The Conservative portfolio was down .45% in July. We’d like to have seen this fund up last month given the positive returns for bonds, but the small stock stake wiped our bond gains.
The biggest hit was a sharp 4.66% drop in the Forward International Small Company fund (PISRX). This market is hitting higher risk funds the hardest, and this top performer is the type that falls the most when the going gets tough. There is a reason we cut our stake in this fund in half to just 5% a few months ago – the downside risk was increasing with the rising market.
Another poor showing was Vanguard Dividend Growth (VDIGX) falling 2.62% - a touch more than the fund was up in the previous month. This fund still beat major stock market indexes, so “poor showing” only means when compared to other holdings in the portfolio.
There is a significant difference between Bridgeway Balanced (BRBPX) and Gateway (GATEX), the former is in this portfolio, the latter in the safety portfolio. While both use stock options as the main ingredient, the strategies are quite different.
Gateway is lower risk – the fund owns a basket of stocks similar to an index, writes covered calls on the holdings, and buys protective stock index puts. Bridgeway buys slightly higher risk stocks, writes covered calls on some of them, and sells “secured” puts, meaning the fund has the money required to buy the stock if the stock falls.
Secured put writing has the risk profile of stock ownership, without the upside. This sounds undesirable (all of the downside, none of the upside?), but serves a purpose. If the market is flat, such a strategy creates income. In an up or flat market Bridgeway Balanced should beat Gateway, which “wastes” money buying protective puts – which only make money if the market goes down. In a down market Gateway should win.
In July Gateway fell just .76% while Bridgeway Balanced slipped around 2.3% - almost as much as the market fell - as the put writing incurred losses. In June, an up month, Gateway rose 1.15% compared to Bridgeway’s 1.25%.
Another explanation of the big discrepancy in July was that option premiums increased. As Gateway is both long and short options (writes calls but buys puts), option premium increases don’t hurt as much as with Bridgeway, where all option stakes are shorts (the fund sells options on both sides, calls and puts). Option premiums tend to go up when the market gets crazy as investor’s buy options to either insure their portfolio or speculate that plus option prices are based on volatility. If option premiums rise after investors sell a call or put, they can lose money. We noted this risk in the last commentary, and it came to pass in July.
Harbor Bond (HABDX) was up just over 1% as bonds rallied again. As noted last month, fund manager Bill Gross loaded up on longer term bonds in recent weeks (right when everyone was sure bond prices would keep falling) and benefited from the fall back in rates.
Fears of a weakening economy didn’t hold back junk; high yield bonds had another good month, with Vanguard High Yield Corporate (VWEHX) up 1.11%.
Foreign bonds were weak even though we’d expect the dollar to fall with fears of a slipping U.S. economy – apparently investors are afraid of a global slowdown. American Century International Bond (BEGBX) was down .52%.
The Aggressive Growth portfolio was down just under 3% in July – our worst showing. In July, higher risk stocks fell the hardest.
All foreign markets were weak, but Japan fell more than most. T. Rowe Price Japan fell almost 7%, erasing the previous month’s big gain. Investors were worried about the U.S. economy decelerating. Such fears tend to hit Japan as the U.S is obviously a big market for their exports. Other foreign markets were almost as bad. Artisan International Small Cap fell 4.5%. Oddly the SSgA Emerging Markets fund (SSEMX), which is the highest risk of the bunch, fell just 1.78%. This could be explained by rising energy prices, which tend to benefit some emerging markets. Latin America was strong last month, which helped some diversified emerging market funds.
The worst showing was a 7.31% drop in Bridgeway Ultra Small Company Market (BRSIX). Microcap’s big run of outperformance is likely over and we’re happy we reduced this stake to 5% from 20% last summer, even though that move was a bit premature.
Foreign bonds were weak despite that we’d expect the dollar to fall with fears of a slipping U.S. economy – apparently investors are afraid of a global slowdown. American Century International Bond (BEGBX), which is in other portfolios, was down .52%. The recently added Payden Global Short Bond fund was up .43%. Unlike BEGBX, this fund hedges currency fluctuations (and has U.S. as well as foreign bonds).
This portfolio didn’t have any action in the few strong areas of the stock market to help prop up returns in July – namely Utilities and Energy.
