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Copyright 2012 Tom Madell, PhD, Publisher
Apr. 2012 Update. Published April 12, 2012

Model Portfolio Performance Update

As regular readers know, our Model Portfolios are constructed for both performance and diversification. While some investors might make big bets on just one fund or category, we will always spread out our choices among categories.

Our Specific Stock Fund Recommendations from Apr. 2011

As emphasized in our Jan. 2012 Newsletter and update, accessible from our home page, we expect that investors who choose our recommended funds should do better than the performance of the average fund within its category.

The following table shows how the funds we recommended one year ago did thru Mar. 31, along with a comparison to how the average fund within its category performed.

Fund We Recommended (Fund Symbol) 1 Yr. Tot. Ret. vs
(Category Average)
Performance
Difference
Vanguard Growth Idx or (VIGRX) 11.7 (8.4) +3.3
American Century Growth Inv (TWCGX) 8.5 (8.4) +0.1
Fidelity Growth Company (FDGRX) (A) 12.7 (8.4) +4.3
Vang. Internat. Growth (VWIGX) -4.7 (-6.1) +1.4
Vang. FTSE All-World ex-US Small-Cap Index (VFSVX) (A) 11.3 (-6.1) -5.2
Vang. Large-Cap Idx (VLACX) 8.0 (6.0) +2.0
Gabelli Asset (GABAX) (A) 2.1 (6.0) -3.9
Fidelity Low Price Stock (FLPSX) 7.3 (0.1) +7.2
T Rowe Price Equity Income (PRFDX) 4.5 (3.4) +2.1
Yacktman (YACKX) (A) 9.0 (3.4) +5.6
Vang. Financials ETF (VFH) (A) -0.7 (3.4) -4.1
Vang Mid-Cap Growth Idx (VMGIX) 2.3 (1.7) +0.6
Vang. Small Cap Idx (NAESX) 0.9 (0.2) +0.7
Note: Funds showing (A) were designated for aggressive investors.

All our moderate or conservative risk funds beat their category average. The average outperformance was 2.2%. However, our choices for aggressive investors had a more spotty performance Combined, ten out the 13 recommended funds outperformed their category average with an average outperformance of 1.1%.

The entire portfolio, weighted as we recommended, returned +3.2% if held over the entire year. While this was ahead of the 2.7% return for the average US diversified stock fund, it significantly trailed the return of the S&P 500 Index, which if held alone would have returned 8.5%.

Our Specific Bond Fund Recommendations from Apr. 2011

In examining how our recommended bond funds performed, using category averages becomes less meaningful. This is because some of the funds do not clearly belong to a single category and because some bond categories do not have available any agreed upon average performance figure.

Therefore, we like to compare each fund's performance to how one would have done merely investing in a broad measure of the bond market, namely the iShares Barclays Aggregate Bond ETF (symbol: AGG), or in the world's biggest bond fund, PIMCO Total Return Inst. (PTTRX). Here are the one year results:

Fund We Recommended (Fund Symbol) 1 Yr. Tot. Ret.
Vang. Tot. Bond Market (VBMFX) 7.6
PIMCO Total Return Instit (PTTRX) 6.0
Harbor Bond Fund (HABDX) 4.9
Vang. Interm. Term Tax-Exempt (VWITX) 10.4
PIMCO Real Return Instit (PRRIX) 11.3
Harbor Real Return (HARRX) 10.5
Loomis Sayles Bond Retail (LSBRX) 6.5
Vang. High Yield (VWEHX) 7.9

As can be seen, our funds did quite well; the average unadjusted return was 8.1%. When compared to the benchmarks cited above, our outperformance, was +0.4 vs. AGG and +2.1 vs PTTRX, adjusted to assume an investor is in the 28% tax bracket thereby taking advantage of the tax-free return from VWITX. Of course, PTTRX is actually a recommended fund within our portfolio.

The entire portfolio, weighted as we recommended, returned +7.7% (adjusted) if held over the entire year. This assumes inclusion of the PIMCO funds as opposed to the Harbor funds; one might recall that we have recommended the Harbor funds only if one does not have access to the PIMCO funds since the former has slightly higher fees.

Discussion

Our overall Model Portfolio percentage returns were mixed, disappointing for stocks, but excellent for bonds.

We have discussed in recent issues how it has been almost impossible to beat the S&P 500 over recent years if one maintained a diversified portfolio that included international investments. Since the average international stock fund trailed the Index by -14.6% (+8.5 vs -6.1), and even more extremely so for emerging market investors, it is easy to see why anyone who had such a fund would have had their performance dragged down rather severely. In fact, international funds have badly trailed basically all US stock funds for an entire five years now.

The reasons for the last 12 mos. international underperformance appear to have been the European debt crisis and fears of a global growth slowdown. Both apparently caused international investors to pull back from riskier investments; US stocks are generally thought to be less risky than stocks from abroad. The good news, although just too tentative to assume a turnaround, is that international investments have started to maintain a roughly equal performance to US stock funds since the beginning of 2012.

Another reason why it has been so difficult to beat the S&P over the last 5 years we have also discussed before. To beat the Index, one must instead invest in categories that are doing significantly better than the diversified Large Cap stocks within the Index. However, in recent years, especially in 2011, no main category of funds has excelled. Only for investors in the very specialized funds within the Health Care and Real Estate sectors have returns lately exceded the Index. (We put out a Buy signal on Real Estate funds on Sept 1, 2011 and have been including the category since.)

As our Model Portfolios change from year to year, it makes less sense these days to examine how our Portfolios would have done if held unchanged over longer periods such as 3 and 5 years, as we have customarily done. But if a buy and hold investor did invest in one of our Stock Portfolios over such periods, down thru the 12 years that we have been publishing them, they generally would have done considerably better than merely holding an S&P 500 Index fund.

And as far bonds are concerned, we are pleased we did better than even PIMCO Total Return or the aggregate index over the past 12 mos. However, in general, we think that most investors will do quite well owning some combination of the PTTRX fund as well as the Vanguard Total Bond Market Fund (VBMFX), a portfolio which tends to do as well as any combination of your own self-managed multiple fund categories.