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May 2015 Performance Review

June 5, 2015

It wasn't our best month, that's for sure. With the S&P 500 rising just over 1% in May, we lost a fraction of a percent in both Powerfund portfolios, thanks mostly to bond underperformance, along with a weak foreign stock chaser. Even with the stumble, the Aggressive portfolio's 3.17% return year-to-date is still within 0.10% of the S&P 500.

The Conservative portfolio fell 1.20% in May. Our Aggressive portfolio dropped 1.39%. Benchmark Vanguard funds for May 2015: Vanguard 500 Index Fund (VFINX) gained 1.27%; Vanguard Total Bond Market Index Fund (VBMFX) fell 0.45%; Vanguard Developed Markets Index Fund (VTMGX) fell 0.15%; Vanguard Emerging Markets Stock Index (VEIEX) dropped 3.38%; Vanguard Star Fund (VGSTX), a total global balanced portfolio, gained 0.35%.

Stocks and bonds falling at the same time is the 'sum of all fears' for investors. When stocks have declined in recent years, interest rates have followed the market down — causing government bonds (and often higher-risk junk bonds) to do quite well. This has allowed the diversified investor (which has become just about everybody) to earn a decent return with minimal downside.

This might not be the case going forward. Interest rates are not going to rocket upward like everyone thinks, and if they do it will be because of inflation and economic growth that is good for stocks. Nobody thinks a 1% yielding ten-year Treasury bond is as likely in the future as a 5% one even though the current yield was recently at around 2.36% (which is still higher than Germany or Japan). People are investing accordingly, pumping trillions in lower duration (less interest rate risk) and higher-default-risk bonds, mere billions in longer-term investment grade bonds. Can't speak for the next few months, but in the long run, the herd is usually wrong.

In specific fund action, our only wow holding was PRIMECAP Odyssey Growth (POGRX), which rose 2.55% and continues to squeeze every last drop from the healthcare and biotech orange. Artisan Global Equity (ARTHX) had a nice 2.41% gain considering the relatively poor showing in May from many foreign stocks. Our biggest loser was iShares MSCI BRIC Index (BKF), which dropped 4.35% on general weakness in emerging markets after a nice rebound recently.

Two disappointing performers were newly added SPDR Barclays Intl. Treasury (BWX), off 3.23% as interest rates rose in Europe and a mild comeback in foreign currencies fizzled, and Wasatch Long/Short Wasatch Long/Short Wasatch Long/Short (FMLSX) which sank a resounding 2.46% as the primarily long/long short fund (net long) managed to lose a lot in relatively flat market.

Long/short funds like Wasatch Long/Short Wasatch Long/Short Wasatch Long/Short (FMLSX) usually underperform during flat markets because its short holdings do so much worse than its longs that returns don't end up covering these funds' high costs. That wasn't the problem with FMLSX in May. This time the culprit appears to be heavy long bets on energy — the worst sector last month and last year — on top of another major long holding, Iron Mountain (IRM), tanking at the end of the month. The short story is Wasatch Long/Short Wasatch Long/Short Wasatch Long/Short (FMLSX) is not pulling its weight around here — unfortunately there are not many attractive alternatives. It's the same old problem: cash yields nothing, and how much more can we stuff into bonds? (The answer: a lot if rates keep going up.)

Stock Funds1mo %
PRIMECAP Odyssey Growth (POGRX)2.55%
Artisan Global Equity (ARTHX)2.41%
Satuit Capital Micro Cap (SATMX)2.19%
Vanguard MegaCap Growth (MGK)1.55%
PowerShares DB Crude Oil Dble Short (DTO)1.44%
[Benchmark] Vanguard 500 Index (VFINX)1.27%
Vanguard European ETF (VGK)0.28%
Vanguard Europe Pacific ETF (VEA)-0.05%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)-0.15%
Gold Short (DZZ)-1.22%
Vanguard Telecom Services ETF (VOX)-1.83%
Wasatch Frontier Emerg Sm Count (WAFMX)-1.98%
Wasatch Long/Short (FMLSX)-2.46%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)-3.38%
iShares MSCI BRIC Index (BKF)-4.35%
Bond Funds1mo %
Vanguard Mortgage-Backed Securities (VMBS)-0.23%
[Benchmark] Vanguard Total Bond Index (VBMFX)-0.45%
Vanguard Long-Term Bond Index ETF (BLV)-2.38%
SPDR Barclays Intl. Treasury (BWX)-3.23%
Vanguard Extended Duration Treasury (EDV)-3.64%