Insightful Investing

Even though the third quarter of 2011 was the worst for the stock market since the fourth quarter of 2008, having a reasonable allocation to Bonds and Hedged Mutual Funds helped some investors reduce their losses. Our leading Hedged Mutual Funds were Hussman Strategic Growth (HSGFX) which gained 7.3% and Invesco Balanced-Risk (ABRYX) which added 2.5% this quarter. Most domestic bond funds had respectable results for the quarter, especially those with an emphasis on longer term US Treasury Bonds. Fidelity Inflation-Protected Bond (FINPX) added 4.6%, Wells Fargo Advantage Government Securities (STVSX) picked up 4.0%,and Fidelity Intermediate Government Income (FSTGX) earned 3.1% for the quarter.

As we would expect during a difficult time for the stock market, our High Yield Bond funds were poor performers, although Well Fargo Short Term High Yield (STHBX) hung in their fairly well, thanks to its short duration, by losing only 2.2%. Also hanging in there well were recently added Hedged Mutual Funds hedge funds Highland Long/Short Equity (HEOZX) and Marketfield Fund (MFLDX), both losers of only 4.6% over the last three months.

As was the case in 2008, our best performing Stock Mutual Funds were run by managers that pay more attention to capital preservation than topping the charts during a raging bull market. Once again leading the charge were Forester Value (FVALX) which fell only 4.4%, Intrepid Small Cap (ICMAX) which lost 9.1%, and Yacktman Fund (YACKX), which dropped 9.4%. Interestingly, while domestic Small Cap Funds performed worse than Large Cap Funds, overseas Small Cap Funds held up better. Our best performing International Funds both fall under this category as Westcore International Small Cap (WTIFX) fell 15.1%, and Wasatch Emerging Markets Small Cap (WAEMX) dropped 16.6%.

Treasury Bonds and Gold were the strongest ETF performers this quarter. Our biggest winner was iShares Barclays 7-10 Year Treasury (IEF)which gained 10.1% and iShares Barclays TIPS Bond (TIP), which picked up 4.5%. SPDR Gold Shares (GLD) gained 8.3% this quarter, even after an 11.1% drop in September. Another good performer was iShares Barclays Aggregate Bond (AGG) which earned 3.8%. Thanks to the inverse correlation of Long Treasuries to stocks during a market crisis, we have decided to add iShares Barclays 20+ Year Treas Bond (TLT) to our watch list. A gain of 29.1% by that ETF this quarter would have made investing in that ETF a great way to celebrate the 4th of July this year.

There were a few stock ETFs that outperformed the stock market in general, led by PowerShares Nasdaq 100 (QQQ) which lost only 8.0%, thanks to the relatively strong Technology sector, and SPDR S&P Dividend (SDY) which fell just 9.4% thanks to a strong dividend yield. iShares MSCI Japan Index (EWJ) was the only International ETF with a single digit loss, dropping 9.3%.

Those of you who are inclined to do a little trading, the iPath S&P 500 VIX Short-Term Futures ETN (VXX), an ETF we track only to watch the amount of volatility in the stock market, was up a stellar 152.5% in the third quarter of 2011, but is amazingly still down 22.8% for the last 12 months. Now that’s an ETF that has far too much volatility for a long-term investor!

Our October 2011 Mutual Fund Portfolios, ETF Investment Portfolios, and Best Fidelity Funds have been updated through September 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.

To say that August was a difficult month for stocks may be an understatement, but at least some of our hedged equity funds did show a profit. Hussman Strategic Growth (HSGFX) gained 3.8% and Invesco Balanced-Risk (ABRYX) added 2.5%. Most bond funds had respectable results for the month, especially those with an emphasis in US Government bonds. Wells Fargo Advantage Government Securities (STVSX) picked up 1.8%, Fidelity Intermediate Government Income (FSTGX) earned 1.5%, and Fidelity Inflation-Protected Bond (FINPX) added 0.9%.

While you may have been disappointed with the performance of several of our funds during the market rebound in 2009, many of these experienced limited losses in August, just like they did in 2008. This is a major reason why we tend to favor managers that pay more attention to capital preservation than topping the charts during a raging bull market. In the long run, these funds tend to outperform their peers because they usually have significantly smaller losses when the stock market goes through a difficult period.

