New User?April 2004 performance review
The SSgA Tuckerman Active REIT (SSREX) fund is no longer in this portfolio – we cashed out of funds that invest in REITs (real estate investment trusts) last summer. While we missed some upside in the fund, we also missed last months 15% fall. Given that stocks are more expensive then last year, if REITs fall another 15% or so we may add a small stake again.
The Conservative portfolio fell 2% in April which given the fall in bonds is not too bad for a bond-oriented portfolio. When bonds take a big hit, even short term bonds slip. Our stake in Vanguard Short Term Corporate (VFSTX) fell around 1.1%. Keep in mind longer term bonds fell over 5%. While short term bonds are better in a rising rate environment there are scenarios where long term bonds are better. If the yield curve flattens out with short term rates climbing while long term rates stay the same (or fall) short term bond investors will under-perform long term bond investors.
The biggest hit in the portfolio was the American Century International Bond fund, down a sharp 4%. We recently cut this fund back to 10% from 20% and would consider going back up to 20% if the fund falls more. Last year the fund was 25% of the portfolio. Even with the pullback, the fund is still up 38% since added in April 2002.
Recently added Bridgeway Balanced (BRBPX) fell 1.78% as the bond side of the fund took a hit, along with a slight decline in portfolio stock holdings, offset but some stock option income.
Utility stocks often tank when rates rise as the stocks are largely owned for the dividend, a dividend that is less attractive when government bonds pay more. American Century Utility Income (BULIX) fell 3.75%.
The growth portfolio fell 2.2% in April. The weakest links were Artisan International Small Cap (ARTJX), down 3.35% and SSgA Emerging Markets (SSEMX), down almost 9%.
Small cap and emerging market foreign stocks have both been so hot for over a year that it would be almost unfair to the other funds if they didn’t have a rough month or two. We recently cut this fund is down to 10% from our original stake of 20%.
Our stake in Vanguard Short Term Corporate (VFSTX) fell around 1.1%. Keep in mind that longer term bonds fell over 5%. While short term bonds are better in a rising rate environment, there are scenarios where long term bonds are better. If the yield curve flattens out with short term rates climbing while long term rates stay the same (or fall) short-term bond investors will under-perform long term bond investors. In general we think bonds were due for a pullback, which explains our shorter term bond focus. This may shift if rates continue to climb.
The largest stocks in the market actually held up well. The recently added Bridgeway Blue-Chip 35 index was down just .29% in April. Another Bridgeway fund we recently slimmed down our stake in didn’t have such a nice month; Bridgeway Ultra Small Company Market (BRSIX) fell 4.6% in April. We trimmed down to 5% last summer - a little early, but our old 20% stake is too much given the valuations and condition of the market.
March 2004 performance review
Our recent spring cleaning seemed to help the Conservative portfolio. For the month it was up .29%, which may not sound like much, but given the stock market’s decline and our shorter duration bond holdings we’ll take it with a smile.
The worst performing fund was the formerly red-hot foreign small cap fund Forward International Small Cap (PISRX), which slipped 1.84%. This didn’t hurt the portfolio much as we cut the fund’s allocation in half at the end of February.
The Vanguard Dividend Growth fund also posted negative numbers in March, down 1.30%. Virtually all larger-cap U.S. stock funds slipped in March.
Newly added Bridgeway Balanced fund rose .90%, our best performer. The bonds in the fund did quite well, and covered calls (which the fund owns) generally do well with stock price declines. The fund was also helped recently by a general lowering of option premiums, which lowers the market price of options. Written options are a liability for the fund, and if their market price falls the funds NAV generally goes up.
The new funds added for March helped the Aggressive Growth portfolio for the most part. For the month the portfolio gained 1.58%, outpacing the stock market as a whole.
The portfolio had a great month considering how most stock funds preformed. The only declines were in Gabelli Global Telecom, down 2.64%, and the just-added Bridgeway Blue-Chip, down 2% (large cap stocks generally fell the most in March).
The big gainer was the T. Rowe Price Japan fund – up a whopping 16.18% in March. The Japanese comeback is convincing more and more investors. This move to near three year highs for the market in Japan was particularly noteworthy as other international markets were flat.
We threw in the towel a little early in higher risk debt. Both the Fidelity New Markets Income fund and Northeast Investors climbed, although the later did no better then our recently added Vanguard Total Bond Index. Emerging market bonds were particularly strong even with a recovering U.S. dollar, Fidelity New Markets was up near 2.5%.
In contrast to the very similar Forward International Small Cap (PISRX), which slipped 1.84%, Artisan International Small Cap rose .84%.
Emerging markets remained a top area, lifting the SSgA Emerging Markets Fund 1.25%, bringing our total return since added in April 2002 to almost 75%.
