Insightful Investing

William Blair International Growth (WBIGX) returned 6.9% for the quarter to top our fund list, followed closely by Royce Pennsylvania Mutual Fund (PENNX). It turned out to be a good quarter for many of our Fidelity funds, as Fidelity Real Estate (FRESX) 3.6% and Fidelity Value (FDVLX) 4.2% ead their respective categories, while Fidelity International Discovery (FIGRX) 5.5% and Fidelity Contrafund (FCNTX) 3.8% finished a close second to their peers.

Ironically, two of our best performers from last quarter were on the bottom of the pile for the most recent quarter as both Kinetics Paradigm (WWNPX) -1.7% and RS Partners (RSPFX) -0.9% gave back a little, but still managed to almost double the average Mid Cap Core and Small Cap Core funds respectively for the year.

There is not a lot to say about Bond Funds this quarter because nothing eventful happened. In fact, while all of our funds were winners for the quarter, only three funds moved up more than 1%. While Vanguard High Yield (VWEHX), Scudder High Income (MGHVX), and Vangard GNMA (VFIIX) gained almost 2% in the 4th Quarter, Fidelity Capital and Income (FAGIX) was our top performing bond fund for the year with a gain of 4.5%.

Our January 2006 Mutual Fund Portfolios and Best Fidelity Funds have been updated through December 2005. The investment performance history of our mutual fund portfolios are tracked on our investment portfolio performance page.

Asset Allocation for 1st Quarter 2006

There were no changes to the bond funds in our portfolios, but we made several additions and deletions to the equity funds. Buffalo Mid Cap (BUFMX), Kinetics Small Cap Opportunities (KSCOX), Marsico International Opportunity(MIOFX), and Royce Value Plus (RYVPX) were added to our recommended list.

Since we added several new mutual funds to our recommended list this quarter, you should not be surprised that we had quite a few we decided to remove because we feel our new choices will be better performers. Those funds leaving our list this quarter are Third Avenue Real Estate Value (TAREX), UMB Scout World Wide, (UMBWX), William Blair Small Cap Growth (WBSNX), and Wasatch Small Cap Growth (WAAEX).

Besides simplifying our Asset Allocation choices for 2006, we have Decreased our allocation to Mid Cap Stocks by 3% and Real Estate by 2% since we anticipate a slowdown in those asset classes after a good run up. That money has to go somewhere, so we are Increasing our our allocation to Intermediate Bonds by 3% and Small Cap Stocks by 2%.

Asset Allocation January 2006

After the volatile action of the 3rd quarter, it was not surprising that this year’s 4th quarter was rather quiet as both stocks and bonds were up slightly. While international stocks could not sustain last quarter’s double digit gains, they still topped the equity markets for the second straight quarter by picking up an additional 4% for the year. All other equity categories were up between 1% and 3%. Not much to write about, but at least its enough to keep you ahead of inflation. All categories of equities were up 3% to 5% for the quarter. Bonds continue to tread water by earning investor about 1%. That does not sound like much, but it does indicate yields are at least managing to compensate for the falling values.

Since the quarter was rather uneventful, let us go straight to a review of 2005. A rough start to the year did not prevent stocks and bonds from having a positive year. Real Estate and Domestic Equities rebounded strongly in the 2nd quarter, while a strong surge by International stocks in the 3rd quarter propelled them to a 13.5% gain for the year. Mid Cap Stocks were not far behind, picking up 12.7% over the last 12 months. That is somewhat amazing given the fact that both Large Caps and Small Caps increased just under 5% this year.

In spite of the fact that Growth stocks outperformed Value stocks for the third straight quarter, it was not enough to declare them the winner in 2005, unless of course you are talking about funds rather than indexes. It appears that active managers are starting to move from Small Value stocks (0.6%) to Large Growth stocks (3.3%), which just so happens to be reflected in the performance of these funds for the quarter.

Even though Real Estate funds had their third year in a row of double digit returns, this year’s 11.5% seems a little small compared to the last two. In spite of all the gloom and doom talk in the press about the bubble bursting in the housing market, these funds did better than most.

Bonds continue to hold up well, in spite of the continued tightening of interest rates by the Fed. A 2.5% return last year may not seem like much, but considering the difficult environment, that is a good showing. This should serve as another reminder that that a well diversified asset allocation is the best way to stay ahead of the markets.

Investment Returns December 2005