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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, 12/14...

Grand Old Rally

Leaping Large Caps

The large-cap segment of the U.S. stock market performed well in November, continuing a strong run that has enabled the S&P 500 Index to post a price gain of nearly 12% so far this year. Also once again, the small-cap segment of the U.S. market lagged, as the Russell 2000 Index was unchanged for the month and is up barely at all for the year.

However, the big financial story in November was energy, as the price of a barrel of oil fell about 15% during the month. Though most sectors of the U.S. market gained ground, most energy stocks plummeted. In fact, the natural resources funds in our database lost an average of 4.3% for the month, and are down almost 12% for the year, making them fully 24% behind the S&P 500.

On average, the international equity funds in our database were essentially flat for the month. They too are barely up for 2014. In fact, the MSCI EAFE Index, the leading benchmark for developed foreign markets, is down 4% this year, pre-dividends. It shouldnít surprise anyone then that the S&P 500 is outperforming most actively managed stock funds. Hereís why: the vast majority of such funds include smaller and/or foreign stocks in their portfolios. On average, the stock funds we cover are up 6.6% this year, through November. Sticking only with U.S. stock funds (which may include small percentages in foreign stocks), the average is 8.2%.

Best Buys Commentary. Given their diversified natures, most of our Best Buys models are performing acceptably this year, in our opinion. After usually outperforming in previous years, most have been at least competitive with asset allocation products of vaguely equivalent risk levels from major mutual fund families, including Fidelity, Price and Vanguard.

Oil and Funds

Many financial advisers recommend dedicated exposure to natural resources investments. Not us. Instead, we favor diversified stock funds that spread their assets across securities in many sectors. We avoid most sector funds, and do not concur with the idea that investors need exposure to commodities to achieve an optimal portfolio mix.

The wisdom of these aspects of our approach was reaffirmed in November. Oil stocks got hammered late in the month when OPEC decided to keep its supply constant despite sagging oil & gas prices and middling growth in global demand for petroleum products, in an effort to maintain worldwide market share. As a result, even some of the best funds that emphasize energy stocks suffered huge losses, driving their year-to-date returns well into the red. Such energy sector funds as Price New Era (PRNEX), Vanguard Energy (VGENX) and Fidelity Select Energy (FSENX) were down 6.0%, 11.4% and 12.0%, respectively, through November, while the stock market as a whole was up.

As part of our continual due diligence on all of our recommendations, we periodically review their sector allocations. We are pleased to report that the vast majority of our Best Buys picks have modest exposures to energy, even as compared with their respective benchmarks.

Our sole recommendation that has a very high allocation to the energy sector is Hennessey Gas Utility Index (GASFX), which we include in the SchwabWealth Builder model. However, this fundís energy holdings are not exploration & production or energy services and equipment companies. Instead, they are mainly pipeline companies, which should be virtually immune from financial damage caused by lower prices for oil and natural gas. Itís even possible that a drop in energy prices would help the bulk of this fundís pipeline companies, which stand to benefit from greater usage if demand increases in response to lower cost. The performance of the fund bears this out: so far in 2014, it is up a whopping 18.8%.

For more of our analysis of natural resources and energy investments, see the December 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 0.92 5%
Price Divsfd Small Cap Gr agg gr 1.30 10%
RiverPark Large Growth growth 1.18 5%
Vangd Total Stock Market Idx growth 1.07 15%
Amer Century MidCap Val growth 0.92 10%
Artisan Global Sm CP global 1.23* 5%
Causeway Int'l Value int'l 1.21 5%
Dodge & Cox Global Stock global 1.20 5%
Artisan Global Opps global 1.17 10%
Vangd U.S. Value gr-inc 1.09 10%
Vangd Equity Income gr-inc 0.90 10%
Fidelity New Markets Inc. bond 0.43 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: 1.01
Average expense ratio: 0.77%
Since January 1, 1988, $10,000 has grown to $152,226


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) $152,226 $137,491 $104,071 $15,189
since 2/1/09
Average portfolio Beta 1.01 0.85 0.61 0.29
Average expense ratio 0.77 0.73 0.61 0.61

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