February 2004 performance review
For the conservative portfolio we sold our 5% position in the Northern Income Equity (NOIEX) fund. We originally added this fund in April 2002 and the fund was up 13.5% over that time period. Convertible bonds benefit from upward movements in stock prices as the value of the conversion feature increases. Convertible bonds yield less then comparable risk corporate bonds because of this upside potential. As stock prices are back to fully valued, we think the below average yield will hold back portfolios going forward.
We cut back on American Century International Bond (BEGBX) to 10% from 20% of the total portfolio as we feel the big fall in the U.S. dollar is largely over. Foreign bonds should almost always play a part in any diversified low volatility portfolio, but 20% is more than we want for the time being. One factor that will prevent the U.S. dollar from racing back to the levels of a few years ago is our ongoing trade imbalance, which has yet to shrink even with the now-weak dollar. This fund is up over 43% since we put it in the portfolio in April 2002, largely because of the falling dollar and to a lesser extent falling global interest rates
We sold all holdings in the American Century Equity Income (TWEIX). This conservative fund is a bit more expensive then it should be and American Century is converting the fund into load classes, making no load investing for new investors impossible. Like many lower risk stock funds, this fund has underperformed in the recent bull market. Since added to the portfolio in April 2002, the fund is up 14.8%
International small cap stocks used to be out of favor and a pretty good value relative to most stocks. We put the higher-risk Forward International Small Company fund (PISRX – was called Pictet International Small Company until recently) in this portfolio back on August 1st 2003 and the fund is now up 45% from that date. Current valuations make this fund too risky for a large allocation, so we cut the fund’s stake down to 5%.
We increased the allocation to Vanguard Short Term Corporate (VFSTX) from 25% or total portfolio to 30% as a parking place while longer-term bonds and stocks are not attractively priced.
We’ve added a 15% stake to the Bridgeway Balanced Fund (BRMPX). This fund writes calls and puts on stocks held in the portfolio and owns bonds. The effect is an almost income oriented stock fund with a risk profile slightly higher then a junk bond fund, but quite a bit less then normal stock funds. This fund is a bit more risky then the similar Gateway (GATEX) fund in our safety portfolio largely because it can lose more if the stock market falls quickly.
In the aggressive growth portfolio we got rid of our remaining allocation to the Fidelity New Markets Income (FNMIX), which was down to 5% from pervious sales. We liked everything about this fund a couple years ago – high risk bond category, falling dollar play, high yield. Today, after a 37% move up after we added the fund, we are cutting lose. Investors are getting too comfortable with risk, and buying emerging market bonds like the ones in this fund after the big run up is giving an investor not much in yield and a lot of potential headaches.
We’re not crazy about junk bonds after the big moves up last year. The Northeast Investors (NTHEX) is a low risk choice and has underperformed in a risk loving environment. This fund will hold up better then most when the risk pendulum swings the other way, but we are still cutting it loose. This fund is up about 15% since added to the portfolio, more then the S&P500 but less then higher risk bond funds.
Small cap has been hot worldwide. Our stake in Artisan International Small Cap (ARTJX) is up 65% since we added it in April 2002 compared to the S&P500s paltry single digits. We’ve cut it back to 10% of the total portfolio from 20% of the total portfolio based largely on higher valuations and limited upside from here.
In keeping with our large-cap-stocks-are-no-longer-evil theme (after years of bad mouthing overpriced large cap stocks that got carried away with late 90s insanity), we’ve added the Bridgeway Blue-Chip 35 (BRLIX). The 10% allocation is a blend of just a few mega cap stocks. This fund is about the lowest fee retail oriented fund in the world, leaving what little returns this market offers in the hands of investors.
The new 10% allocation of the Payden Global Short Bond (PYGSX) will give the portfolio a diversified, low fee exposure to shorter term bonds. This low risk fund will likely never go up or down in the double digits in a year. This fund is hedged against currency fluctuations, which normally is something we avoid as we feel a portfolio should have unhedged foreign exposure for diversification.
March 2004 Trade Alert!
We are making the following change to our Conservative portfolio on February 27th 2004:
<ul><li><font color="red"><b>SELL</b></font> All holding of Northern Income Equity (NOIEX). This holding was 5% of the total portfolio.
<li><font color="red"><b>SELL</b></font> Reduce American Century Intl. Bond (BEGBX) to 10% of the total portfolio from 20% of the total portfolio.
<li><font color="red"><b>BUY</b></font> Reduce Pictet International Small Company to 5% of the total portfolio from 10% of the total portfolio.
<li><font color="red"><b>BUY</b></font> Increase allocation of the Vanguard Short Term Corporate Fund (VFSTX) with proceeds of the above sales from 25% or total portfolio to 30%.
<li><font color="red"><b>BUY</b></font> New allocation of the Bridgeway Balanced Fund (BRMPX) with proceeds of the above sales. The new Bridgeway fund allocation will be 15% of the Conservative Portfolio. </ul>We’re lowering our risk level slightly by moving some profits into more conservative investments. Stocks (particularly foreign stocks), convertible bonds tied to stocks, and foreign bonds have all risen in the last year. The reward for risk taking will be lower going forward.