Our top stock performers in August were Yacktman Fund (YACKX), which dropped only 1.0%, Forester Value (FVALX) which fell 1.4% and Intrepid Small Cap (ICMAX) which lost 1.8%. Interestingly, while domestic Small Cap funds had a very difficult month, our International Small Cap Funds performed significantly better, led by Westcore International Small Cap (WTIFX) fell only 4.2%.
A couple of our recent high fliers tuned in the worst results in August as Westcore Select (WTSLX) dropped 10.5% and Parnassus Small-Cap (PARSX) which lost 10.3%.

Bonds and some commodities were the strongest performers this month as SPDR Gold Shares (GLD) gained 12.3%, PowerShares DB Agriculture (DBA) gained 5.8%, iShares Barclays 7-10 Year Treasury (IEF) added 4.7%, while iShares Barclays Aggregate Bond (AGG) and PowerShares Emerging Markets Debt (PCY) both earned 1.5%.

There were a few stock ETFs that outperformed the stock market in general, led by SPDR S&P Dividend (SDY) which lost only 0.7% thanks to a strong dividend yield. The iShares MSCI Australia Index (EWA) and iShares MSCI Canada Index (EWC) both performed relatively well, benefiting from the significant contribution natural rersouces contribute to their economy, losing only 3.4% in August.

Our worst Bond ETF was SPDR Barclays Capital High Yield Bond (JNK) which lost 3.0%. On the stock side of the ledger, the biggest losers were
iShares MSCI BRIC Index (BKF) dropping 10.1%, iShares Russell Microcap Index (IWC), down 10.6%, Rydex S&P Equal Weight Financials (RYF) losing 10.9%, SPDR S&P Biotech (XBI) falling 11.2%, and iShares MSCI Germany Index (EWG) collapsing 18.7%.

Those of you who are inclined to do a little trading, the iPath S&P 500 VIX Short-Term Futures ETN (VXX), an ETF we track only to watch the amount of volatility in the stock market, was up 66.4% in August, but is actually down 55.6% in the last year. Now that’s an ETF that has far too much volatility for a long-term investor!

Our September 2011 Mutual Fund Portfolios, ETF Investment Portfolios, and Best Fidelity Funds have been updated through August 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.

The turmoil in the financial markets, both in the United States and overseas, proved to be a difficult environment for our Stock Funds in July, while most of our Bond Funds had good results. Topping our performance list was Fidelity Inflation-Protected Bond (FINPX) which gained 3.6%, Dreyfus International Bond (DIBRX) which picked up 3.2% and Payden Emerging Markets Bond (PYEMX) which earned 2.7%.

Only a couple of our US stock fund managers protected their investors equity in July as FBR Large Cap (FBRPX) picked up 0.3% and Royce Micro-Cap (RYOTX) added 0.1%. On the other hand, most of our International funds had positive results for July, led by Wasatch Emerging Markets Small Cap (WAEMX) which jumped 4.7% and Driehaus Emerging Markets Growth (DREGX) and earner of 3.1%

Other than commodities, July was not a very eventful month for ETFs. After suffering significant losses in the second quarter of 2011, iShares Silver Trust (SLV) bounced back strongly by gaining 14.8% for the month. Also picking up steam was SPDR Gold Shares (GLD) which earned 8.4%, PowerShares DB Commodity Index (DBC) with 4.6% gain, and PowerShares DB Energy (DBE) with a 2.5% return.

While most stock ETFs lost money in July, a few gained some ground. iShares MSCI Singapore Index (EWS) earned 4.7%, iShares MSCI Japan Index (EWJ) picked up 2.7%, and PowerShares Nasdaq 100 (QQQ) added 1.7%.

All of our Bond ETFs had positive returns in July. The iShares Barclays TIPS Bond (TIP) ETF gained 3.9%, iShares Barclays 7-10 Year Treasury (IEF) earned 3.2%, and PowerShares Emerging Markets Sovereign Debt (PCY) added 2.1%.

Our August 2011 Mutual Fund Portfolios, ETF Investment Portfolios, and Best Fidelity Funds have been updated through July 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.