Commentary

October Market Update

The financial markets performance this past quarter remained consistent with our long stated view of a cyclical recovery, as it continues to react to positive factors. Economically, the positives include a bold tax bill that should have a very positive impact on longer term productivity boosting the economy for the near term as well as for many years to come. The other positive was the success of the Iraq invasion which, in the markets view, substantially reduced the uncertainty associated with terrorism. These underpinnings are critical to the positive long term outlook of the U.S. and global financial markets. The third quarter thus continued the upward trend, albeit at muted levels, that began during the previous quarter. The markets swift rise in the second quarter provided an impetus for the positive shift in market sentiment to continue as an accommodative Fed and cooperative government policy laid the groundwork for economic recovery. Low and unchanged interest rates provided a timely opportunity for businesses and consumers to refinance debt, while tax cuts implemented last summer put money back into the pockets of consumers whose spending continued to support consumer related businesses.

The positioning of the portfolios during this past year for a cyclical recovery has translated into increased value as the markets have begun their upward trend. With an increasing emphasis on aligning investments with an economy that continues to have exceptional productivity, we have favored technology companies. With their combination of strong fixed-income characteristics and increasing value from their equity component, this has benefited our convertible portfolios. As the market has improved and volatility has decreased, premium levels have declined as expected. We consider this normal, as conversion premium levels are reverting to historical norms. Issuance of good convertible opportunities remained somewhat subdued this past quarter: In our experience, issuance typically begins to increase as a byproduct of a more constructive equity market environment.

Long term, our view is unchanged. While we always include individual event risks and short-term investor behavior in our risk management analysis, we are long-term investors and continue to look toward longer-term conditions for investment opportunities. For the past numerous quarters, we have based our outlook and investment allocations on the belief that the U.S. is resilient and would experience an economic recovery. Although our view may have seemed a bit out of consensus a few quarters ago, today the broad economic picture appears much rosier to the overall market.

We continue to position our portfolios by investing in areas of the marketplace that may see increased earnings and improving business from economic recovery. Earlier in the recovery, those businesses and sectors we favored were largely in consumer-oriented goods and services. Today, we focus on areas that may benefit from increased capital spending from the corporate sector, such as technology and capital goods, while remaining well allocated to discretionary consumer spending and retail. To do so, we have not purchased riskier, highly leveraged companies that now comprise a large portion of some of the broad convertible indexes. These names, while theyve boosted financial markets and index performance thus far in 2003, carry too large a risk for a prudently managed, quality portfolio in our view. Should the recovery slow down, or if investors pull back as they have recently, these names are most at risk in our opinion (and have fallen accordingly), and are not suitable for a risk-managed portfolio. We still believe that the recovery is strong and continuing, and that increased capital spending will be the next step in the process.