We are making the following change to our Aggressive Growth portfolio on February 27th 2004:
<ul><li><font color="red"><b>SELL</b></font> Total holding of Fidelity New Markets Income (FNMIX) This holding was 5% of the total portfolio.
<li><font color="red"><b>SELL</b></font> Total holding of Northeast Investors (NTHEX). This holding was 10% of the total portfolio.
<li><font color="red"><b>SELL</b></font> Reduce Artisan International Small Cap (ARTLX) to 10% of the total portfolio from 20% of the total portfolio.
<li><font color="red"><b>BUY</b></font> New allocation of the Bridgeway Blue-Chip 35 (BRLIX) with proceeds of the above sales. The new Bridgeway fund allocation will be 15% of the total portfolio.
<li><font color="red"><b>BUY</b></font> New allocation of the Payden Global Short Bond (PYGSX) with proceeds of the above sales. The new Bridgeway fund allocation will be 10% of the total portfolio.</ul> We’re lowering our risk level slightly by moving some profits into more conservative investments. Stocks (particularly foreign stocks and bonds and small cap stocks) have risen sharply and the reward for risk taking will be lower going forward. Last year was one were risk taking was handsomely rewarded, be it microc-ap, emerging markets, foreign small-cap, and junk bonds. We’re also lowering our portfolio expense ratio with the addition of some lower fee funds as some of the more targeted (and higher fee) funds are not as appealing as they were last year.
January 2004 performance review
With a larger equity stake then the safety portfolio, the conservative portfolio was up 1.42% in January. Utility stocks were strong, as they usually are when interest rates fall. The American Century Utility Income fund (BULIX) was up 1.8% for the month.
The weakest fund was the American Century International Bond fund (BEGBX) largely because the U.S. dollar rebounded slightly and forign bonds were not as strong as U.S. bonds. As a near direct dollar play, this fund is probably our most volatile non-stock fund, although over the long hall its quite conservative as the dollar can’t rise (or fall) forever. This fund has had a spectacular run and we may ease up our allocation, however, we feel some non-US bond allocation is good for diversification regardless of the recent strong past performance; we just may want a smaller allocation for the time being. This fund has recently changed policy to allow a greater Yen denominated bond allocation.
Speaking of volatile, the white hot Forward International Small Company fund (formerly called Pictet International Small Company) fund was up 6.26% for the month. As this fund climbs it gets more risky, and we may have to consider lowering our exposure to keep the overall portfolio risk down.
The Aggressive Growth portfolio’s 2.51% return was fueled largely by smaller cap stocks continuing to outperform the rest of the market. This phenomenon is worldwide: Artisan International Small Cap (ARTJX) was up 3.2% and Bridgeway Ultra Small Company Market (BRSIX) was up a whopping 6.49% for the month.
Including 2002’s weak markets, this Bridgeway fund is up over 80% since we added it to the portfolio in early 2002. This Microcap trend is now trading mostly on momentum. New money going into these thinly traded stocks is pushing up prices. It is difficult to say when this effect will end, but the rational reasons to over allocate to micro cap has long passed. We’ve cut back on our over allocation, and may soon under allocate.
Japan was somewhat weak compared to other markets as the country deals with the possibility of a too-strong Yen hurting exports. T. Rowe Price Japan (PRJPX) was still up .97%.
The strong returns from emerging market bond investing slowed, with the Fidelity New Markets Income (FNMIX) fund up just .21% after many months of big gains. We think emerging market bond investing is due for a pullback or at least underperformance. The main factors keeping these bonds up are a continued desire to speculate by investors, a generally falling dollar, and emerging market economies that are flush with cash (relatively) because of rising commodity prices. High oil prices alone can probably keep countries such as Russia from having creditworthiness problems for the time being.
This entire portfolio is up some 50% over the last year. While pretty remarkable, if we didn’t cut back on some of the hotter funds and move to short term corporate bonds we’d be up even more spectacularly. We’re confident our strategy of lightening up on overexposed areas will help lower risk and increase returns over the long run.
December 2003 performance review
In December the Conservative portfolio climbed 3.45% to end the year up 19.2%. More conservative stocks were hot in December, of the ilk found in the Vanguard Dividend Growth fund (VDIGX) – the fund was the best performer in the portfolio, up just over 6%.
Nipping at Vanguard’s heels was the American Century International Bond fund (BEGBX), up a surprising 5.18%. For the year the fund gained just under 20%. Since we placed the fund in the portfolio in 2002, it is up 41.6%. The cause is a falling dollar, which slipped in December to the lowest level yet against the euro. My how far the dollar has fallen since we wrote our “Go Go euro” piece a few years back. Euro’s could be had for close to $.80 a couple years ago, now they are fetching some $1.30. When will the carnage stop? We think very soon. In fact, we don’t see the dollar falling much further then current levels. We will likely always have some foreign bond exposure in this portfolio, but we may lower our allocation soon. There has been quite a bit of new money flowing into foreign bonds of late, as investors follow their usual performance chasing, buy high patterns.
