Performance Review

April 15, 2003

April 15 is tax time, but we’re resisting the urge to write an article about funds and taxes. I figure you’ve read more than enough articles about tax time by now this month. Besides, most investments are down these last few years leaving investors with plentiful tax-loss carry forward options. 

Instead let’s look back over the last 12 months since we launched MAXadvisor at what has been going on in the markets and with the 7 model portfolios we follow, and how we have done compared to the market and other benchmarks.

In the last year the Dow, S&P500, and Nasdaq have fallen 22.58%, 24.94%, and 27.88% respectively. Smaller cap stocks, represented by the Russell 2000 Index, have dropped 26.96%. 

Foreign stock markets have fared no better, in fact many are worse. Most international stock indexes are down over 30% over the last year, even taking a falling dollar into consideration. Most foreign markets are actually down more than US stocks in their local currency.

There is no stock index, style, or broad sector that is up over the last 12 months. Which brings us to an important point about stocks investors can learn from last year: when stocks are really bad, all sectors are affected. While it lessons risk to build a portfolio that invests in stocks in different markets, categories, and styles, diversification only goes so far.

The last year of the now three-year bear market has differed from the first couple. Those years were marked primarily by a drop only in the highest valuation “growth“ stocks. In fact many value stocks were up in 2000-2002, along with certain areas of the market that were long ignored, like small cap value, REITs, and natural resources. Before investors were giving up on late 90s super growth stocks, by now they are giving up on stocks in general. And who can blame them, what with high valuations, out of control CEOs, corrupt investment bankers, and lackluster (at best) earnings.

How have stock funds done? Over the last 12 months only about 3% of stock funds are up, and most of those 3% short stocks. Aren’t any fund managers good enough to pick stocks that go up in a down market? Generally no. The best investors can realistically hope to settle for in a bear market like this is for a fund they own to simply drop less far than other funds.

Bonds on the other hand have performed smashingly. One of the strongest asset classes over the last year was long-term US Government bonds, up around 20% in total return (interest plus capital appreciation as bonds with higher coupons went up in price while rates fell). Other bonds types of bonds have done well, too, particularly Foreign bonds, which are the top asset class over the last year. Foreign debt has benefited from a bull market in bonds and a falling U.S. dollar.

Recently we’ve seen higher risk bonds take the limelight, as emerging market and high yield (junk) bonds are up over 10% in the last few months. Fortunately most of our model portfolios own junk, emerging market, and foreign bonds, which helped offset the losses in our stock funds.

As for our model portfolios, our trailing 12 month returns for our 5 core portfolios are: 

Safety : +3.43%

Conservative: +.49%

Moderate: -9.55%

Growth: -15.14%

Aggressive growth: -9.97%

And our non-core portfolios:

Low Minimum: -7.85%

Daredevil: -15.61%

While we are happy all our model portfolios have outperformed the broad stock indexes, it is not entirely fair to compare them directly to stock indices. We build diversified portfolios of bonds and stocks for different risk profiles. 

A more accurate evaluation would be to compare our model portfolios to so-called fund-of-funds, many of which build portfolios comprised of both equity and debt, like our model portfolios do. These funds are very similar to our own model portfolios as we build portfolios of funds too.

Fund-of-funds are mutual funds that are run by expert fund pickers. Instead of buying individual stocks and bonds these managers choose other mutual funds to own, building portfolios of funds. Investor in these fund-of-funds often get a total portfolio solution. 

Of the 63 fund-of-funds, only three were up over the last year. Of these 3 fund-of-funds that are up, 2 are all-bond and really are not total portfolios so much as bond funds. All our model portfolios have stock exposure, including our safety portfolio. The third fund of fund that was up last year (it was up less than 1%) had less than 15% in stocks. Our safety portfolio had between 20% and 30% in stocks all year and was up over 3%.

Our “average” core portfolio was down – 6.15%. The average of the 58 professionally managed fund-of-funds was down –16.12% over the last year. This is probably the most accurate measure of our performance vs professional fund pickers as these fund-of-funds, like ours, range from conservative to aggressive total portfolios. We included the 3 fund-of-funds that were up even though they are mostly bond funds just to be fair to the competition.

It’s worth noting that we operate under restrictions these guys don’t. We generally pick funds with low minimums so our subscribers can invest and build a portfolio for 30k or less. We sometimes are forced to dump funds that are perfectly good simply because the fund added a load (all the funds in our model portfolios are strictly no-loads). We have been forced to sell funds that close even though existing investors can still buy because new investors to our model portfolios can’t get in. 

Even with these constraints, we still whipped the fund-of-fund competition. Why? Two reasons: our methodology is simply better at choosing the best fund to own in each category and our analysts are better at figuring out what category of funds has more potential to do well going forward. 

Despite our relative success, we are still not satisfied. We hate that even one of our portfolios is in the red. Next month we’ll tell our newsletter subscribers what we plan to do to make year two of our model portfolios even better than the first.