Stocks stalled in April as fears of a European collapse came back into play. Emerging markets appear shaky too while the U.S. market and economy were relatively strong. 

Our portfolios performed well relative to the benchmarks this past month. Our Conservative Portfolio was up 0.44%. Our Aggressive Portfolio gained 0.60%.

Benchmark Vanguard index funds for April: the Vanguard 500 Index (VFINX) was down 0.64%, while Vanguard Total Bond Market (VBMFX) gained 1.14%. Vanguard International Index (VTMGX) dropped 2.29% and Vanguard Emerging Markets Stock Index (VEIEX) fell 1.75%. 

The U.S. stock market has been outperforming the rest of the world for the better part of five years. Our own relatively recent moves back into foreign have proved to be a bit early.. 

Fund investors continue pulling money out of stock funds. We see around $10+ billion a month come out of ordinary mutual funds – an investment class that is in long term decline. If it wasn’t’ for 401k assets, there would be big problems in the mutual fund industrial complex. ETFs continue to bring in money to offset these losses in total fund assets.

The best performing stock fund categories last month included Utilities, up in the 1%-2% range, funds invested in Asia notably China, with returns in the 0.50% - 1% range.  Funds that short were up marginally, and smaller cap foreign funds did well with a 0.40% return. Bonds were much better, as is often the case when fear returns to markets. These funds were up 4.75% for the month, while more diversified long term bond funds gained 1.70%. Municipal bond funds did well, posting returns in the 1.3%-1.5% range.

At the bottom of the performance list in April: Latin American funds fell 4.3% and Japan funds dropped 3.48%. Foreign value oriented funds fell in the 1.3%-2.5% range.

April's Powerfund Winners

Our Government Bond fund Vanguard Extended Duration Treasury (EDV) rose 7.50% in April, ahead of its benchmark bond index by 6.4%.

American Century Utility Income (BULIX) climbed 1.79% last month. Utility stocks tend to do well when riskier parts of the market slide and bonds outperform.

Vanguard Long-Term Bond Index ETF (BLV) climbed 3.44% in April, better than the bond market by 2.3% as interest rates slid anew.

Scout International Discovery (UMBDX) gained 1.38% in April – a good showing for foreign stocks.

Health Care Select SPDR (XLV) slipped 0.27% in April, beating the S&P 500 by 0.4% as safer stock categories preformed relatively well.

April's Powerfund Losers

iShares MSCI Japan Index (EWJ) fell 4.28% in April, worse than the S&P 500 by 3.6%.

Vanguard European ETF (VGK) dropped 2.50% as fears resumed in the euro region.

Vanguard Europe Pacific ETF (VEA) lost 2.38% in April, on twin weakness in Japan and European stocks. 

Our Long/Short fund PowerShares DB Crude Oil Double Short (DTO) fell 2.29% in a month where renewed fears over the economy should have led to oil falling.

Jensen Value J (JNVSX) dropped 1.88% in April, worse than the S&P 500 by 1.2%, as value stocks globally were weak (other than healthcare, telecom, and utilities).

Investment grade bonds were flat while stocks continue to rise as investors continued the move back into riskier assets. Our returns were between the two.

In February, our conservative portfolio was up 1.39% while our aggressive portfolio was up 2.31%. The benchmark Vanguard 500 (VFINX) fund delivered a 4.31% return for the month while Vanguard Total Bond Index (VBMFX) was down 0.05%. Foreign stocks, as measured by Vanguard Tax-Managed International (VTMGX), were up 5.12% while emerging market stocks, as measured by Vanguard Emerging Markets Stock Index (VEIEX), gained 5.56%.

Typically emerging market stocks rebound faster than the US stock market when the market heads back up (like we saw in January) but there seems to be some fears around that the emerging markets era of outperformance is waning and the US may be more insulated than faster growing markets from Europe’s ongoing troubles. 

European and technology stocks rose the most, both up just under 7%, followed closely by financials and growth stocks in general. Safer stocks that did well last year, notable healthcare and real estate, delivered relatively lackluster returns of around 2%. The only area of weakness was real estate funds, down 0.71% in February. Rents are doing well, but home prices are slipping anew and are at post 2006 lows – significant given how low mortgage rates are today. Higher risk bonds did well in February. Funds investing in emerging markets and high yield bonds were strong, up 2.84% and 2.16% respectively.

Our February Benchmark Beaters:

Vanguard European ETF (VGK) rose 5.42% in February, ahead of the benchmark S&P 500 by 1.1%.

Our Mortgage Bond fund Doubleline Total Return Bond (DLTNX) increased 0.94% in February, better 1% better than the bond market benchmark.

With a dose of higher risk bonds, Investment Grade Bond fund Metropolitan West Total Return (MWTRX) increased 0.73% in February, better than the bond market by 0.8%.

Royce Financial Services Fund (RYFSX) climbed 4.91% in February, beating the S&P 500 by 0.6% as financials continued to rebound.