Bonds in general were hot in December, with even the low-volatility Vanguard Short Term Corporate fund climbing .59%. Seeing that the Harbor Bond fund (HABDX) was up just 1.06%, and seeing how other types of bonds have done in December, leads us to believe that Bill Gross, the Harbor Bond’s manager, is playing things very safe. He must have a good deal of the portfolio in shorter term bonds. He certainly can’t have much foreign unhedged debt, junk bonds, or longer term government bonds, given the mediocre performance last month compared to most bond categories. Stick with Gross - he knows more about bonds than most, and he is reassuring us about our recent moves to shorter term and out of higher risk bonds.
If you think we’re too pessimistic on occasion, take a gander at Mr. Gross’ monthly outlook column posted on the PIMCO (www.pimco.com) website. In fact, after reading his most recent outlook he confirmed the allocation we assumed based on the recent performance. He likes short and intermediate term treasuries, especially TIPS, or Treasury Inflation Protected Securities – default free government bonds that adjust with inflation. He paints a bleak picture, but facing reality early is better then late as an investor. For the record, Warren Buffett, is about as pessimistic about stocks as Gross is about bonds. It’s going to take some fancy footwork (not to mention low fees) to eek out gains for the foreseeable future.
The Pictet International Small Company fund (PISRX) is now being distributed by Forward funds, a fund family like Harbor that assembles funds from different managers. The new name is the Forward International Small Company fund. Still no-load. Same manager. Same great returns. Last month the fund scored another 5.5%, for a crazy 17.9% 3-month return and a whopping 61% for the year – one of the hottest funds in the business. Now we’re getting worried the small-cap foreign rally is getting long in the tooth, along with the U.S. small cap move. Maybe we worry too much, but that’s our job. We’re due to give the good people of Pictet another follow up call about the fund and the holdings. We’ll report back soon.
The Aggressive Growth portfolio was up 4.77% in December, finishing up a good year on a positive note. In 2003 the portfolio was up 44.56%, our top performing portfolio. Don’t forget its our second highest risk portfolio too, and can fall fairly sharply as well.
Japan had a strong month, with the T. Rowe Price Japan fund (PRJPX) up the most in the portfolio, a 7.1% gain. We’re glad, as Japan is one area that we have not cut back on after fairly big gains. If the U.S. dollar were to fall significantly further from these levels we would be concerned about the Japanese economic recovery.
Emerging market bonds weren’t particularly hot in December, but the dollar slipped, leading to a gain in the Fidelity New Markets (FNMIX) of almost 4% for the month. The fund was up just over 31% for the year. This move makes it the #4 no load, non institutional bond fund in the business by performance in 2003 out of over a thousand choices. For the record, the #2 bond fund (Excelsior High Yield UMHYX) was a fund we wrote about favorably on the MAXfunds website a year ago – just so you know that this wasn’t a fluke. And you just though of us as stock fund experts… OK, maybe it was a bit of a fluke, there are almost 1,000 no load taxable bond funds – don’t expect us to pick #2 and #4 again next year.
Small cap foreign stocks were hot again. The now-closed Artisan International Small Cap (ARTJX) fund was up 6.41% for the month, and a whopping 63% for the year. The substitute choice, the Pictet International Small Company fund (PISRX) is doing equally well. Frankly, the asset class is red hot. Now we’re getting worried the small cap foreign rally is getting long in the tooth, along with the U.S. small cap move. Maybe we worry too much, but that’s our job. For the record, the Pictet fund is now called Forward International Small Company fund, same ticker, same manager.
One of the hottest areas around in December was emerging markets. The SSgA Emerging Markets fund (SSEMX) was up 9.28% for the month, a remarkable run. The fund is up over 53% in 2003. Valuations are still somewhat reasonable, but getting stretched. We’ve come across some examples of stocks in emerging markets trading for similar valuations to U.S. based companies in similar businesses. This doesn’t make sense as these economies are really not growing that fast, and there are added risks involved in this type of investing. Emerging market stocks should be less costly than U.S. stocks to reward investors for the extra risk. When that discount slips away, it gets time to move on as an investor, or at least lighten up.
November 2003 performance review
Equities and debt both gained in November, but most of the action was in smaller cap issues. The Russell 2000 index was up over 3.5%.
The Aggressive Growth portfolio was up .95% in last month, barely outpacing the S&P500, Dow, and the Lehman Brothers Long Term Treasury bond index.
Japan was weak in November as a category, giving back a little of its strong recent gains. The Growth Portfolio’s T. Rowe Price Japan fund was down just under 5%. One question in the great recovery in long downtrodden Japanese equities is this: how well can a primarily export driven society do if our dollar keeps falling making their goods more expensive? One answer is that other currencies are not falling against the Yen. Another is that Japan makes some items in our country to create a natural hedge against currency movements.
