CHESTNUT STREET EXCHANGE FUND
(A California Limited Partnership)
David R. Wilmerding, Jr.
Chairman
October 22, 2012
Fellow Partner:
Our
Fund earned $7.09 per share of net investment income in the nine months ended September 30, 2012, compared to $5.00 per share in the same period of 2011.
After providing for the $1.60 per share distribution to partners of record on September 27, 2012, the net asset value per partnership share on September 30, 2012 was $395.53. The net asset
value on June 30, 2012, our last report date, was $380.34, and the value on September 30, 2011 was $312.90.
Commentary on market conditions and a comparison of our Funds performance to the Standard & Poors 500 Index and
the Dow Jones Industrial Average will be found in the accompanying Investment Advisers Report.
Your comments or
questions concerning Chestnut Street Exchange Fund are welcomed.
Yours sincerely,
David R. Wilmerding, Jr.
CHESTNUT STREET EXCHANGE FUND
(A California Limited Partnership)
INVESTMENT ADVISERS REPORT
|
|
|
Market
Review
|
|
Third Quarter 2012
|
Equities climbed higher in the third quarter, powered mainly by policy action from the worlds largest
central banks. However, investor sentiment was clearly affected by jitters about the global economy and the ongoing debt crisis in Europe. The S&P 500
®
Index rose 6.34% over the quarter, bringing year-to-date gains to 15.87%.
The quarter began with concerted efforts from three major central banks the European Central Bank (ECB) lowered its benchmark interest rate, the Bank of England increased its
bond-buying program and Chinas central bank lowered rates for the second time within a month. However, these moves were not enough to excite investors under a dark cloud of economic gloom. Manufacturing activity continued to slow in Europe,
China and the United States and the International Monetary Fund lowered its forecasts for global economic growth. Economies across Europe faced stagnation and the slowdown in China the worlds second-largest economy continued to
weigh on the outlook for global growth. Exporters in the United States saw profits suffer as European and Chinese consumers and businesses pulled back on spending. US corporate earnings growth generally decelerated and management forecasts grew
increasingly cautious. The economic recovery in the United States continued to be fettered by high rates of unemployment; however, the housing sector was a bright spot in the bigger picture as home prices began to rise over the summer. While the
dreary economic landscape continued to encumber investor sentiment, growing hopes for additional stimulus from global central banks particularly the US Federal Reserve (the Fed) kept stocks moving higher through the
quarter.
Yields on Spanish debt soared higher in July as the ability of Spain to contain its severe debt problems grew
increasingly questionable, and the notion of a euro collapse rose again to the forefront of investor concerns. ECB chairman Mario Draghi acted to allay these fears by explicitly stating his commitment to hold the euro zone together. This hint of a
new round of stimulus from the ECB pushed global risk-asset markets higher and government borrowing costs for Spain and Italy moved lower. Early in September, the ECB announced its plan to make secondary-market purchases of sovereign debt to help
bring down borrowing costs in the euro zones most troubled nations. This move brought relief to financial markets and global equities rallied. The increasing visibility of European leaders determination and collaborative efforts to
stabilize the euro zone was another driving force behind the broader rebound in risk assets during the quarter.
Back in
the United States, market participants were looking to the Fed to give the US economy a kick start. In the middle of September, the Fed made its long-awaited announcement and surprised investors with its aggressive policy action a commitment
to purchase $40 billion of agency mortgage-backed securities per month until the US economy exhibits enough strength to sustain real growth and improving labor market conditions. Additionally, the Fed stated that it would continue Operation Twist
until the end of the year (purchasing long-term Treasury bonds with the proceeds from shorter-term debt sales to keep long-term interest rates low) and extended its timeline for maintaining low short-term interest rates into 2015. Investors
responded with enthusiasm and equity prices surged.
Additional policy accommodation came at the end of September from
central banks in Japan and China. While market participants were mostly encouraged by the intervention from the worlds largest central banks, the global rally began to slow near the end of the quarter as investors questioned whether the
Feds stimulus programs would actually be effective in helping the US economy gain momentum. Also raising concerns was
2
CHESTNUT STREET EXCHANGE FUND
(A California Limited Partnership)
INVESTMENT ADVISERS REPORT (Continued)
|
|
|
Market Review
(concluded)
|
|
Third Quarter 2012
|
uncertainty about the upcoming US presidential election and the threat of the United States falling off the fiscal cliff (the expiration of the Busch-era tax cuts and other provisions coupled
with automatic spending cuts at the turn of the year). All the while, the broader issues around Europes ongoing debt crisis remain unresolved.
