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Alternative Investments Review

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Foster & Motley began recommending alternative investments in 2006 with a 5% allocation, and subsequently increased our recommendation to 10% in 2007. We made these recommendations on the theory that alternative investments are a part of a well diversified portfolio which should reduce volatility while maintaining a similar level of expected return. Our main obstacle in choosing alternative investments was the lack of a long term performance track record. Since the financial markets from 2003 to 2006 provided healthy, low volatility returns, few of the alternative investment choices that we were considering had been tested through tough markets. However, with the S&P 500 falling -9.45%, the first quarter of 2008 has been a good test for our alternative investment strategy.

Absolute return investments make up 6% of our suggested alternative investment allocation. They are designed to provide relatively consistent returns with a small influence coming from the stock market. Our typical weighting of absolute return investments fell -1.36% during the first quarter. While a small loss in an absolute sense, this certainly cushioned equity returns.

Real asset strategies are influenced by commodity prices. They should perform best when inflation is rising. Since inflationary markets are bad for both stocks and bonds real assets provide a good hedge to traditional investments. Our typical 4% allocation to real assets returned 5.72% in the first quarter.

We are pleased with the results of our alternative asset recommendation both in terms of performance and reduced volatility. We continue to look for investment options outside of the traditional stocks and bonds that can provide a positive impact on client portfolios.