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October 2013 Performance Review

November 4, 2013

In October stocks went back to their old tricks and treats…see-sawing up and down on scary financial news but ultimately ending with a big gain. As the specter of global calamity resulting from a shutdown and defaulting U.S. Government fell to the wayside (at least for a few months…) the stock market sprang back to life, and is now up for the year about as much as the entire year of 2008 – a major rebound year for stocks after a sharp slide.

Even bonds are coming back as inflation remains low and the Federal Reserve seems wary enough of shutdown antics to continue low rate policies for longer than investors thought was likely a few months ago.

Our Conservative portfolio was up 2.71% in October. Our Aggressive portfolio gained 3.29%. Benchmark Vanguard funds for October 2013: 500 Index (VFINX) up 4.59%, Total Bond Market Index (VBMFX) up 0.78%, International Index (VTMGX) up 3.23%, Emerging Markets Stock Index (VEIEX) up 4.65%, Vanguard STAR (VGSTX), a total balanced portfolio, up 2.91%.

Not a bad month all around for the Powerfund Portfolios considering our relatively low stock allocations. Beating other balanced portfolios is an important gauge of success because we fell by more than ten percentage points less than the average moderate risk balanced portfolio in 2008. An important factor in our outperformance versus alternatives is that we fall less during down markets. That said, we won’t beat the pure-equity S&P 500 when it gains over 25% YTD at our risk level, though with our Aggressive portfolio up just over 17% YTD we’re satisfied.

Our main fear now is stretching valuations. If the economy and revenues don’t start growing faster, we don’t see how stock prices can continue clocking big gains in coming years. This doesn’t mean a great collapse is coming like in 2007 when the economy was built on a teetering housing bubble, just that future returns will likely be lackluster. This is a bigger problem in smaller cap stocks (which we are largely out of) which are getting into 2000-ish stock bubble level valuations with near 30 trailing P/Es and 1% dividend yields. Long term investment grade bonds are looking quite favorable compared to smaller cap stocks right now even though the next 10 years for bonds will be nothing like the last. Post shutdown, money is coming back into stock funds, which could be a sign of trouble down the road. Overconfident investors are a symptom of market tops, not bottoms.

Telecom was strong, with our Vanguard Telecom Services ETF (VOX) up over 7%. This sector is now among the best of the last five years (and did well in the down turn when we owned it). This fund has now delivered among our best since inception returns - 122% since we added it to the Powerfund Portfolios. Interestingly, other top sectors for the last five years include healthcare and technology funds, areas we focused on for much of the last five years (because investors were not focusing on them). More recently healthcare was weak relative the market last month, though we have cut back here. Utilities, which were underperforming this year, did well last month.

India was the hottest foreign market, up over 10%, which we only partially benefited from as our recently bought ‘BRIC’ fund saw its Indian stocks returns weighed down by so-so returns in China and Brazil.

Stock Funds1mo %
PowerShares DB Crude Oil Dble Short (DTO)11.13%
Vanguard Telecom Services ETF (VOX)7.11%
American Century Utility Income (BULIX)5.10%
Vanguard MegaCap Growth (MGK)4.86%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)4.65%
[Benchmark] Vanguard 500 Index (VFINX)4.59%
Wasatch Frontier Emerg Sm Count (WAFMX)4.38%
Vanguard European ETF (VGK)4.18%
iShares MSCI BRIC Index (BKF)3.57%
Wasatch Long/Short (FMLSX)3.29%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)3.23%
Vanguard Europe Pacific ETF (VEA)3.21%
Satuit Capital Micro Cap (SATMX)2.67%
PRIMECAP Odyssey Growth (POGRX)2.12%
Artisan Global Equity (ARTHX)1.59%
Gold Short (DZZ)0.00%
Bond Funds1mo %
Vanguard Long-Term Bond Index ETF (BLV)2.33%
Vanguard Extended Duration Treasury (EDV)1.89%
PIMCO Mortgage Opportunities D (PMZDX)1.01%
[Benchmark] Vanguard Total Bond Index (VBMFX)0.78%
DoubleLine Floating Rate N (DLFRX)0.47%