Energy stocks (+10.14%) led the S&P 500
®
Index
during the third quarter as oil prices rose. The telecommunication services sector (+8.06%) continued to deliver strong returns. Consumer discretionary (+7.44%) and information technology (+7.42%) performance reflected a more optimistic view on
consumer spending. Financial stocks (+6.94%) benefited from the global central bank policy moves during the quarter. Nine of the ten sectors moved up for the quarter, while utilities (-0.53%) posted a marginal loss.
3
CHESTNUT STREET EXCHANGE FUND
(A California Limited Partnership)
INVESTMENT ADVISERS REPORT (Continued)
|
|
|
Portfolio
Review
|
|
Third Quarter 2012
|
Summary
Aggressive monetary policy actions by the Federal
Reserve and European Central Bank boosted investor confidence during the quarter, lowered systemic risk, and helped propel the S&P 500 Index to its highest level in more than 4 ½ years. In addition to the expectation and announcement of
these open ended bond buying programs, improving housing data and Q2 earnings which were not as weak as anticipated created a much more favorable environment for US equities. Commodities also performed well during the period, driving both energy and
metals & mining stocks sharply higher. Within the S&P 500 Index, the energy sector provided the leadership, rebounding from the poor performance during the second quarter.
The Chestnut Street Exchange Fund underperformed the 6.3%
return posted by the S&P 500 Index during the third quarter. Stock selection in the information technology, materials and consumer staples sectors accounted for the underperformance, and more than offset stock selection in consumer discretionary
and health care.
Performance Attribution
Stock selection in the information technology sector accounted for much of the Funds underperformance during the quarter. The Funds technology holdings collectively declined, as the
large holding in Intel Corp. fell 14% during the period. The semiconductor company traded lower as PC sales showed signs of weakness and forced the company to pre-announce weaker than expected third quarter sales expectations. In addition, the
Funds lack of exposure to both Apple Inc. and Google Inc. detracted from relative performance as these two large benchmark holdings each posted strong double-digit gains.
The Funds investment in the materials sector also negatively impacted performance. The Funds largest holding in the sector, chemical producer Cabot Corp., declined during the period as
tire industry demand for the companys rubber products fell globally during the third quarter. In consumer staples, a large position in Coca-Cola Inc. contributed negatively as the stable growth global beverage company failed to participate in
the third quarter market rally.
Avoidance of the hotels restaurants and leisure industry combined with a large
overweight position in the media industry accounted for the relative strength in the consumer discretionary sector. Key contributors in the media industry included Comcast Corp. and CBS Corp., which each climbed more than 11%. In health care, the
Funds investments in Baxter International Inc. and Merck & Co. added value during the quarter.
Outlook
As a result of market movement and shares redeemed during the quarter, the Funds overall weightings in the financials and
consumer discretionary sectors increased modestly, while exposure to the information technology sector declined. We used investor redemptions to eliminate the Funds investments in Cabot Microelectronics Corp. and Hospira Inc., and reduced
positions in Wal-Mart Stores Inc. and Exxon Mobil Corp. The Fund remains well diversified, with the largest weightings in the financials, health care, industrials
and consumer staples sectors. Relative to the S&P 500 Index, the Fund holds significant overweights in the industrials, consumer staples, and health care sectors, and notable underweights in
information technology, utilities, and consumer discretionary.
4
CHESTNUT STREET EXCHANGE FUND
(A California Limited Partnership)
INVESTMENT ADVISERS REPORT (Concluded)
|
|
|
Portfolio Review
(concluded)
|
|
Third Quarter 2012
|
Any opinions expressed are those of BlackRock as of the date of this report and are subject to change based on changes in market or economic conditions. Past performance is not a guarantee of
future results. There is no guarantee that forecasts made herein will come to pass. The comments should not be construed as a recommendation for any individual holdings or market sectors. Information and opinions are derived from proprietary and
non-proprietary sources deemed by BlackRock to be reliable. We cannot guarantee the accuracy of such information, assure its completeness, or warrant that such information will not be changed without notice. Reliance upon information in this report
is at the sole discretion of the reader.