The Bridgeway Ultra Small company market fund continued its big ascent, up 4.24% for the month. This fund is turning out to be one of the hottest funds of the year, gaining over 73% in the last 12 months. The fund benefited from a continued rally in micro cap stocks, but we are cautious about small and micro-caps going forward. It seems like the main reason investors hare clamoring into them is because “small caps always do well in the early stages of a recovery”.
Foreign stocks were strong in U.S. dollars, but in local currency were not up much more than our markets. The Artisan International Small Cap fund was up 2.26 %.
A falling dollar continues to reward foreign bond investors. The Fidelity New Markets Income fund was up 1.6% for the month. The possibility that Iraq’s outstanding debt with countries like France and Russia might not get repaid has not roiled emerging market debt.
As noted in the commentary for our more conservative portfolios, low risk investing will be difficult next year with possibly rising rates and inflation. Investing for growth won’t be much easier. While a chart of more speculative funds or markets looks like we are only just starting what should be a long big move back to the levels of a few years ago, the fact is we are not likely to hit those heights anytime soon.
A more realistic view of the market would indicate that current stock prices do not leave much room for big gains going forward. This is particularly true for smaller cap stocks and other more speculative fare.
Even the dollar, which we have been negative on for years, has fallen quite far and has likely hit bottom. This will hold back more big gains in foreign bonds and stocks.
Normally REITs (real estate investment trusts) make a good inflation hedge as they tend to borrow money to buy assets (properties). High inflation can increase the value of their real estate portfolio and income (rents) and make the debt easier to pay off. Real estate prices have already climbed, however, and there is risk in real estate at these prices. If we get a good size pullback in REIT prices and the economy remains strong enough to fill offices, we’ll consider adding REITs back to the portfolio.
Other traditional inflation hedges like gold are already priced high, and do not offer a safe haven at this time. Oil companies may prove to be safe place for investors as oil gets expensive when the dollar. Pharmaceuticals are another possible beneficiary of inflation and a weak dollar, but prices are not low enough to make such an investment low-risk enough for a very conservative investor. The recent drug bill passage does, however, add another reason to own drug stocks. We may be moving into these areas in the coming months.
October 2003 performance review
October was strong for stocks and weak for bonds. The Conservative portfolio was up 1.76%, not bad given its large bond stake. Stocks are just a 30% allocation here, so investors shouldn’t expect big upward movement just because stocks are hot.
If you liked the Pictet International Small Company (PISRX) fund’s big 5.75% return in September, you’ll be even happier this month. The fund almost doubled it for a whopping 10.65% 1 month return. The fund is now up over 23% in three months – more than the Nasdaq. Frankly, this is too big a move for fund in a conservative portfolio, but we have the rest of the portfolio safe enough to balance the riskier Pictet allocation. Small cap stocks like those in the Pictet fund are cruisin for a bruising. They just can’t keep up numbers like this much longer.
Other winners in October were the Northern Income Equity fund, up 3.37%, and the Vanguard Dividend Growth fund, up just shy of 5% and in line with the broader market. The Northern Income Equity fund is a convertible bond fund, not a stock fund, and tends to move more with the general level of the stock market than with bonds.
Shorter term bonds had a rough month as fears the fed will raise rates on the heels of better-than-expected economic growth numbers. The Vanguard Short Term Corporate fund fell .24%, which shows that short term bonds are anything but risk free in the short term. Still, longer term bonds fell over 2% for the month on inflation and interest rate fears. Frankly we’d like to see rates swoop up so we can move out on the yield curve and capture some more income. We’re tired of low rates and we’re sure anyone in money markets these last few years feels the same way.
The American Century International bond fund fell 1.1% - the portfolios worst performer.
Junk bonds moved against the bond tide and had a positive month. While junk (or high yield) bonds are interest rate sensitive (fall when rates rise), they are also responsive to the strength in the economy. A strong economy means fewer defaults by corporate America, which means investors are taking less risk in Junk bonds. As this “risk premium” falls and investors are more willing to buy junk bonds yielding less, junk bonds rally in price. Last month the Vanguard High Yield Corporate fund (VWEHX) was up 1.45% thanks to positive news on the economy. We feel there is still risk in the economy, and are no longer comfortable overweighting junk bonds at these relatively low current yields.
October was strong for stocks and weak for bonds. The Aggressive Growth portfolio, which is 70% in stocks, managed to keep pace with the broader market due to some above average stock funds. We’re happy about this because we’re taking less risk then a broad equity index right now, but keeping pace with market performance. The portfolio was up 5.22% for the month.
In the above average camp was the Artisan International Small Cap fund (ARTJX), up 7.3%, the Bridgeway Ultra Small Company Market fund (BRSIX), up 9.27%, the SSgA Emerging Markets fund (SSEMX) up 6.57%, the Gabelli Global Telecom (GABTX) fund, up almost 7%, and the T. Rowe Price Japan fund, up 8.87%. Japan remains hot, and we’re getting a little concerned over prices, not the local economy, which we think is back for real this time.
