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July 2015 Performance Review

August 4, 2015

With interest rates heading back down and a global commodity slide intensifying, the Powerfund Portfolios are back to doing well relative to benchmarks. Our Aggressive portfolio matched the performance of the S&P 500 in July, even with the Aggressive port's 40% (roughly) bond allocation.

Our Conservative portfolio gained 1.63% in July. Our Aggressive portfolio was up 2.07%. Benchmark Vanguard funds for the month: Vanguard 500 Index Fund (VFINX) up 2.08%; Vanguard Total Bond Market Index Fund (VBMFX) up 0.76%; Vanguard Developed Markets Index Fund (VTMGX) up 1.25%; Vanguard Emerging Markets Stock Index (VEIEX) down 6.81%; Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 0.92%.

There is a bit of a chicken before the egg issue here. Are commodities collapsing because emerging market economies are sliding and demand is faltering, or are emerging markets economies — many fueled by profits generated by selling commodities at inflated bubble prices — following commodity prices down?

The real cause, of course, is too much money going into commodities and emerging markets over the last decade or so. Investors collectively decided a globally diversified portfolio with a smart allocation to 'real' assets and fast-growing emerging markets was a can't miss proposition. We prefer emerging markets when they're out of fashion. Unfortunately, our own small emerging markets allocation is preforming poorly, but the upside in shorting commodities has made up for it.

In general, being short earnings and yield-less commodities and long real businesses with earnings and dividends is a good lower volatility strategy, if not for the high cost overhang and general difficulties shorting commodities for smaller investors. Too bad all the lousy high-fee market neutral funds out there missed this one.

The only real equity strength in July was in larger-cap U.S. and developed economy foreign stocks. The hardest hit areas were emerging markets, and smaller cap stocks. Long term investment grade bonds were the best in fixed income. Real estate, healthcare, and utilities did well while energy, natural resources, and notably precious metals funds (down almost 20% for the month — which is also about the average annualized yearly return for the last five years) fell.

Emerging markets are underperforming U.S. and developed markets by some of the widest margins since the 1990s. Investors seem to be getting the message and bailing out of emerging markets, which should lead to an opportunity to increase emerging market allocations. But don't hold your breath — there is still so much money for others to lose.

In big winners, PowerShares DB Crude Oil Dble Short (DTO) was up just over 43% for the month. Yep — we should have doubled down after selling a good chunk of this stake at even higher levels earlier this year. Vanguard Extended Duration Treasury (EDV) spiked 7.04% and basically wiped out the previous months fall as rates went back down. Gold Short (DZZ) was up 13.61% as hoarders, gold bugs, and America declinists are just starting to get the message that the 40%+ slide in gold since 2011 probably isn't going to turn around anytime soon. If you want a good scare, take a look at the performance of an ETF that owns shares of gold mining companies over the last few years. And they still have billions in assets.

In big losers, iShares MSCI BRIC Index (BKF) was in the eye of the emerging market's storm with its significant allocation to China (the C in BRIC stand for China, after all). The fund slid 7.77% for the month.

Stock Funds1mo %
PowerShares DB Crude Oil Dble Short (DTO)43.06%
Gold Short (DZZ)13.61%
Vanguard European ETF (VGK)4.37%
Vanguard MegaCap Growth (MGK)3.50%
Vanguard Europe Pacific ETF (VEA)2.79%
PRIMECAP Odyssey Growth (POGRX)2.17%
[Benchmark] Vanguard 500 Index (VFINX)2.08%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)1.25%
Artisan Global Equity (ARTHX)0.62%
Vanguard Telecom Services ETF (VOX)-0.60%
Wasatch Frontier Emerg Sm Count (WAFMX)-1.01%
Wasatch Long/Short (FMLSX)-3.55%
Satuit Capital Micro Cap (SATMX)-4.08%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)-6.81%
iShares MSCI BRIC Index (BKF)-7.77%
Bond Funds1mo %
Vanguard Extended Duration Treasury (EDV)7.04%
Vanguard Long-Term Bond Index ETF (BLV)3.07%
Vanguard Mortgage-Backed Securities (VMBS)0.80%
[Benchmark] Vanguard Total Bond Index (VBMFX)0.76%
SPDR Barclays Intl. Treasury (BWX)-0.21%