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The No-Load Fund Investor The No-Load Fund Investor

Highlights of the Current Issue
of The No-Load Fund Investor

From The No-Load Fund Investor, 7/15...

A Choppy Market

The S&P 500 fell nearly 2% in June and produced a total return of only about 1.2% in the first half of the year. Of course, the big news in early July was the Greek default of a payment of $1.7 billion in loans, followed by their populist referendum and rejection of the additional relative austerity the rest of the Euro Zone wants the country to adopt as a condition of another bailout of its government debt. The face value of their total indebtedness amounts to about 323 billion euros (approximately $360 billion), though most of it isn’t due to be repaid for years.

While the situation in Greece will play out over the next few weeks, we do not believe the amounts in question are large enough to impact the U.S. economy or stock market much. In fact, the situation could even work eventually to the benefit of the U.S., which is proven, once again, to be a much safer place to invest than virtually anywhere else.

Most areas of the stock market were weak in June. One exception was the small-cap area, especially of the ‘growth’ style. (The Russell 2000 Growth Index gained 1.3%, for example.) For the first half of the year, healthcare was the best performing sector, by far. On average, the healthcare funds in our database gained 15.8%.

Most large-cap and value funds have been losing ground. While funds of the growth style in our database lost an average of 0.6% in June, those of the ‘value’ style lost an average of 1.8%. For the first half of the year, growth beat value 5.0% to 0.8%. Distinct yield substitutes within equities also have been struggling, including electric utilities and real estate investment trusts, as have metals & mining and various energy stocks.

Alternative Possibilities

Concerned about the trajectories of the stock and bond markets, one of my wonderful money management clients wrote me the other day to inquire as to whether we should add some alternative types of assets to his accounts. By alternative, he meant investments that closely correlate with neither stocks nor bonds, yet have some potential for positive total returns, especially if stock or bond prices fall.

Within the mutual fund world, alternative assets include several kinds of offerings, including bear funds, managed futures, currencies, merger funds, metals, long-short and market neutral products.

Let’s discuss these. Bear funds use derivatives to benefit in direct or even leveraged proportion from declines in their benchmarks, usually stock indexes. Though they do go up when the market goes down, their long-term returns have been abysmal, so we would avoid them.

Managed futures funds typically use the futures markets to “go long,” i.e., buy, and/or “go short,” i.e., sell, futures on various commodities, including metals, agricultural products and energy products. Usually, such offerings engage in trend following, operating on the assumption that commodities that are rising in price will continue moving in the same direction, and vice versa. Compared to the S&P500, most such funds have performed poorly in recent years. Only one, for example (NatixisASGManaged Futures, multiple share classes), has gained even 10% annually over the three-year period ended June 30, vs. 17.3% for the S&P 500. The vast majority of such funds gained less than 5% annually, or even lost money. Besides lackluster performance, another reason we don’t favor them is the absence, in our opinion, of fundamental reasons for the methodologies used on these products to succeed over the long run.

Multicurrency funds invest in various foreign currencies their managers expect to rise in value versus the U.S. dollar. Given the strength of the greenback over the past several years, it should be no surprise that most such funds have achieved precious little. For example, of the 77 multicurrency funds tracked by Morningstar (including multiple share classes of the same funds), only 24 had even so much as a smidgen of gain over the past three years. The best performer, the institutional shares of a fund called FX Strategy, gained only 5.1% a year.

You can read more of our analysis of alternative mutual funds in the July issue of The No-Load Fund Investor.


Model Portfolios

Sample Model Portfolio from the Current Issue
of The No-Load Fund Investor

Wealth Builder Portfolio

Fund

Obj.

Beta

% Weighting

Price Health Sciences sector 0.85 5%
Price Divsfd Small Cap Gr agg gr 1.07 10%
RiverPark Large Growth growth 1.04 5%
Vangd Total Stock Market Idx growth 1.01 15%
Amer Century MidCap Val growth 0.88 10%
Artisan Global Sm CP global 1.23* 5%
Dodge & Cox Global Stock global 1.14 5%
Causeway Int'l Value int'l 1.01 5%
Artisan Global Opps global 0.96 10%
Vangd U.S. Value gr-inc 1.01 10%
Vangd Equity Income gr-inc 0.94 10%
Fidelity New Markets Inc. bond 0.37 5%
Vanguard Prime Money Market money mkt 0.00 5%
* = Estimated
N = New this month
H = Hold
W = Change in portfolio weighting
D = Deleted this month
Average portfolio beta: 0.92
Average expense ratio: 0.77%
Since January 1, 1988, $10,000 has grown to $158,106


Best Buy Portfolios

 

Wealth Builder

Pre-Retirement

Retirement

Income & Preservation

Cash 5% 10% 15% 20%
Bonds 5% 15% 30% 60%
U.S. Equities 75% 65% 50% 15%
Int'l Equities 15% 10% 5% 5%
Portfolio returns since 1/1/88 through most recent month ($10,000 original investment) $158,106 $142,086 $105,633 $15,212
since 2/1/09
Average portfolio Beta 0.92 0.76 0.54 0.23
Average expense ratio 0.77 0.73 0.61 0.61

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