Moreover most of our bonds didn’t fall with the broader bond market weakness because investors were even more Ga-Ga over high risk debt. Junk bonds moved against the tide in bonds and had a positive month. While junk (or high yield) bonds are interest rate sensitive (fall when rates rise), they are also sensitive to the strength in the economy. A strong economy means fewer defaults by corporate America, which means investors are taking less risk in Junk bonds. As this “risk premium” falls and investors are more willing to buy junk bonds yielding less, junk bonds rally in price. Last month the Northeast Investors fund (NTHEX) was up 1.95% thanks to positive news on the economy. We feel there is still risk in the economy, and are not comfortable over weighting junk bonds anymore at these relatively low current yields. This is a solid, lower risk choice – the managers share our risk aversion and are keeping much of the portfolio in cash. They were a little early on that one, but better early than late.
The Vanguard Short Term Corporate fund fell .24%, which shows that short term bonds are anything but risk free in the short term. Still, longer term bonds fell over 2% for the month on inflation and interest rate fears. Frankly we’d like to see rates swoop up so we can move out on the yield curve and capture some more income. We’re tired of low rates and we’re sure anyone in money markets these last few years feels the same way.
September 2003 performance review
Stocks were down slightly in September while bonds rebounded strongly. The Conservative portfolio, being mostly bonds, was up smartly, logging in a 2.8% gain for the month. Over the last three months the portfolio was up 2.46%, while over the last year it has risen 17.4%
Leading the charge was the American Century International Bond fund (BEGBX), up 6.65%. This fund, which has returned some 32% since added to the portfolio, benefited from falling interest rates and a falling dollar – the foreign bond investor’s dynamic duo. While we love the diversification benefits of foreign bond investing, if these gains keep up much longer we will have to cut back on our position a bit here. Much of the fall in the U.S. dollar and interest rates has already happened. Our continued position is more reflective of a lack of compelling alternatives than love of foreign bonds right now.
We recently sold off our real estate sector fund holdings, which would have been up last month. Maybe it looks like a bad move now, but in a year from now you’ll see why we did it.
The Pictet International Small Company fund (PISRX) was up a crisp 5.75% for the month, about as much as it was up the month before. That’s a near 12% return since we added this fund to the portfolio just two months ago. Small cap foreign stocks have been as hot as U.S. small cap stocks over the last year, in fact, over the last few months they have been even hotter. Our other small cap foreign pick from our other model portfolios, the Artisan International Small Cap fund (ARTJX), has done equally well and recently closed to new investors after massive inflows. Both of these funds are relatively new offerings, showing that you don’t necessarily have to wait for a fund to age and have a great track record before you can invest. That said, we expect international small cap stocks to cool down. The Pictet fund is the highest absolute risk fund in the portfolio so we have the allocation low.
Our newly added Vanguard Short Term Corporate bond (VFSTX) fund tagged on 1.34%, about as much as you can hope to make in such an investment in a short time period. However, if interest rates rise again it will lose this much or slightly more just as quickly.
Our biggest loser was the Vanguard Dividend Income fund, down .9%. The Dow and S&P500 were both down over 1%. This move is inline with what we expect from this fund – about 85% of the downside risk of those indexes.
Junk bonds were strong, pushing the Vanguard High Yield Corporate fund (VWEHX) to a 2.11% gain. Junk bonds are officially no-longer undervalued as an asset class. There is plenty of risk here, and the current return on these bonds barely rewards investors for it anymore.
The American Century Utility Income fund (BULIX) was up 1.48% in Septermber. Utility stocks, which have under performed the market, have moved closely with interest rates recently. The assumption is higher rates hurt these companies for two reasons – higher debt costs and the dividend income gets less attractive as safe bond alternatives yield more.
Stocks were down slightly in September while bonds rebounded strongly. The Aggressive Growth portfolio managed a gain of 1.85% even though it is primarily in stocks. For the trailing year the portfolio is up 40.5%, and up 9.4% over the last three months.
There were eight funds in this portfolio over the last year. Three were up over 50%, two others were up over 40%. Choosing the right categories to be in was 90% of the game here, in fact some of our fund choices have been somewhat mediocre of late, namely the FMI Common Stock fund and the Northeast Investors fund – both too conservative for a risk fueled market.
Unlike U.S. small cap stocks last month, foreign small cap stocks were not so weak. The Artisan International Small Cap fund (ARTJX) was up 4.62%, continuing a strong return that has carried this fund to a 32% gain since we put it in the portfolio early last year. The fund has recently closed to new investors, and we are recommending the Pictet International Small Company fund (PISRX) for small cap foreign exposure to those who can’t buy the Artisan fund.
Small cap foreign stocks have been as hot as U.S. small cap stocks over the last year. In fact, over the last few months they have been even hotter. Both of our small cap foreign picks are newish funds and have done well, showing that you don’t necessarily have to wait for a fund to age and have a great track record before you can invest. That said, we expect international small cap stocks to cool down.