Scout International Discovery (UMBDX) climbed 4.90% in February, better than the S&P 500 by 0.6% as foreign markets recovered. Vanguard Europe Pacific ETF (VEA) climbed 4.88%. 

Last Month's Misses:

Our alternative fund PowerShares DB US Dollar Index (UUP) slipped 0.72% in February, worse than the S&P 500 by 5% as the US dollar lost some safe haven support.

Health Care Select SPDR (XLV) increased 1.06% in February, while American Century Utility Income (BULIX) rose just 1.37% as investors favored riskier stocks.

PRIMECAP Odyssey Growth (POGRX) rose a mere 1.88% in February, 2.4% worse than the S&P 500 and a poor showing in a month that was good for tech and growth in general. The fund is very heavy in healthcare including biotech, with some underperformers for the year.

An early December slide threatened to push the market into the red for 2011, but a late month rebound gave stocks a 1.97% return for the year (with dividends). For 2011 there was plenty of volatility for what ultimately turned out to be a near-flat year.

Our Conservative Portfolio was up 0.92% last month while our Aggressive Portfolio was down 0.26%. The benchmark Vanguard 500 (VFINX) fund delivered a 1.02% return while Vanguard Total Bond Index (VBMFX) was up 1.09%. Foreign stocks, as measured by Vanguard Tax-Managed International (VTMGX), were down 2.33% for the month while emerging market stocks, as measured by Vanguard Emerging Markets Stock Index (VEIEX), were down 3.32%.

For 2011 our Conservative Portfolio was up a respectable 3.5% while our Aggressive Portfolio’s winners couldn’t overtake the drag of foreign markets and financials, giving us a 0.41% loss for the year. A drop of less than one-half of one percent may compare favorably to most global portfolios (the Morningstar Global Allocation category was down about 4% for 2011), but we consider it a disappointing result.

It was anything but flat for foreign stocks in 2011, with a -12.51% return for the year. This 14.48% gap is the biggest between the EAFE index and the S&P 500 this decade. Money put in a foreign stock index at the end of 2007 is now down 28.6% compared to only 6.6% for the S&P 500, and this was a time most fund investors favored foreign stocks because foreign stocks whipped US stocks in 2002-2007. If we get another year even half as bad for foreign stocks relative to US stocks the entire excess return of foreign stocks over US stocks in the 2000 decade will be gone. In fact our own increasing stakes in foreign stocks this year is largely why our Aggressive Portfolio missed the S&P 500 by a small margin in 2011 (we were a little early returning more to this now underperforming area).

Emerging markets were even harder hit, down 18.78% for the year after a steep 3.32% drop in December. Now emerging markets are also underperforming the S&P 500 since the end of 2007, but because of simply massive returns in the early part of the decade are still way ahead of larger cap US and foreign stocks for the last ten years.

Bonds were up 1.09% in December and once again delivered a return higher than expected as rates continued ever downward. 2011’s total return was good for 7.57% - the best debt performance since 2002. Considering how much lower yields were to start 2011 we just saw perhaps the greatest return above and beyond the actual bond yield of the portfolio for the decade (in other words the actual interest payments were perhaps only a bit over 4% of this year’s 7.57% return, the rest was bond price appreciation). No wonder bonds are getting all the new money (and no wonder the next ten years of bond returns are going to be lackluster).

The best performing stock fund categories last month were real estate (up 4.40%), healthcare  (up 2.00%), utilities (up 1.90%), large cap value (up 1.20%), and financials (up 1.00%). We were in three of these four best performing categories. 

The worst performing were natural resources (down 4.90%), Asia (down 4.70%), and emerging markets (down 3.60%).

December’s Benchmark Beaters:

Our ultra-long duration government bond fund Vanguard Extended Duration Treasury (EDV) rose 5.42% in December, better than the bond market by 4.3%.

Long/Short fund PowerShares DB Crude Oil Double Short (DTO) climbed 3.01% last month, topping the S&P 500 by 2.0% as oil slid on economic and European fears.

Health Care Select SPDR (XLV) capped off a great year by jumping another 2.95%, better than the S&P 500 by 1.9%.

Vanguard Long-Term Bond Index ETF (BLV) climbed 2.41% in December, better than the bond market by 1.3%.

Satuit Capital Micro Cap (SATMX) rose 2.22%, besting the S&P 500 by 1.2%.

American Century Utility Income (BULIX) climbed 2.19% last month, better than the S&P 500 by 1.2% as investors scared of risk piled into bonds and safer stocks.

PowerShares DB US Dollar Index (UUP) climbed 1.86% as investors retreated to the safety of the US dollar in the face of euro fears.

December’s Benchmark Laggers:

Scout International Discovery (UMBDX) fell 3.86% in December, worse than the S&P 500 by 4.9%.

Vanguard European ETF (VGK) dropped 2.35% last month, worse than the S&P 500 by 3.4%.

iShares MSCI Japan Index (EWJ) fell 2.27%, worse than the S&P 500 by 3.3%.

