Insightful Investing

Our call to rebalance portfolios by taking profits from Bond Funds to increase allocations back to targets in Stock Funds to start the 4th Quarter proved to be a profitable maneuver. That being said, we do not expect the stock market to do much between now and the November elections, so we are keeping our Asset Allocation at the targets we set three months ago.

We have no additions to our Mutual Fund list or our ETF Watch List for this quarter, but we have added Forward Commodity L/S Strategy (FCOMX) and Grant Park Managed Futures Strategy (GPFNX) to our model portfolios.

Asset Allocation January 2012

A strong fourth quarter helped many of mutual funds end the year in the black, but for some funds, in particular those invested overseas, that was not enough to turn the year around. The top rebounder in the 4th quarter was Fidelity Small Cap Discovery (FSCRX) which bounced up 19.2% to finish the year just above break even with a gain of 0.4%. Not far behind was FBR Small Cap Investor (FBRYX) which picked up 18.5% to end the year up 2.3%. Our top equity based mutual fund in 2011 was Neuberger Berman Real Estate (NBRFX) which benefited from a 15.9% rebound last quarter finish with nice 8.3% return in 2011.  A couple of other strong performers for the year were Wells Fargo Advantage Growth (SGROX) which earned 7.9% and the Yacktman Fund (YACKX) which added 7.3%.

Our best funds in 2011 were invested in TIPS as Fidelity Inflation-Protected Bond (FINPX) and American Century Infl-Adj Bond (ACITX) both gained 13.0% in 2011. Not too far behind was Invesco Balanced-Risk Allocation (ABRYX) which earned 10.5% thanks to a significant allocation to Bonds. It proved to be a good year for Fidelity Bond Funds as Fidelity New Markets Income (FNMIX) gained 7.9% this year and Fidelity Total Bond (FTBFX) returned 7.4% in 2011.

While it was a tough year for International Mutual Funds, at least our choices were ahead of more than half of their competition. Our best performers in 2011 were Westcore International Small Cap    (WTIFX) which lost (5.7%), Fidelity International Growth (FIGFX) which fell (8.9%) and Matthews Asia Dividend (MAPIX) which fell (10.0%).

Amazingly, our best performning ETFs in the fourth quarter of 2011 did not gain enough to finish the year in the black. SPDR Homebuilders (XHB) returned 29.0% for the quarter, but actually lost (0.1%) for the year and iShares S&P SmallCap 600 Value (IJS) picked up 18.4% last quarter but still lost (1.7%) for the year. Our best performing Bond ETF for the quarter was iShares iBoxx High Yield Corporate Bond (HYG) gained 10.0% last quarter, but iShares Barclays 20+ Year Treas Bond (TLT) on the other hand was the bigger winner with a return of 33.6% in 2011.

Our best stock ETFs for the year were SPDR Dow Jones Industrial Average (DIA) which gained 7.7% and SPDR S&P Dividend (SDY) which added 7.1%. Internationally, a couple of ETFs almost showed a profit as PowerShares International Dividend Achievers (PID) lost only (2.4%) and iShares MSCI Malaysia Index (EWM) fell only (2.7%). There was an amazing range of returns across sector ETFs in 2011. While Utilities Sector SPDR (XLU) gained 19.5% and Consumer Staples Sector SPDR (XLP) returned 14.1%, Financial Sector SPDR (XLF) lost (17.1%) and Materials Sector SPDR (XLB) lost (10.7%).

While the fourth quarter of 2011 was quite strong for stocks, it was not strong enough to make up for a terrible third quarter. Large Cap Stocks, represented by the Standard and Poor’s 500 Index were up all of 2.1% for the year, helping the overall market finish the year with 1.0% gain, as Mid Cap Stocks were down 1.7% and Small Cap stocks fell 2.9%. Looking at the view from the top, the final statistics would lead one to believe that it was a rather uneventful year in the financial markets. In reality, nothing could be further from the truth. Volatility was up significantly this year, in particular over the summer when the Debt Crisis in Europe stole the headlines. As far as the stock market was concerned, a few signs of an improving economy in the United States were not enough to make up for the bad news from overseas.

The best place to be invested in 2011 was actually Long Term Treasury Bonds which gained a whopping 30% in 2011. These government securities were buoyed far more by the flight to quality by investors than governmental efforts to keep interest rates low across the globe. TIPS gained 13.6% for the year, even with rather low inflation during the year. This was certainly due to an expectation of significant inflation once that once the economies of the world start to pick up steam. Interestingly, REITS actually had a nice year, as these securities gained 8.5% in anticipation of a recovery in the housing market. From a style perspective, Large Cap Growth fared the best this year, while Small Cap Value was on the wrong end of the investment performance curve.

On the other side of the spectrum, it was a difficult time to be invested overseas, thanks to a continuing stream of disturbing headlines from Europe. Not only did this take down international financial markets, the impact was even worse for US investors thanks to the rise in the Dollar sparked by a flight to quality. Developed countries were down 12.1% in 2011, while Emerging Market Equities took an even bigger hit by falling 18.4% in 2011.

Investment Returns December 2011