Our newly added Vanguard Short Term Corporate bond (VFSTX) fund tagged on 1.34%, about as much as you can hope to make in such an investment in a short time period. However, if interest rates rise again it will lose this much or slightly more just as quickly.
Junk bonds were strong, pushing the Northeast Investors fund (NTHEX) up 1.84%. This fund continues to play it safe and underpeform junk bond indexes for it. This strategy will likely help over the next year, but in retrospect we could have used a more risky junk bond fund here.
Emerging market bonds are still pretty hot, with the Fidelity New Markets Income fund (FNMIX) up about 3% last month.
Japan just keeps on chugging along. Our strongest fund this month was the T. Rowe Price Japan fund (PRJPX), up a sharp 7%. This fund is up 24% in the last three months, our top performer in any portfolio.
Putting a damper on the good times was the FMI Common Stock fund (FMIMX), down some 4%. The fund is having a so-so year, mostly the result of being conservative. A 4% one month decline is a bit odd given their fairly low-risk stance. Certain types of lower priced growth stocks had a tough month. Most of the speculation lately is in smaller cap stock than this fund typically invests, plus more speculative fare is in play these days.
August 2003 performance review
August saw the Conservative portfolio move up just shy of 1%. The bigger movers included the Vanguard Dividend Growth fund, up 2.35% and the newly added Pictet International Small Company fund, up 5.7%. This latter fund is a bit risky, but the relatively small position keeps it from generating too much risk to the portfolio.
These increases in stocks offset weakness in international bonds. Our American Century International Bond fund was down 1.24%. The bonds in the fund’s portfolio were likely up, but the U.S. dollar was strong, offsetting the gains made in bond prices. Keep in mind this fund does not hedge currency risk, which means if the US dollar falls 10% against a basket of foreign currencies you can expect the fund to go up approximately 10%, assuming no change in the underlying bond market.
Most of last month’s action was in small cap and tech stocks, neither of which played much of a roll in this portfolio until we added the Pictet fund last month.
In August the Aggressive Growth Portfolio was up 3.8%, more than the broader stock market as a whole. How could this portfolio, which has 15% in low-risk short-term bonds and a total bond exposure of 30% achieve this market-beating return? Great fund picking, that’s how.
More speculative foreign stocks were hot. The Artisan International Small Cap fund was up 5.92%, the SSgA Emerging Markets fund rose almost 7%.
The T. Rowe Price Japan fund jumped 9.7% for the month. Japan is – keep your fingers crossed – turning in to a heck of a turnaround story. We’re very pleased about Japan’s recent strength. We’ve been investing in the Land of the Rising Sun in several of our portfolios since last year and had been disappointed in the returns our Japan funds were earning.
The Bridgeway Ultra-Small Tax Advantage fund continues to run, up 4.5% last month. We cut back on this fund last month, which is not up a remarkable 41% since we put it in the portfolio last April. We may be guilty of being a little early on the reduction, but at some point investor’s current infatuation with micro-cap stocks will be over. We don’t want to get hit too hard when it is.
July 2003 performance review
For the month of July the Conservative portfolio slipped 1.25%. our worst showing of any of our model portfolios. The culprit: one of the lousiest months on record for bonds (the conservative portfolio is bond heavy). Most of the punishment was in longer-term government bonds, which were down almost 10% for the month. We don’t own much of these types of bonds, so the damage was somewhat blunted for us.
Our biggest hit was from the Harbor bond fund, down 3.72% for the month. Fund manager Bill Gross had been warning the best years are behind us in bonds, but even he can’t hide from the a sharply rising yield curve.
We finally lost some ground in the American Century International Bond fund, which was hit on two fronts: a rising US dollar and falling bond prices (rising yields). The fund slipped 3.43%.
Utility stocks were weak last month, bucking the upward trend is equities. One possible reason is utility stocks are primarily bought for their dividend yield, which was high a few months ago but is not lower as prices have gone up. That coupled with rising bond yields tempting investors played a roll in the softness in prices.
Saving the portfolio was the SSgA Tuckerman Active REIT, up 5.52%. Too bad it was just 5% of the portfolio.
At the end of July we made changes to the portfolio. The moves were designed to lower the overall risk and get out of some areas that have appreciated significantly.
We dropped the real estate fund entirely. While we love the diversification real estate offers, we think rising rates will be the straw that breaks the camel's back in the real-estate mini-bubble. Before the sale, the SSgA Tuckerman Active REIT was up 23.2% since we added it last October. This is the first time we have not had a real estate allocation in this model portfolio.
We lightened up on our convertible bond allocation; reducing the 10% we had in Northern Income Equity down to 5%. A slightly overblown stock and convertible market should keep this category weak to below average going forward.
We sold the entire holdings in the FMI Sasco Contrarian Value fund as we lowered overall equity exposure. We were not enamored with this fund of late.