5
CHESTNUT STREET EXCHANGE FUND
(A California Limited Partnership)
PERFORMANCE SUMMARY
As of September 30,
2012
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chestnut Street
Exchange Fund
|
|
|
S&P 500
Index
|
|
|
DJIA
Index
|
|
3rd Quarter 2012
|
|
|
4.42%
|
|
|
|
6.35%
|
|
|
|
5.02%
|
|
1 Year
|
|
|
29.34%
|
|
|
|
30.20%
|
|
|
|
26.52%
|
|
3 Years*
|
|
|
12.54%
|
|
|
|
13.20%
|
|
|
|
14.46%
|
|
5 Years*
|
|
|
1.16%
|
|
|
|
1.06%
|
|
|
|
2.17%
|
|
10 Years*
|
|
|
6.88%
|
|
|
|
8.02%
|
|
|
|
8.61%
|
|
Inception (12/29/76)
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized*
|
|
|
10.87%
|
|
|
|
10.81%
|
|
|
|
9.46%
|
|
Cumulative
|
|
|
3898.10%
|
|
|
|
3818.29%
|
|
|
|
2431.38%
|
|
The performance data represent past performance and should not be considered indicative of future
performance which will fluctuate with changes in market conditions. These performance fluctuations will cause an investors shares, when redeemed, to be worth more or less than their original cost.
In addition, the data does not reflect the deduction of taxes that a shareholder would pay on distributions or redemption of Fund
shares.
B
LACKROCK
C
APITAL
M
ANAGEMENT
, I
NC
.
6
CHESTNUT STREET EXCHANGE FUND
(A California Limited Partnership)
STATEMENT OF NET ASSETS
September 30, 2012
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Value
|
|
COMMON STOCKS98.4%
|
|
BASICS4.8%
|
|
Air Products & Chemicals, Inc.
|
|
|
72,392
|
|
|
$
|
5,986,818
|
|
Cabot Corp.
|
|
|
86,032
|
|
|
|
3,146,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,133,008
|
|
|
|
|
|
|
|
|
|
|
CAPITAL EQUIPMENT7.7%
|
|
Emerson Electric Co.
|
|
|
131,650
|
|
|
|
6,354,746
|
|
General Electric Co.
|
|
|
364,049
|
|
|
|
8,267,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,622,299
|
|
|
|
|
|
|
|
|
|
|
CONSUMER CYCLICALS12.0%
|
|
3M Co.
|
|
|
27,565
|
|
|
|
2,547,557
|
|
CBS Corp.,Class B
|
|
|
60,100
|
|
|
|
2,183,433
|
|
Comcast Corp.,Class A
|
|
|
149,743
|
|
|
|
5,356,307
|
|
Procter & Gamble Co.
|
|
|
85,100
|
|
|
|
5,902,536
|
|
Walt Disney Co. (The)
|
|
|
129,129
|
|
|
|
6,750,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,740,697
|
|
|
|
|
|
|
|
|
|
|
ENERGY10.3%
|
|
Exxon Mobil Corp.
|
|
|
122,789
|
|
|
|
11,229,054
|
|
Schlumberger, Ltd.
|
|
|
114,584
|
|
|
|
8,287,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,516,915
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL16.0%
|
|
American Express Co.
|
|
|
98,525
|
|
|
|
5,602,132
|
|
Ameriprise Financial, Inc.
|
|
|
22,266
|
|
|
|
1,262,260
|
|
Bank of America Corp.
|
|
|
56,084
|
|
|
|
495,222
|
|
JPMorgan Chase & Co.
|
|
|
140,310
|
|
|
|
5,679,749
|
|
Moodys Corp.
|
|
|
82,738
|
|
|
|
3,654,537
|
|
Wells Fargo & Co.
|
|
|
391,823
|
|
|
|
13,529,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,223,548
|
|
|
|
|
|
|
|
|
|
|
HEALTH CARE14.6%
|
|
Abbott Laboratories
|
|
|
130,891
|
|
|
|
8,973,887
|
|
Baxter International, Inc.
|
|
|
64,986
|
|
|
|
3,916,056
|
|
Johnson & Johnson
|
|
|
100,789
|
|
|
|
6,945,370
|
|
Merck & Co., Inc.