Vanguard Europe Pacific ETF (VEA) retreated 2.15% in December, worse than the S&P 500 by 3.2%.

Royce Financial Services Fund (RYFSX) slipped -0.93% in December, lagging the S&P 500 by -1.9%.

Five months of negative returns in a row for stocks had to end with a sharp rebound. A 10.91% jump in U.S. stocks in October pushed the market up for 2011, but just by a little over 1%. Larger cap foreign stocks have only gained 5.65% year to date and are still down by high single digits in 2011. Emerging markets rebounded 13.51% and were still down 13% year to date. Supposedly the Greece situation is coming to an acceptable solution…except every few days that seems too change.

One oddity of the new market environment is everything that is somewhat risky to very risky has been moving in near perfect sync - so wild swings tend to hit everything the same way, making well diversified portfolios appear quite risky. Longer term government bonds –which have limited long term appeal at current low rates, remain the best offset to sliding everything, almost always going up significantly when fears drive riskier global assets down.

Our portfolios are a little too heavy in bonds and safer categories that did well on the way down, (specifically utilities and healthcare) to jump as much as the market on such a big rebound, but both are also beating the S&P 500 year to date with less volatility. We could have used another stock allocation increase in our aggressive portfolio as we neared Dow 10,000 but were getting a little greedy for deals as the fear was building in the market.

In October, Our Conservative portfolio was up 2.82% while Our Aggressive portfolio gained 4.62%. The benchmark Vanguard 500 (VFINX) fund delivered a 10.91% return in October while Vanguard Total Bond Index (VBMFX) returned 0.16%. Foreign stocks, as measured by  Vanguard Tax-Managed International  (VTMGX), gained 5.65% while emerging market stocks as measured by Vanguard Emerging Markets Stock Index (VEIEX) were up 13.51%

The best performing stock fund categories last month were Latin America, up 17%, natural resources, up 16.8%, and energy, up 16.50%. The worst performing were Japan, down -1.00%, Utilities, up 6.05% and Healthcare, up 6.37% - basically the categories that did the best on the way down. In bonds, junk bond funds were up 5.52% followed closely by emerging market bond funds, up 5.35%, while long term government bond funds slid 3.51%.

In portfolio fund action in October:

Our alternative fund Satuit Capital Micro Cap (SATMX) soared 15.91% in October, better than the S&P 500 by 5.0%.

Our Large Cap Value fund Homestead Value Fund (HOVLX) soared 13.07% in October.

Vanguard European ETF (VGK) rose 12.42% in October, better than the S&P 500 by 1.5% and foreign stocks in general as Europe – hit the hardest in the crisis rose the most on any good news for the area.

Large Cap Growth fund PRIMECAP Odyssey Growth (POGRX) jumped 12.13% in October.

Our Investment Grade Bond fund American Century Core Plus (ACCNX) increased 0.93% in October, better than the bond market by 0.8%

Our Investment Grade Bond fund Metropolitan West Total Return (MWTRX) increased 0.65% in October, better than the bond market by 0.5%

In underwhelming performance:

Our alternative fund PowerShares DB US Dollar Index (UUP) fell -3.30% in October, worse than the S&P 500 by -14.2% as the US dollar sunk after climbing during the Greece crisis.

iShares MSCI Japan Index (EWJ) slipped -0.63% in October, worse than the S&P 500 by -11.5%.

Our extremely long duration Government Bond fund Vanguard Extended Duration Treasury (EDV) sank -6.68% in October, worse than the bond market by -6.8%

Vanguard Telecom Services ETF (VOX) climbed 4.20% in October, worse than the S&P 500 by -6.7%.

We’ve executed a trade in both the Conservative and the Aggressive Powerfund Portfolios today, September 19th 2011. The main goal is a small increase in stock fund allocation by 5% for the aggressive portfolio and 1% for the conservative portfolio because stocks, while riskier, are more attractively priced than bonds after the slide in stocks this year. More important to our methodology, fund investors are taking money out of stocks and going into bonds at elevated levels. 

Note that while we are not increasing our stock allocation significantly in our Conservative Portfolio, we are shifting to significantly riskier bonds funds, notably a zero coupon bond ETF that is more volatile than stocks - yearly swings of 25%-50% are common with such bond fund, but can offer some offsetting protection in the case of a significantly slowing economy with falling inflation expectations.

You can view the Conservative Portfolio’s trade chart by clicking here, and you can access the Conservative Portfolio’s trade calculator by clicking here.

The Aggressive Portfolio’s trade chart can be viewed by clicking here, and the Aggressive Portfolio’s trade calculator can be found here.

As always check with your fund or broker on short term redemption fees, if any, on selling fund shares and try to minimize all such fees. Also consider trying to book long term capital gains where possible. We have owned these funds for over a year but that doesn’t mean you have.

Redemption Fee Information:

A redemption fee of 2%/60 in the table above indicates that an investor will be required to pay a 2% fee on shares sold within 60 days of purchase.