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The Conservative portfolio was down .45% in July. We’d like to have seen this fund up last month given the positive returns for bonds, but the small stock stake wiped our bond gains.
The biggest hit was a sharp 4.66% drop in the Forward International Small Company fund (PISRX). This market is hitting higher risk funds the hardest, and this top performer is the type that falls the most when the going gets tough. There is a reason we cut our stake in this fund in half to just 5% a few months ago – the downside risk was increasing with the rising market.
Another poor showing was Vanguard Dividend Growth (VDIGX) falling 2.62% - a touch more than the fund was up in the previous month. This fund still beat major stock market indexes, so “poor showing” only means when compared to other holdings in the portfolio.
There is a significant difference between Bridgeway Balanced (BRBPX) and Gateway (GATEX), the former is in this portfolio, the latter in the safety portfolio. While both use stock options as the main ingredient, the strategies are quite different.
Gateway is lower risk – the fund owns a basket of stocks similar to an index, writes covered calls on the holdings, and buys protective stock index puts. Bridgeway buys slightly higher risk stocks, writes covered calls on some of them, and sells “secured” puts, meaning the fund has the money required to buy the stock if the stock falls.
Secured put writing has the risk profile of stock ownership, without the upside. This sounds undesirable (all of the downside, none of the upside?), but serves a purpose. If the market is flat, such a strategy creates income. In an up or flat market Bridgeway Balanced should beat Gateway, which “wastes” money buying protective puts – which only make money if the market goes down. In a down market Gateway should win.
In July Gateway fell just .76% while Bridgeway Balanced slipped around 2.3% - almost as much as the market fell - as the put writing incurred losses. In June, an up month, Gateway rose 1.15% compared to Bridgeway’s 1.25%.
Another explanation of the big discrepancy in July was that option premiums increased. As Gateway is both long and short options (writes calls but buys puts), option premium increases don’t hurt as much as with Bridgeway, where all option stakes are shorts (the fund sells options on both sides, calls and puts). Option premiums tend to go up when the market gets crazy as investor’s buy options to either insure their portfolio or speculate that plus option prices are based on volatility. If option premiums rise after investors sell a call or put, they can lose money. We noted this risk in the last commentary, and it came to pass in July.
Harbor Bond (HABDX) was up just over 1% as bonds rallied again. As noted last month, fund manager Bill Gross loaded up on longer term bonds in recent weeks (right when everyone was sure bond prices would keep falling) and benefited from the fall back in rates.
Fears of a weakening economy didn’t hold back junk; high yield bonds had another good month, with Vanguard High Yield Corporate (VWEHX) up 1.11%.
Foreign bonds were weak even though we’d expect the dollar to fall with fears of a slipping U.S. economy – apparently investors are afraid of a global slowdown. American Century International Bond (BEGBX) was down .52%.
The Aggressive Growth portfolio was down just under 3% in July – our worst showing. In July, higher risk stocks fell the hardest.
All foreign markets were weak, but Japan fell more than most. T. Rowe Price Japan fell almost 7%, erasing the previous month’s big gain. Investors were worried about the U.S. economy decelerating. Such fears tend to hit Japan as the U.S is obviously a big market for their exports. Other foreign markets were almost as bad. Artisan International Small Cap fell 4.5%. Oddly the SSgA Emerging Markets fund (SSEMX), which is the highest risk of the bunch, fell just 1.78%. This could be explained by rising energy prices, which tend to benefit some emerging markets. Latin America was strong last month, which helped some diversified emerging market funds.
The worst showing was a 7.31% drop in Bridgeway Ultra Small Company Market (BRSIX). Microcap’s big run of outperformance is likely over and we’re happy we reduced this stake to 5% from 20% last summer, even though that move was a bit premature.
Foreign bonds were weak despite that we’d expect the dollar to fall with fears of a slipping U.S. economy – apparently investors are afraid of a global slowdown. American Century International Bond (BEGBX), which is in other portfolios, was down .52%. The recently added Payden Global Short Bond fund was up .43%. Unlike BEGBX, this fund hedges currency fluctuations (and has U.S. as well as foreign bonds).
This portfolio didn’t have any action in the few strong areas of the stock market to help prop up returns in July – namely Utilities and Energy.