Insightful Investing

For most investors, January was a rather quiet month in both the stock market and the bond market. Our leading stock funds were Cohen & Steers Realty Shares (CSRSX) which was up 3.5%, Artisan Mid Cap Value Investor (ARTQX) gaining 3.4%, Neuberger Berman Real Estate (NBRFX) picking up 3.3%, and Wasatch Large Cap Value (FMIEX) earning 3.2%. On the down side, the biggest mover was Royce Micro-Cap (RYOTX) which lost 2.1%. The only real movement in our bond funds was in the High Yield category as Artio Global High Income (BJBHX) and Metropolitan West High Yield Bond (MWHYX) each gained 2.5% and Fidelity High Income (SPHIX) picked up 2.4%.

The more adventurous investors, on the other hand, saw a lot more action in their investments. Unfortunately, most of that action was to the downside with Wasatch Emerging Markets Small Cap (WAEMX) falling 8.2%, Lazard Emerging Markets (LZOEX) dropping 5.5%, and Harding Loevner Emerging Markets (HLEMX) falling 4.8%.

Once again, ETFs were where the action was on both sides of the ledger. A couple of European ETFs that were hard hit last year, bounced back strongly with iShares MSCI Spain Index (EWP) up 14.0% and iShares MSCI Italy Index (EWI) gaining 10.7%. Probably the most interesting thing about January was the divergence in commodities. While PowerShares DB Agriculture (DBA) gained 6.0%, PowerShares DB Precious Metals (DBP) lost 7.3%.

Our February 2011 Mutual Fund Portfolios, ETF Investment Portfolios, and Best Fidelity Funds have been updated through January 2011. The Mutual Funds in our Mutual Fund Portfolios are chosen from our 50 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.

On paper it looked like the year started off with a relatively quiet month, but the political unrest in Egypt essentially cut equity returns for January in half. The leaders of the pack were Real Estate and Large Cap Value stocks, both turning in a gain of 3.2%. Most equity categories returned a little over 2% this month, although Small Cap Stocks essentially broke even, while Emerging Market Equities actually lost 2.7%.

Bonds held their ground after a difficult 4th quarter, gaining all of 0.1%. High Yield Bonds, on the other hand, looked more like stocks (as they often do), gaining 2.2% in January. Emerging market bonds, like their equity counterparts dropped about 1.0% this month. It was only a matter of time before precious metals experienced a significant correction, and the start of 2011 turned out to be that time. The most surprising aspect of the month was not the significant drop in the price of Silver and Gold, but the fact the the US dollar fell as well. Most of that can be attributed to a strengthening of the Euro given the recent stability in Spain and Italy, both of which turned in double digit gains this month.

As a new feature for 2011, we are going to start writing brief profiles about some of our Mutual Funds and ETFs. Let’s start it off with the newest addition to our list of the Best Mutual Funds.

The rise from the ashes of interest rates at the end of 2010 sent us scrambling to research potential new investments for 2011. We have been waiting to see when all the government stimulation was going to start showing up as increasing inflation in the economy. It looks like that time has come. As some of you may know, rising interest rates hurt the performance of bonds, in particular those that have a longer time horizon. While we would never suggest the elimination of bonds from your portfolio, we do have a suggestion for some of the money you would normally park in those investments.

Funds that invest in floating rate debt securities are one answer to this dilemma. This should help investors in two ways. First, these floating rate loans should not lose value in a rising interest environment like bonds normally do. Second, the fact that the interest paid to investors in these loans actually increases as the market rates increase, something a fixed rate security is unable to do.

Since these funds invest in below investment grade securities, similar to High Yield Funds, we place high importance on a manager’s ability to preserve capital in a bear market. The fact that the Fidelity Floating Rate High Income Fund (FFRHX) lost less than any other fund of this type during the 2008 bear market is the major reason why it is our top choice in this category. The reason the fund performed better than its peers was because it was invested in higher quality loans than most similar funds. The downside to this approach is that the fund did not perform as well as many other funds during the market rebound. We think this is a small price to pay for significantly less volatility and better capital preservation than other floating rate funds.