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Powerfund Portfolios Year-End Review

January 6, 2014

Happy New Year! And what a year it was. The S&P 500 was up just over 32% with dividends – its best year since the mid-1990s. Hopefully, the economy will be as good as it was in the late 1990s, or those buying small-cap stock indexes at 30+ P/E ratios and 1% yields might be sorry.

In hindsight, it was a year in which to invest wholeheartedly in U.S. stocks, the perfect cap to a multi-year trend of outperformance that began right about the time everyone gave up on America.

Bonds – except junk bonds, very low-duration bonds, and bonds  convertible into (rising) stocks – were down for the year. Emerging market stocks were also down, as were commodities and gold. Major foreign markets were up, but not as much as the U.S. market. 

Our Conservative portfolio was up 0.66% in December, while our Aggressive portfolio gained 0.46%. Benchmark Vanguard funds for December 2013 were as follows: 500 Index (VFINX) up 2.51%, Total Bond Market Index (VBMFX) down 0.65%, International Index (VTMGX) up 1.59%, Emerging Markets Stock Index (VEIEX) down 0.96%, and Vanguard STAR (VGSTX), a total balanced portfolio, up 1.35%.

We were held back late in the year by our large longer-term bond positions, and recently added emerging market stocks (we've been light on the latter for years now.)

In general, global balanced (stocks and bonds from around the world) portfolios did well in 2013, but still significantly lagged behind U.S. stock portfolios. We were too global and balanced, although we largely avoided foreign bonds. 

Global balanced strategies have become popular in recent years; Blackrock Global Allocation (MDLOX), the largest total global portfolio fund with its $60 billion in total assets, and one of the largest funds in general, was up just over 14% in 2013. But before 2013, MDLOX performed only so-so. Over the last three years, it’s posted only a 6.63% average annual return, while the S&P 500 has been up 16% (annualized) during the same time period.

MDLOX carries about the same level of risk as our Aggressive portfolio now (although we fell less in 2008, down 16.23% vs. 20.56% for MDLOX). Our Aggressive portfolio performed better than MDLOX in 2013, up 19.04%. The Aggressive portfolio has also fared better over the last three years, up 10.74% (annualized). The 10-year annualized return for our Aggressive portfolio is higher than BlackRock Global Allocation as well, and BlackRock beat more than 80% of the global allocation funds still in existence over the past ten years.

We won't dwell on all of the expert (and expensive) Wall Street competition we routinely outperform. Let's look at the Vanguard 500 (VFINX) fund that underperformed in 2013, instead. Our mistake was playing it a bit too conservatively in 2013 and getting too global, too soon. This whole global portfolio diversification thing has gotten way too popular in the years since 2000, when U.S. stock-focused portfolios ruled the roost. 

What really worked this year (and has for most of the last seven years now) was owning 1999-style portfolios: U.S. stock-heavy, with a focus on growth. Small growth stock funds were up 41% in 2013. Of our current holdings, only PRIMECAP Odyssey Growth (POGRX) (39.30% in 2013) and Satuit Capital Micro Cap (SATMX) (39.51% in 2013) reached these heights last year, although our recently sold long-term holding, SPDR Healthcare ETF (XLV), was up 41.4% in 2013.

Weak areas in 2013 included commodities in general and precious metals, in particular. Anything that's typically bought in order to fight the ravages of inflation – namely REITs, TIPs and gold – had a lousy 2013. After a roughly 50% hit in 2013, precious metals funds are basically the worst fund category (that doesn’t short) over the last 1, 3, 5, and eventually, 10-year time period, as it has been most of the time since the dawn of the fund business. 

Our more conservative, bond-heavy Conservative portfolio was up 10.43% in 2013, and 7.43% (annualized) over the past three years – a three-year return that's still better than Wall Street’s most successful global portfolio. 

Stock Funds1mo %
Gold Short (DZZ)7.25%
Satuit Capital Micro Cap (SATMX)4.67%
Artisan Global Equity (ARTHX)3.39%
Vanguard MegaCap Growth (MGK)3.36%
Vanguard European ETF (VGK)2.93%
[Benchmark] Vanguard 500 Index (VFINX)2.51%
Vanguard Telecom Services ETF (VOX)2.18%
Vanguard Europe Pacific ETF (VEA)1.88%
PRIMECAP Odyssey Growth (POGRX)1.66%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)1.59%
Wasatch Long/Short (FMLSX)0.86%
American Century Utility Income (BULIX)0.71%
Wasatch Frontier Emerg Sm Count (WAFMX)0.17%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)-0.96%
iShares MSCI BRIC Index (BKF)-1.84%
PowerShares DB Crude Oil Dble Short (DTO)-11.30%
Bond Funds1mo %
DoubleLine Floating Rate N (DLFRX)0.22%
PIMCO Mortgage Opportunities D (PMZDX)-0.28%
[Benchmark] Vanguard Total Bond Index (VBMFX)-0.65%
Vanguard Long-Term Bond Index ETF (BLV)-1.02%