|
|
|
171,108
|
|
|
|
7,716,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,552,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Value
|
|
RETAIL2.4%
|
|
Home Depot, Inc.
|
|
|
23,400
|
|
|
$
|
1,412,658
|
|
Kohls Corp.
|
|
|
15,200
|
|
|
|
778,544
|
|
Safeway, Inc.
|
|
|
44,558
|
|
|
|
716,938
|
|
Wal-Mart Stores, Inc.
|
|
|
21,410
|
|
|
|
1,580,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,488,198
|
|
|
|
|
|
|
|
|
|
|
STAPLES9.5%
|
|
Altria Group, Inc.
|
|
|
18,000
|
|
|
|
601,020
|
|
Coca-Cola Co. (The)
|
|
|
314,344
|
|
|
|
11,923,068
|
|
Hanesbrands, Inc.*
|
|
|
5,688
|
|
|
|
181,333
|
|
Kraft Foods, Inc.,Class A
|
|
|
12,456
|
|
|
|
515,056
|
|
PepsiCo, Inc.
|
|
|
43,600
|
|
|
|
3,085,572
|
|
Philip Morris International, Inc.
|
|
|
18,000
|
|
|
|
1,618,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,924,969
|
|
|
|
|
|
|
|
|
|
|
TECHNOLOGY12.8%
|
|
Check Point Software Technologies Ltd.*
|
|
|
52,400
|
|
|
|
2,523,584
|
|
Cisco Systems, Inc.
|
|
|
32,700
|
|
|
|
624,243
|
|
Hewlett-Packard Co.
|
|
|
18
|
|
|
|
307
|
|
Intel Corp.
|
|
|
335,071
|
|
|
|
7,599,410
|
|
International Business
Machines Corp.
|
|
|
39,708
|
|
|
|
8,237,425
|
|
Microsoft Corp.
|
|
|
95,282
|
|
|
|
2,837,498
|
|
Oracle Corp.
|
|
|
74,000
|
|
|
|
2,330,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,152,727
|
|
|
|
|
|
|
|
|
|
|
TRANSPORTATION4.8%
|
|
Union Pacific Corp.
|
|
|
75,444
|
|
|
|
8,955,203
|
|
|
|
|
|
|
|
|
|
|
UTILITIES3.5%
|
|
Verizon Communications, Inc.
|
|
|
143,830
|
|
|
|
6,554,333
|
|
|
|
|
|
|
|
|
|
|
Total Common Stocks
|
|
|
|
|
|
|
|
|
(Cost: $33,168,272)
|
|
|
|
|
|
$
|
185,864,181
|
|
|
|
|
|
|
|
|
|
|
See
Accompanying Notes to Statements of Net Assets.
7
CHESTNUT STREET EXCHANGE FUND
(A California Limited Partnership)
STATEMENT OF NET ASSETS (Concluded)
September 30, 2012
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value
|
|
TOTAL INVESTMENT IN SECURITIES
|
|
(Cost 33,168,272)**
|
|
|
98.4
|
%
|
|
$
|
185,864,181
|
|
Other assets in excess of liabilities
|
|
|
2.1
|
%
|
|
|
3,844,463
|
|
Distribution payable
|
|
|
(0.4
|
%)
|
|
|
(665,802
|
)
|
Other Liabilities
|
|
|
(0.1
|
%)
|
|
|
(88,969
|
)
|
|
|
|
|
|
|
|
|
|
NET ASSETS
|
|
|
|
|
|
|
|
|
(Applicable to 477,722 partnership shares outstanding)
|
|
|
100.0
|
%
|
|
$
|
188,953,873
|
|
|
|
|
|
|
|
|
|
|
Net Asset Value Per Share
|
|
|
|
|
|
$
|
395.53
|
|
|
|
|
|
|
|
|
|
|
Net assets applicable to shares owned by:
|
|
Limited partners
|
|
|
|
|
|
|
|
|
(477,630 shares)
|
|
|
|
|
|
$
|
188,917,484
|
|
Managing general partners
|
|
|
|
|
|
|
|
|
(92 shares)
|
|
|
|
|
|
|
36,389
|
|
|
|
|
|
|
|
|
|
|
Total net assets
|
|
|
|
|
|
$
|
188,953,873
|
|
|
|
|
|
|
|
|
|
|
**
|
At September 30, 2012, the federal tax cost, aggregate gross unrealized appreciation and depreciation of securities held by the Fund were as follows:
|
|
|
|
|
|
Federal tax cost
|
|
$
|
30,721,286
|
|
|
|
|
|
|
Gross unrealized appreciation
|
|
|
155,142,895
|
|
Gross unrealized depreciation
|
|
|
0
|
|
|
|
|
|
|
Net unrealized appreciation
|
|
$
|
155,142,895
|
|
|
|
|
|
|
The difference between book basis and tax basis of investments is attributable to the use of the Individual
partners tax basis for those securities contributed to the Fund at its inception, as required by law.
