The No-Load Fund Investor, Welcome

Despite an extremely volatile year, the U.S. stock market ended 2011 about where it started, with large-cap indexes doing a little better and small-cap indexes a little worse than zero. Historically defensive sectors such as utilities, consumer staples and healthcare produced double-digit gains, while the materials and financial sectors produced double-digit losses. Some highly competitive, economically sensitive industries, including alternative energy, coal, steel, and investment managers/broker dealers, produced losses of as much as 30%, 40% or even 50%. Commodity-sensitive industries within technology, including semiconductors, also were hard hit.

Overseas markets were pummeled in 2011. For example, the average international equity fund in our database produced a loss during the year of nearly 15%, while exchange traded funds for certain emerging market countries produced losses easily in excess of 25%.

All of these factors helped produce a lousy year for active equity portfolio management. Despite the flat performance of the S&P 500 before dividends (and a 2% total return including them), the average stock fund in our database produced a loss of 4.5%.

Best Buys Commentary/Changes. That’s one reason several of our Best Buys model portfolios produced small losses in 2011. Though we include large-cap index funds in each of our core models, we also include diversified mixes of actively managed funds that we believe stand a strong chance of outperforming relevant indexes over a multiyear period. Even so, 10 of our Best Buys model portfolios ended up for the year, albeit modestly so. For more detailed results and analysis of Best Buys portfolios’ performance, see our January issue.

It seems to us that equities are more likely to be up from current levels at the end of 2012 than they are to be down. In fact, it wouldn’t surprise us at all if broad measures of the U.S. stock market gained more than 10% in 2012, with an outside chance at 20%.

We are bullish for several reasons. First, equity market valuations are attractive. For example, according to State Street Global Advisors, the price/earnings ratio (P/E) based on forecast fiscal-year earnings for 2012 for the S&P 500 is less than 13, vs. an average in modern financial history of about 15. That P/Es are so low in an environment in which yields on Treasury bonds are at record low levels presents a significant opportunity for equity investors, we believe. Consider: earnings for the stocks in the S&P 500 are estimated to come in at about $97 for 2011, vs. about $84 for 2010. So, despite an increase in operating earnings of about 15%, and a decrease in the yield of the 10-year Treasury to about 2% from 3.3%, the S&P 500 trades at nearly exactly the same level as it did a year ago.

Valuations are currently low mainly because of fears of what might happen to corporate profits and stock prices were the European Union to disintegrate and Europe to enter a deep recession. We would say that investors already expect the European economy to languish; many also believe that various countries will abandon the euro and go back to their former currencies, wreaking economic havoc in the short run. Of course, nobody knows for certain what will happen. What can be judged is whether or not stock prices are adequately discounting the risk of a “worst-case” outcome in Europe and significant carryover effects to a host of other countries. Given current valuations in the U.S. and emerging markets (and among some leading global companies based in Europe itself), we believe the market is already discounting a pretty bad outcome. Our opinion: Though market volatility would increase immediately after a disintegration of the euro compact, it would settle down within short order. The downside to broad market benchmarks would be more limited than most other investors appear to expect.

Meanwhile, if Europe managed to perform governmentally and economically better than investors expected, valuations would rise along with earnings, begetting significant gains from equities. Certainly, several trends are developing that argue for a moderately improving economy in the U.S., which would be good for corporate profits and stock prices in 2012. Though still well below measures achieved before the credit crisis, several indicators of economic achievement are advancing. For example, the U.S. housing market is showing nascent signs of improvement. Sales of existing homes (single-family, townhomes, condos and co-ops) increased 4% in November from October and are up 12.2% year over year.

More of our 2012 market forecast is contained in 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

Fund	Obj.	Beta	% Weighting
Price Health Sciences	sector	0.88	5%
Price Divsfd Small Cap Gr	agg gr	1.17	10%
Cambiar Small Cap -W	growth	1.20	5%
Baron Opportunity	growth	1.14	10%
Artisan Growth Opps	growth	1.12	10%
Artisan Value	growth	1.09	10%
Vangd Total Stock Market Idx	growth	1.04	15%
Causeway Int'l Value	int'l	1.31	5%
Wasatch Emerg Mkts Sm Cap - N	int'l-emerg	1.31	5%
Matthews Asia Dividend	int'l	0.84	5%
Vangd Equity Income	growth	0.92	10%
TCW Emerg Mkts Local Curr N	bond	0.24 *	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: 0.98 Average expense ratio: 0.96% Since January 1, 1988, $10,000 has grown to $93,754

Best Buy Portfolios

	Wealth Builder	Pre-Retirement	Retirement	Income & Preservation
Cash	5%	10%	15%	25%
Bonds	5%	15%	30%	55%
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)	$93,754	$89,586	$75,961	$12,817 since 2/1/09
Average portfolio Beta	0.99	0.83	0.63	0.25
Average expense ratio	0.99	0.86	0.70	0.57

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

Model Portfolios

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