Insightful Investing

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%).

Our January 2012 Mutual Fund Portfolios, ETF Investment Portfolios, and Best Fidelity Funds have been updated through December 2011. The Mutual Funds in our Mutual Fund Portfolios are chosen from our Best Mutual Funds. The ETF’s in our ETF Investment Portfolios are chosen from our List of 100 Best Exchange Traded Funds. The investment performance history of our mutual fund portfolios and ETF investment portfolios are tracked on our investment portfolio performance page.

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

US stocks were the quietest category of all with only a couple of Stock Funds picking up more that that 2% in November as Fidelity Small Cap Discovery (FSCRX) added 2.3% and Westport R (WPFRX) gained 2.2%. On the down side, Royce Micro Cap (RYOTX) fell 2.2% this month. International stocks did not fair as well thanks to continued turmoil in Europe resulting in a stronger dollar. Fidelity International Growth (FIGFX) lost the least with a drop of 1.4%, while Harding Loevner International Small Company (HLMSX) lost 4.4%.

For the most part, Bonds hand a more difficult time than stocks, although Fidelity Inflation-Protected Bond (FINPX) did manage to pick up 0.6% in November. High Yield Bonds took the biggest hit with Artio Global High Income (BJBHX) falling 2.8%. International Bonds were not far behind as Dreyfus International Bond (DIBRX) dropped 2.6%.

As usual, there was a little more action in ETFs, in particular those with a sector orientation. Interestingly SPDR S&P Homebuilders (XHB) was up 5.8%, while PowerShares DB Energy (DBE) gained 3.4% and Consumer Staples Sector SPDR (XLP) added 3.1%. While iShares S&P SmallCap 600 Value Index (IJS) was our big US Stock ETF gainer in Noverber by rising 1.5%, SPDR S&P Dividend (SDY) was not far behind with a gain of 1.3%. This ETF has been one of the better performers for the year, up 6% in 2011 thanks to it significant dividend. Technology stocks took the biggest hit for the month as PowerShares Nasdaq 100 (QQQ) fell 2.7% in November.

Internationally, Market Vectors Russia ETF (RSX) added 2.5%, while iShares MSCI South Africa Index (EZA) rose 2.2% in November. On the other hand, it was an even more difficult market for stocks in South American than Europe as iShares MSCI Chile Index (ECH) fell 6.4% and iShares MSCI Brazil Index (EWZ) dropped 5.4%.

Like Mutual Funds, Government Bond ETFs faired better than International Bonds and High Yield, led by a gain of 2.0% by iShares Barclays 20+ Year Treas Bond (TLT). SPDR Barclays Capital International Corporate Bond (IBND) fell 6.2%, while SPDR Barclays Capital High Yield Bond (JNK) dropped 2.8% in November.

Our December 2011 Mutual Fund Portfolios, ETF Investment Portfolios, and Best Fidelity Funds have been updated through November 2011. The Mutual Funds in our Mutual Fund Portfolios are chosen from our Best Mutual Funds. The ETF’s in our ETF Investment Portfolios are chosen from our List of 100 Best Exchange Traded Funds. The investment performance history of our mutual fund portfolios and ETF investment portfolios are tracked on our investment portfolio performance page.