Fayez Sarofim & Co. Investment Counselor / Consultant

In spite of considerable consternation surrounding the state of the global economy, European sovereign debt issues, and turmoil in the Middle East, financial markets finished the first half of 2011 with modest gains. The Standard & Poor’s 500 Index registered a total return of 6.0% for the six-month period while the Barclays Capital Government/Credit Index of fixed income securities produced a 2.6% return over the same time period. Virtually all of the return for the S&P 500 came in the first quarter before concerns about economic growth resurfaced. And, almost all of the return for the bond index came in the second quarter along with those concerns. The Fayez Sarofim & Co. Equity Fund Composite produced superior results while focusing on financially-strong, industry-leading companies. In fact, our composite has returned over 33% in the past twelve months, beating the S&P 500 by almost three percentage points. Although market gains may slow down relative to that pace, we expect growth in profits, dividends, and attractive valuations to provide a solid foundation for future results.

Unquestionably, recent events remind us all that there are considerable risks in today’s investment environment. Some of these risks are residual effects of the recent financial crisis and “Great Recession,” including excessive overall levels of indebtedness and precarious government finances. Other risks are more exogenous in nature, like the earthquake and tsunami in Japan and political upheaval in the Middle East, which has contributed to a significant rise in oil prices. Policies designed to combat the economy’s malaise are also coming to an end. The Federal Reserve’s “QE2” program has run its course, and the federal government is currently negotiating a deficit reduction plan that will reduce government spending and potentially raise taxes. Recent employment gains have been dismal, leading to a 9.2% unemployment rate that remains abnormally high and is probably understated. All of these factors make investors anxious.