October 02, 2001

The terrorist attack on U.S. soil had quite a negative impact on the financial markets. Very likely it also affected the relative performance of different asset classes as well as size related strategies. Our view is that the small cap effect that is due to inflation hedging, tax sheltering and regulation skirting bodes well for the large cap stocks if you believe that the Fed is on a price rule. In that case the liquidity injection is temporary and just necessary to insure the functioning of the financial markets. Over time, as confidence is restored to the economy, the Fed is likely to withdraw all the liquidity and inflation should remain contained. However, if the Fed acts cautiously, we should expect some excess liquidity and that could lead to slightly higher inflation in the future. Under this scenario we would expect that initially the larger caps would fare quite well with the market rotating to the smaller issues. Our forecast is consistent with that view of the world.

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