Junk bonds have been good to us, but we dropped half the position and took it from 10% to 5% at the end of the month. The spread over treasuries is getting a little low for our liking, and too many fund investors have hopped into junk bonds of late.
We’ve had a spectacular run in international bonds, but cut back slightly in our allocation to the American Century International Bond fund from 25% to 20%. We don’t expect the dollar to continue falling going forward or bond prices to rise, the two reasons we’re up over 25% in the fund. If there were more compelling places to invest we’d sell more, but the pickings are slim right now.
We added some international stock exposure here with the Pictet International Small Company fund (PTSCX) which became 10% of the portfolio.
Moving forward we’re going to have an above target allocation to shorter-term corporate bonds for the time being, and we just added the Vanguard Short Term Corporate fund to fit the bill. The move should give us some income while reducing risk.
For the month of July the Growth portfolio was up 1.72%. Bonds slipped while stocks moved up. Most of the punishment was in longer-term government bonds, which were down almost 10% for the month. We don’t own much of these types of bonds, so the damage was blunted for us.
Our worst fund was the one that has been our star performer since we started the portfolio, up an astounding 21% since April 2002 even after dropping 3.75% last month. The Fidelity New Markets Income fund invests in emerging market debt, an area that has been hot but could probably stand for some cooling off. Part of the fall was from the dollar gaining strength amidst strong economic signals.
Utility stocks were weak last month, bucking the upward trend is equities. One reason for the negative pressue is that utility stocks are primarily bought for their dividend yield, which was high a few months ago but is not lower as prices have gone up. That, coupled with rising bond yields, played a roll in the softness in prices. The American Century Utility income fund was our weakest link, down 3.54%.
Small cap stocks continued to outperform, helping lift the top performing Royce Value fund up 5% for the month.
Our strongest holding for the second month running was the T.Rowe Price Japan fund, up a solid 5.89%. It may be too early to tell, but it’s looking like August may be big for Japan again. Right when everybody finally bailed out on Japan earlier this year for good, it comes roaring back. We’re sticking around to see how far it can go. So far, the economy there is showing some good signs.
At the end of July we shifted the portfolio around. The moves were designed to lower the overall risk and get out of some areas that have appreciated significantly.
We’ve made a bundle in emerging market bonds, but its time to take some chips off the table. We cut the position in half, from 10% to 5% of the portfolio.
Micro-cap stocks have been the hottest area of the market, and the Bridgeway Ultra Small Tax Advantaged fund (now called Bridgeway market fund) has been our strongest fund, up 35.3% since we placed it in the portfolio. The fund is getting too large, and too much money is chasing micro cap performance, so we cut back on the allocation to just 5% from 20%.
We increased our exposure to the FMI Common stock fund, raising it to 15% from 10%.
Moving forward we’re going to have an above target allocation to shorter-term corporate bonds for the time being, and we just added the Vanguard Short Term Corporate fund to fit the bill. The move should give us some income while lowering risk.
May 2004 performance review
Bonds were down while stocks went up. The combined effect netted out, leaving the Safety portfolio flat for the month of May.
The biggest hit to the portfolio was a 1.6% fall in Vanguard High Yield Corporate (VWEHX) as junk bonds took a beating in May. The fund is down to just 5% of the Conservative portfolio, so the total effect was muted.
On the upside, foreign bonds were strong largely because the U.S. dollar slipped. Foreign bonds can be a good inflation hedge as domestic inflation tends to devalue a currency to the benefit of those with investments in other more stable currencies. All bets are off if there is global inflation, which hurts all bond investors equally and offers no currency play. American Century International Bond (BEGBX) was up 1.21% for the month, and our 10% stake made up for any junk bond losses.
Foreign stocks were weak, particularly smaller cap and emerging markets. Formerly hot Forward International Small Company (PISRX) fell 2.38%. Our reduced stake of 5% limited the hit to the portfolio.
The Aggressive Growth portfolio dipped .58%, largely on weakness in foreign stocks.
The only real downer was a big 4.24% fall in T. Rowe Price Japan (PRJPX). After a 16% jump in March we can’t fee too bad about the pullback in Japan. There has been much in the way of positive articles about Japan of late. This positive coverage is an indication that future returns will be less fabulous going forward, although we’re sticking with our stake as few other areas are currently appealing.
Emerging markets didn’t fare much better. SSgA Emerging Markets (SSEMX) was down 1.35%. Small cap foreign stocks in all countries, emerging and emerged, preformed poorly. Artisan International Small Cap slipped .68%.
The strong parts of the portfolio were the U.S. stock holdings. Newly added Bridgway Blue Chip 35, one of the world’s cheapest funds, was up .58%. The hot Bridgeway Ultra Small Company Market (BRSIX) was up .97%.
For the record, Fidelity New Markets Income (FNIMX), our former emerging markets bond fund, fell another 2% last month. If the drubbing keeps up much longer we’ll consider adding it back to the portfolio.