovery of minerals and/or metals deposit will evolve into a production site to be mined for many years, if not decades, into the future.
2. We selectively invest in exploration companies because of their strong management, the quality of their portfolio of properties, and the probability for success based on geological results, as well as an assessment of known risks.
3. The price of gold today, or of any metal commodity, is likely to have little effect on the valuation of an exploration company.  The size of the deposit(s), the cost of extraction, and the projected revenue over the life of the mine are some of the primary drivers of value for an exploration company.

While gold is largely an investment commodity with relatively little commercial use, the exploration companies we invest in pursue copper, nickel, cobalt, silver, platinum, and other metals.  These metals are used much more broadly and are essential to industrialized countries as well as the modernization of China, India, and emerging nations throughout Asia, South America and Africa. There will always be ebbs and flows in the growth rate of the world economy, and there will always be demand (likely increasing) for new and growing sources of these materials to be used in transportation, manufacturing, and construction worldwide.

Value is measurable

On the lower end of the risk spectrum, we continue to follow the basic tenets of our value strategy.  We do not overpay for assets, we do not buy companies with unfavorable debt ratios, and we do buy companies with smart management.  Our current value selection holdings were purchased at a price close to, or below, their net tangible assets, they have little or no long term debt, and we have a high degree of confidence in management.

We are not market timers.  Sometimes we are lucky and our price target for a stock coincides with the stock’s low price; sometimes the market pushes the price even lower.  In either case, we continue to believe in the strength of these companies. We are confident the value we identified remains and we will reap the benefits of these investments over the long term.

Back to basics

I am disappointed with the results of the hedging tactics we employed to protect our portfolios in falling markets.  Inverse ETFs for the Venture Exchange and put options for our Canadian stocks were not readily available as hedging tools.  As a result, I did the next best thing;   I believed (and continue to believe) there is a great chance of the U.S. markets falling dramatically. As such, most of our hedging positions were designed to provide protection against U.S. market declines. However, while all markets are down over the past six months (as I predicted) our Canadian holdings fell even more.  As a result, our hedges provided some protection, but not as much as I had hoped.

 My views of the U.S. markets have not changed.  I see opportunities in individual companies, but I also see risk in our economy and markets; and we will continue to hedge against this risk.  Additionally, we will seek new hedging opportunities that more closely correlate to our overall holdings.  We have initiated a gold hedging program in the past month – which has worked well – and last week we began a copper hedging program in our most aggressive strategy. You will hear more in the future about additional hedging measures aimed at protecting your capital against falling markets.

Closing thoughts

 We understand these are difficult times. The performance of our portfolios in 2011 has been the worst in my investment career. Your confidence in the markets has likely been shaken, and you may have doubts about your decision to invest in equities in general.

Early in my career I learned a valuable lesson that has proved itself many times over the last 30 years: In the short term, stocks prices reflect the dreams and fears of buyers and sellers.  In the long term, stock prices more closely reflect the true value of an enterprise.  It’s important not to confuse a “change in stock price” with a “change in value and opportunity”.

As you may have heard me say before, you can only judge the success of an investment portfolio over an entire market cycle – with both the ups and downs.  While we can’t control how others price stocks in the short term, we continue to believe the value and the future potential of our stock selections will be proven over the long term.

I thank you for your trust and continued business.

Sincerely,

Raymond Mullaney

Founder and Chief Investment Officer

Dear Client,

Enclosed please find a Summary Report detailing the performance of your account(s) since inception and from the beginning of the year through the end of the second quarter.

The madness of crowds

“Anyone taken as an individual is tolerably sensible and reasonable.  As a member of a crowd, he is at once a blockhead.” – Friedrich von Schiller

By the time this letter reaches you, it’s unlikely the account value presented in the enclosed summary will match the current value of your account.  In today’s emotionally driven market environment, a few days, or even a few hours, can see market prices fluctuate wildly.  Considering the U.S. debt ceiling debates, high levels of unemployment, the ongoing Euro Zone financial crisis, and tomorrow’s news, the only thing we can predict with any degree of certainty is that short term investor sentiment will result in stock price volatility.  One look at the range of highs and lows of the S&P 500 Index over the past six years, or the past six months, will illustrate this point.

Short term fluctuations in stock prices often have little to do with the fundamental value of companies or the health of markets they serve.   They are more likely affected by emotion and herd mentality of investors, large and small.

We follow the headlines and diligently monitor news related to our current and prospective investments as we strive to avoid macro-economic or sector risk, but they do not drive our investment decisions.  Instead, we are primarily concerned with the value and the opportunity presented by the companies in which we choose to invest.

Rational Exuberance

At Mullaney Management & Trust, we do not invest emotionally, and we do not follow the trends of the market indices. Correlation between our performance and the market is typically coincidental. We believe a successful strategic manager seldom invests in the trends of the moment, but instead identifies and invests in the value others will only discover tomorrow.

