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February 2004 performance review

March 17, 2004

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.