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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, 2/15...

Tough Beginnings

The stock market struggled in January. The large-cap S&P 500 Index fell 3.1%, while the small-cap Russell 2000 Index dropped 3.3%. In terms of sectors, the worst offenders were energy and financial services, broad funds of which lost an average of about 4% and 7%, respectively.

‘Value’ funds tend to hold more in energy and traditional financial services companies (e.g., big banks) than growth funds. As a result, the former funds in our database lost an average of 3.3% in January, vs. 2.0%, on average, for the growth group.

Also hurting, once again, were some foreign markets for which energy and industrial commodities account for significant portions of their exports. Exchange traded funds for such countries as Brazil and Canada, for example, produced losses of between 5% and 10%.

However, some other foreign markets performed well in January. The Indian stock market rallied strongly, as did Japan’s. Even a few European markets (including Germany and France, despite the horrific terrorist attacks in Paris last month) produced gains. All told, the gains across foreign developed markets were not all that substantial last month, as the MSCI EAFE Index of foreign developed markets was up 0.4%.

In the U.S., healthcare stocks continued their impressive, multiyear run of strong performance. Led higher by the biotechnology industry, the average healthcare stock fund in our database gained 3.2%. REITs also performed well, as did electric utilities. Finally, in a reversal of fortune, precious metals mining stocks produced the market’s biggest gains. They were helped both by increases in the prices of gold and silver and, probably, investor expectations that the huge drop in oil prices over the past several months should improve the profits of mining companies by significantly decreasing their production costs

Bond Market Outlook

Review of 2014: The high-quality portion of the U.S. bond market surprised most investors in 2014. Instead of rising throughout the year, interest rates on long-term, high-quality debt fell to historically low levels, causing such investments to rise in value.

For example, the yield of the 30-year U.S. Treasury bond fell about one percentage point, all the way down to about 2.8%, very near an all-time record low. The 10-Year Treasury fell from about 3% at the beginning of 2014 to about 2.15% by the end, and has since fallen all the way to 1.77%. This is near the all-time lows set in mid-2012.

As a result, mutual funds and exchange traded funds (ETFs) that invest mainly in long-term, high-quality U.S. bonds produced strong total returns last year, mainly from increases in net asset value thanks to the increased value of older existing notes in their portfolio, which still offer higher interest rates. Case in point: the iShares 20-plus Year Treasury (TLT) ETF, which we track in The Investor’s ETF Report (to subscribe to this sister publication, call 800-706-6364) generated a total return of 27.3%.

Municipal bond products also performed well, especially if they emphasized long-term securities. Case in point: Vanguard Long-Term Tax-Exempt (VWLTX) gained 11.1%, while the same company’s intermediate-term equivalent fund (VWITX) produced a total return of 7.2%.

Short-term and lower-quality bonds failed to match their cousins, however. ETFs for high-yield, so-called junk bonds produced total returns in 2014 on the order of 1% or 2%, as investors flocked instead to the perceived safety of U.S. government bonds. Meanwhile, short-term bond funds, because they benefit so little from declines in interest rates, produced similarly paltry gains.

Because we seek to moderate various kinds of risk, our bond fund recommendations within our Best Buys models tend to stress medium-quality, intermediate-term selections. We see this area of the bond market as the ‘golden mean’ of fixed income, protecting against rising rates or falling economic growth, but hopefully making money even in a different economic and investment environment. As a result, most of our fixed income selections turned in performance that fell somewhere between last year’s winners and losers among fixed-income sectors.

Forecast for 2015: As we noted above, yields on long-term Treasuries have fallen to very low levels. Partially as a result, we do not expect funds that invest in such debt to produce exceptional total returns once again over the next 12 months. For more on our 2015 bond market outlook, see the February 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 1.01 5%
Price Divsfd Small Cap Gr agg gr 1.17 10%
RiverPark Large Growth growth 1.12 5%
Vangd Total Stock Market Idx growth 1.03 15%
Amer Century MidCap Val growth 0.89 10%
Artisan Global Sm CP global 1.23* 5%
Causeway Int'l Value int'l 1.17 5%
Dodge & Cox Global Stock global 1.19 5%
Artisan Global Opps global 1.13 10%
Vangd U.S. Value gr-inc 1.04 10%
Vangd Equity Income gr-inc 0.91 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: 0.98
Average expense ratio: 0.77%
Since January 1, 1988, $10,000 has grown to $149,134


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) $149,134 $135,542 $102,888 $15,175
since 2/1/09
Average portfolio Beta 0.98 0.82 0.58 0.27
Average expense ratio 0.77 0.73 0.61 0.61

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