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June 2004 performance review

July 15, 2004

The Conservative portfolio climbed just over 1% in June. Two of the funds in the portfolio were flat; American Century International Bond didn’t budge, while low risk Vanguard Short Term Corporate moved up less than one tenth of one percent. 

The biggest gainer was in Forward International Small Company (PISRX) which rebounded sharply, up 4.78%, as investors got comfortable with higher risk international stocks again.

Vanguard Dividend Growth fund (VDIGX) was up 2.4% as investor’s interest in safer U.S. stocks continued.

Harbor Bond (HABDX) was up .46%. It’s worth noting the fund’s manager, Bill Gross, recently bought more U.S. bonds as rates on the ten year treasury bond inched closer to 5%. The move seemed to work as rates came down in recent weeks, pushing bond prices up.

In these flattish markets, a fund like Bridgeway Balanced (BRBPX) offers a fairly consistent, lower risk income return. The fund was up 1.25% in June. This fund sells covered call options. Unfortunately for option writers, volatility has been low in the market and option premium has been minimal, leaving a potential for a lower return if volatility returns quickly and option prices rise, hurting recent sellers. The bond side of the portfolio worked in their favor in June as well.

Junk Bonds rebounded, with the Vanguard High Yield Corporate fund (VWEHX) up 1.26% for the month. This is a fairly conservative junk bond fund and doesn’t climb as much when more speculative debt rises in price. As such the fund is more correlated to general interest rate fluctuations as credit risk takes a back seat to interest rate risk.

The Aggressive growth was our strongest performer in June, up 2.14%. The portfolio is up over 27% over the last twelve months, outpacing the Nasdaq, Dow, and S&P500, even though the portfolio holds bonds, is more diversified, and is less risky. 

The biggest gainer was a 7.22% increase in T. Rowe Price Japan (PRJPX). The hot fund is now up 61% over the last twelve months, far outpacing a 19% move in the S&P500, a 26% jump in the Nasdaq, and a 33% rise in the smaller cap Russell 2000. The volatility of Japanese stocks has risen recently, which has led to some spectacular big months (and some quick drops). In the last thirteen months, this fund has posted monthly gains of over 5% eight times. No question about it - the hot money has found Japan. If the U.S. market stays weak and Japan gains another 20% we may lower our stake here.

There was good action abroad beyond Japan; Artisan International Small Cap (ARTJX) moved 2.62%, while Gabelli Global Telecom rose 1.69%. Emerging markets were weak, possibly on falling commodity prices and fears about the risks of emerging market investing.

The later was brought front and center with Russia’s ongoing battle with Yukos and the company’s jailed Billionaire 41 year old executive Mikhail Khodorkovsky. Shareholders hate it when emerging market governments deal too aggressively with companies. The strong handed moves can smack of nationalizing, the ultimate fear of an emerging market investor. In such a scenario the state takes over control of a company and jails or kicks out the former executives and the shareholders they ostensibly represent. SSgA Emerging Markets (SSEMX) fell .48% last month. Emerging markets was one of the only weak fund categories last month (the old Dreyfus Emerging Markets fund we had in this portfolio before it went load was actually up last month, but most emerging market funds were flat to weak.) 

Artisan International Small Cap was up less then the near 5% move in the Forward International Small Company (PISRX) fund which is in our other portfolios. Artisan has a bigger Russian and smaller Japan stakes, explaining some of the gap. Artisan is more mid cap oriented, partially because the fund’s size leaves less options open. Smaller cap stocks have been hot again.

FMI Common Stock (FMIMX) was up 4.71%. More conservative stock funds in the mid cap range should be the best performers over the next year.