See
Accompanying Notes to Statements of Net Assets.
8
CHESTNUT STREET EXCHANGE FUND
(A California Limited Partnership)
NOTES TO STATEMENT OF NET ASSETS
September 30, 2012
(Unaudited)
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period.
Actual results could differ from those estimates. The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements.
Securities listed or traded on an exchange are valued generally at the last sales price as of the close of the customary trading
session on the exchange where the security is principally traded, or lacking any sales on a particular day, valued at the closing bid price on that day. Each security reported on the NASDAQ Stock Market, Inc. is valued at the NASDAQ Official Close
Price. Securities for which market quotations are not readily available or are believed to be unreliable are valued at fair value as determined in good faith using methods approved by the Managing General Partners. Short-term obligations having 60
days or less to maturity are valued at amortized cost which approximates market value.
Fair Value
Measurements
The inputs and valuation techniques used to measure fair value of the Funds investments are summarized into three levels as described below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
|
quoted prices in active markets for identical securities
|
|
|
|
|
|
|
Level 2
|
|
|
|
other significant observable inputs (including quoted prices for identical securities in active markets and for simular securities, interest rates, prepayment speeds,
credit risk, etc.)
|
|
|
|
|
|
|
Level 3
|
|
|
|
significant unobservable inputs (including the Funds own assumptions in determining the fair value of investments)
|
The inputs or methodology used for valuing securities are not necessarily an indication of the risk
associated with investing in those securities.
At the end of each calendar quarter, management evaluates the
classification of Levels 1, 2 and 3 assets and liabilities. Various factors are considered, such as changes in liquidity from the prior reporting period; whether or not a broker is willing to execute at the quoted price; the depth and consistency of
prices from third party pricing services; and the existence of contemporaneous, observable trades in the market. Additionally, management evaluates the classification of Level 1 and Level 2 assets and liabilities on a quarterly basis for changes in
listings or delistings on national exchanges.
For the period ended September 30, 2012, there were no transfers between
Levels 1, 2 and 3 for the Fund.
9
CHESTNUT STREET EXCHANGE FUND
(A California Limited Partnership)
NOTES TO STATEMENT OF NET ASSETS (Concluded)
September 30, 2012
(Unaudited)
The following is a summary of inputs
used, as of September 30, 2012, in valuing the Funds investments carried at value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Value at
09/30/12
|
|
|
Level 1
Quoted
Price
|
|
|
Level
2
Significant
Observable
Inputs
|
|
|
Level
3
Significant
Unobservable
Inputs
|
|
Investments in Common Stocks*
|
|
$
|
185,864,181
|
|
|
$
|
185,864,181
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
See details of industry breakout.
|
For more information with regard to significant accounting policies, see the most recent annual report filed with the Securities and Exchange Commission.
10
[INTENTIONALLY LEFT BLANK]
MANAGING GENERAL
PARTNERS
Gordon L. Keen, Jr.
Edward J. Roach
Langhorne B. Smith
David R. Wilmerding, Jr.
INVESTMENT ADVISERS
BlackRock Capital Management,
Inc.
100 Bellevue Parkway
Wilmington, Delaware 19809
TRANSFER AGENT
BNY Mellon Investment
Servicing (US) Inc.
P.O. Box 8950
Wilmington, Delaware 19899
(800) 852-4750
Third Quarter
Report
September 30, 2012
(Unaudited)
Chestnut Street Exchange
Fund
103 Bellevue Parkway
Wilmington, Delaware 19809
(800) 852-4750
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