In the near term, the price of the stocks in which we invest will rise and fall with market sentiment, but over time your investments should justify the price you paid and reward the patience you have shown when others panicked. Our goal is to add meaningful growth to our clients’ accounts over a full market cycle while avoiding unnecessary or catastrophic risk.

To accomplish this goal we invest in three types of companies which we believe will deliver above average results over time:

Tangible Value Stocks – We search for solid companies with a strong balance sheet, where the sum of tangible assets (cash, inventory, property and plant) is greater than its market cap and our research indicates potential for continued growth.    We see this as the safest form of investment.

Growth At a Reasonable Price (GARP) Stocks – We search for solid companies with low debt, priced near their tangible value, where even a conservative evaluation of our research suggests strong and sustainable earnings growth.

Discovery Stocks – We leverage our unique experience and expertise in the biotech and mineral exploration sectors to research and select companies with high quality management teams, recognizable value in their real or intellectual properties and strong preliminary results in R&D or exploration.

Mullaney Management & Trust does not believe the securities market is a risk free environment. To further protect our clients from market and currency risk, we are currently diversifying portions of your cash position away from the U.S. Dollar and into foreign currency funds.  In addition, we have taken positions in inverse ETFs to hedge against downside market and sector risk.

Housekeeping

We moved!  We are still at 1177 High Ridge Road in Stamford, CT, but we have moved to the second floor.  The move was carried out without interruption of business and provides us with a more efficient layout.

With our growing participation in Private Placements we are in the process of consolidating custody, correspondent and clearing services with Haywood Securities, a Canadian firm specializing in these services.

Many of you feel TD Ameritrade’s online portal is not up to par with offerings from Schwab and Fidelity.  We don’t disagree, but also recognize the value provided by TD Ameritrade is not readily visible to our clients.  When evaluated as a whole, TD Ameritrade’s ability to provide timely and accurate brokerage and back-end services for both the U.S. and Canadian exchanges is currently without peer.  However, we have communicated your feedback to TD Ameritrade’s management team and will keep you abreast of improvements to online access and reporting.

Closing thoughts

Over the years, adherence to our investment philosophy has allowed us to avoid the fallacies of bubbles and various market panics, and we did not yield to the pressure of inappropriate short-term performance comparisons. In retrospect, these may have seemed like easy and sensible investment decisions, but we know they are not.

We appreciate your continued confidence in Mullaney Management & Trust.  If you know of others you feel would benefit from our investment approach, please have them contact us.

As always, please call if there is anything we can do to help you with your goals.

Sincerely,
Raymond Mullaney

Founder & Chief Investment Officer

Stamford and its surrounding communities are securely cemented as one of the asset management capitals of the world. As a result, residents have a myriad of choices of how to employ their capital in an effort to plan for and secure their financial future.

Whether choosing to invest in individual equities, bonds, REITS and so on, one of the first decisions an investor has to make is whether to use an index fund, an actively-managed fund or whether they should instead employ an active manager for their proprietary account(s). The argument of which is the best choice has raged on for years.

What is an Index Fund?

Index funds are passively managed portfolios designed to replicate the proportionate holdings of a target index. The Standard & Poor’s 500 index is one of the most recognized of the hundreds of market and sector index funds available to investors in the form of an index fund. Since the focus of the fund is to mimic the holdings and returns of a specific index, managers are able to leverage technology to effectively maintain the portfolio at a reduced expense, which typically results in razor-thin fees.

You won’t get any argument from me that low fees are, in general, a good idea.  However, I would also caution that, sometimes, cheap advice could be very expensive. I suspect anyone who invested in the S&P 500 from 2001 through 2011 finds little comfort in having paid low fees for pedestrian returns on investment while being exposed to one of the most volatile market periods since the Great Depression.

What is an Actively-Managed Account?

Active managers come in several flavors and styles: value, growth, growth at a reasonable price (GARP), momentum, etc. Some manage mutual funds while others may manage your individual portfolio. However, they all share one common trait: they are not constrained by the limits of an index and are free to make investment decisions based on the merits of the opportunity or, in some cases, take a defensive position in the market or simply move to cash.

This added flexibility provides active managers with one advantage over index funds — active managers have the potential to outperform a market or sector. Unfortunately, finding an active manager who can consistently outperform the market is no easy task.

Statistics — and the numbers will vary from publication to publication — state that over 80 percent of actively-managed U.S. Large blend funds and more than 60 percent of actively managed U.S Small Value funds underperform their benchmark on an annual basis. Sometimes ignored, of course, is the glass-half-full fact that close to 20 percent large cap blends and 40 percent of small value funds equal or outperform the indexes, so some strong performers do exist.

In the end, the adage “buyer beware” is as appropriate in picking investment managers as it is in buying a car or a home. It’s a significant decision, and there is not one single solution that is right for everyone. Do your homework and ask questions, and if you don’t understand the answer, ask again.