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

From The No-Load Fund Investor, 1/10...

The Investor's Good Year

The stock market finished 2009 on the upswing. Small-cap stocks, especially of the growth variety, performed especially well, as did technology stocks. U.S. equities generally outperformed foreign equities, as some emerging markets cooled off and the U.S. dollar rebounded a bit.

On the whole, 2009 was a pretty good year for investors. The S&P 500 produced a total return of about 26.5%. The 50%-plus rebound in the stock market since March has been especially impressive. High-yield bonds also performed splendidly, with gains on the order of 40% to 50% not uncommon for the year. Conversely, Treasuries, especially longer-term ones, produced losses.

Our Best Buys portfolios performed well. The Master Aggressive model gained 41%. Each of our six Wealth Builder models gained considerably more than the U.S. stock market; our Pre-Retirement models matched or beat the market; and our Retirement models achieved gains as high as 23.3%. Even our Income & Capital Preservation portfolios produced gains of as much as 18.6% since their inceptions in February.

Our fund picking was so strong for 2009 that it compensated for fairly conservative asset allocations. For example, let s say that instead of following our specific recommendations, an investor had implemented our Wealth Builder allocation with index investments in this way: 70% S&P 500 Index; 15% MSCI EAFE; 10% Barclays Aggregate Bond; and 5% one-to-three month Treasury bills. His total return for the year would have been about 23%. The actual returns of our Wealth Builder models ranged from 29.6% to 33.6%. While an index portfolio with our Pre-Retirement allocation would have gained about 19.2%, our actual Best Buys models for this risk level gained as much as 29.5%. For Retirement, the index portfolio would have gained about 14.3%, vs. as high as 23.3% for our actual Retirement models.

Favorites for 2010

Our favorite picks for U.S. and international equity exposure in 2010 are the same as they were for 2009: Vanguard Dividend Growth (VDIGX) and Matthews Asia Dividend (MAPIX, formerly called Matthews Asia Pacific Equity Income).

U.S. Favorite. Vanguard Dividend Growth is included in three of the four Master Best Buys portfolios and all four Vanguard Best Buys portfolios. The fund gained 21.7% in 2009, a decent absolute performance but quite a bit behind Vanguard Total Stock Market Index s 28.7% gain. That stems from the nature of the fund s holdings, which tend to be high-quality companies with stable finances and steady operations. Such stocks did relatively better in 2008 when the fund lost only 25.6%, vs. a decline of 37.0% for the broader market. The robust market rally off of March 2009 s lows was led largely by more speculative stocks and sectors that bad been beaten down to extreme levels, leaving many of the fund s less volatile holdings behind.

Manager Donald Kilbride invests in stocks with both histories of rising dividend payments and the capacity and intent to continue increasing dividends in the future, and he buys such stocks only when they appear to have attractive valuations. The fund is invested almost exclusively in large-cap stocks, and it tends to favor very large stocks: its median market capitalization is $56.1 billion. For more details on Vanguard Dividend Growth, see our January issue.

Foreign Favorite. We include Matthews Asia Dividend in eight Best Buys portfolios: Master Wealth Builder, Pre-Retirement and Income & Capital Preservation; Schwab Wealth Builder and Income & Capital Preservation; and Fidelity Brokerage Wealth Builder, Pre-Retirement and Income & Capital Preservation. It offers broad exposure to the Far East. The fund was stellar in 2009; it gained 47.5% for the year, while most other funds with considerable holdings of Japanese stocks gained much less. Its 2008 performance was similarly superior: its 26.0% loss was one of the smallest of any international equity fund we track.

Like all its sibling Matthews Asia funds, this one employs an indexes of the future strategy in picking stocks. That is, the managers attempt to build portfolios that will represent how Asian economies evolve over time rather than based on a snapshot of the region that an index provider took years ago. In practice, this means that Matthews Asia Dividend invests far more in small and midsize company stocks with a focus on domestic Asian markets than on the multinational exporters favored by the major indexes. More details on the fund are included in our January issue.

Persistency of Performance

Since 1991, the Investor has offered a strategy called Persistency of Performance: buying the last year s top-performing, no-load, non-sector U.S. stock fund and holding it for one year, then replacing it with the following year s winner.

Based on its performance in 2008, Heartland Value Plus (HRVIX) was the pick for 2009. This fund went on to gain 26.4% in 2009, vs. 26.5% for the S&P 500. So, it was about average versus the market, especially large caps. However, Persistency of Performance calls for beating the average diversified U.S. stock fund tracked by the Investor. That bogey, which includes out-performing small cap funds (the true peer group for Heartland Value Plus), gained 33.8% in 2009. So we have to chalk up 2009 as a failure for the strategy, even though investors in the fund didn t have much to complain about.

This marks the third-straight year in which the Persistency of Performance winner failed to beat the average diversified U.S. stock fund in our database. Therefore, while we are continuing the strategy, we are not going to devote as much attention to it this year as we have done in the past. We need to ascertain whether the strategy has just had a run of bad luck, or if something has really changed in the market to invalidate it.

For the identity of our 2010 Persistency of Performance pick, see the January 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

Top Twenty No-Loads

Among stock and bond funds rated in Investor newsletter only.
Includes low-loads. Latest 3 years.

#   Fund                                Obj.     % Change
---------------------------------------------------------
1.  iShares COMEX Gold                sector       19.3
2.  USAA Prec. Metals & Mins          sector       16.1
3.  Matthews China                    int l-emerg  15.7
4.  Reynolds Blue Chip                agg gr       13.4
5.  Guinness Atkins China & HK        int l-emerg  12.2
6.  Price Latin America               int l-emerg  12.2
7.  Fidelity Sel Gold                 sector       11.1
8.  GAMCO Gold AAA                    sector       10.6
9.  Fidelity China Region             int l-emerg  10.1
10. Price New Asia                    int l-emerg   9.6
11. Matthews Asia Dividend            int l-pacific 8.9
12. PIMCO Total Return D              fix-inc       8.8
13. Yacktman Focused                  growth        8.8
14. TCW Tot Return Bd N               fix-inc       8.6
15. Harbor Bond                       fix-inc       8.5
16. Janus Flex Bond J                 fix-inc       8.3
17. Hussman Strategic Total Ret       fix-inc       8.2
18. Managers Fremont Bond             fix-inc       8.2
19. Matthews Pac Tiger                int l-emerg   8.1
20. Fidelity New Mkts Inc.            fix-inc       7.7