Insightful Investing

Vanguard REIT Index (VGSIX) led a strong comeback for Real Estate Funds. A 14.4% gain by this index fund topped the 14.2% return by new addition Neuberger Berman Real Estate (NBRFX). While Third Avenue Real Estate Value (TAREX) did not keep up with these two funds for the quarter, a 9.7% return in 2005 actually leads all of our Real Estate Funds this year. Unfortunately, this fund is closing to new investors.

Next in line were a couple of new entries in the Mid Cap Fund category. Kinetics Paradigm (WWNPX) gained 9.7% for the quarter, while RS Value (RSVAX) picked up 6.8%. They were followed by Artisan Mid Cap Value (ARTQX), a fund we recommended a while ago, with a 6.2% return.

Large Growth Funds led the big stock funds this quarter, with Atlas Growth Opportunities (ASGIX) bringing home 3.5% for the quarter, and Fidelity Contrafund (FCNTX).

Is not surprising that the Small Cap Funds were led by funds that we have recommended in the past, but have since been closed to new investors. RS Partners (RSPFX) continues to be a star performer with gaining 6.2% for the quarter, but if you did not purchase this fund when we recommended it over a year ago, you have missed out. Leading those Small Cap Funds that you can purchase were Vanguard Explorer (VEXPX) at 4.1%, Fidelity Small Cap Independenc (FDSCX) at 4%, and a new Royce Fund for this quarter, Pennsylvania Mutual Inv (PENNX) at 3.7%.

Several of our recommended International Funds continue to perform well, but they have also closed to new investors. The leader of this group was William Blair International Growth (WBIGX) which returned 2.3% for the quarter. We are adding UMB Scout WorldWide (UMBWX) for this edition of the newsletter, which gained 1.8% for the quarter. It replaces our favorite International Fund Julius Baer International Equity (BJBIX) which is no longer open.

There was not a lot of difference between Bond Funds this quarter as all categories had a good quarter. TCW Galileo Total Return Bond (TGMNX) was the leading Intermediate Bond Fund with a gain of 3.0% and Westcore Flexible Income (WTLTX) topped our High Yield funds with a return of 2.8% in the second quarter.

Our Mutual Fund Portfolios and Best Fidelity Funds have been updated through December 2004. The investment performance history of our mutual fund portfolios are tracked on our investment portfolio performance page.

Asset Allocation for 1st Quarter 2005

There are several changes to our Recommended Fund List and All Funds Model Portfolios this quarter.

First of all, Third Avenue Real Estate Value (TAREX) and Julius Baer International Equiy (BJBIX) have closed to new investors. While you should stay invested in these funds if you already are, we have added Neuberger Berman Real Estate (NBRFX) and UMB Scout WorldWide (UMBX) for those of you looking to invest new money into Real Estate Funds and International Funds.

We have eliminated Neuberger Berman Fasciano (NBFSX) from our recommended list because we have been disappointed with its performance over the last year. In addition, we have replaced the Royce Micro Cap (RYOTX) and Royce Premier (RYPRX) with the Royce managed Pennsylvania Mutual Fund (PENNX). This fund uses a style that is a blend of the two funds it is replacing and gives the manager the flexibility to take advantage of both small cap and micro cap companies.

Starting off the second half of 2005, we have Increased our equity allocation by taking 5% of our Insightful Portfolio from High Yield Bonds and moving that to Mid Cap Funds which we feel are likely to outperform both Small Cap Funds and Large Cap Funds through the rest of this year. There have been no changes to our Conservative Portfolio Asset Allocations.

Conservative Asset Allocation July 2005

Insightful Asset Allocation July 2005

All you had to do was take the return chart for the first quarter and turn it upside down to get the second quarter. Well, not exactly. What that tells you is that the market has gone almost nowhere in 2005, except for the one asset class that was beginning to show signs of running out of gas last quarter. Real Estate more than made up for a terrible first quarter by leading the pack with a gain of almost 15% for the quarter, and 6% for the year.

The equity markets, along with around $60 per barrel Oil, seem to stabilize this quarter. While Mid Cap Stocks and Small Cap Stocks both gained just over 4% for the quarter, Large Cap Stocks and International Stocks were close enough to break even for the quarter, and for all of 2005 as well, that we might as well just say that stocks have been treading water in 2005. While that sounds a bit disappointing, we regard it a good showing considering the 33% increase in oil prices this year.

Bonds continue to hold up well, in spite of the continued tightening of interest rates by the Fed. A 3% return for the quarter keep them on track to match the 6% to 7% they have averaged over the past 5 years. While only the contrarians may have expected these results, it reminds us that a well diversified asset allocation is the best way to stay ahead of the markets.

Speaking of contrarian thinking, Growth equities out paced Value equities by all of 0.5% for the quarter. While that may not sound like much, its been pretty rare in the last 5 years. Last quarter we suggested that it could it be time for the market to revert to the mean and start favoring growth stocks again. It looks like that might be starting to happen.

Investment Returns June 2005