Insightful Investing

Bond Fund results have been so close to flat that they are almost not worth writing about. For both the quarter and the first half of the year, our leader was Fidelity Capital and Income (FAGIX) with 2.3% and 5.5% returns respectively. Vanguard GNMA (VFIIX) trailed the pack of our bond funds with a loss of -0.7% for the quarter and a gain of 0.6% so far this year.

12.5% seems to be the magic number for stock funds the first half of 2007, as Atlas Growth Opportunities (ASGIX), RS Value (RSVAX), and Artisan Mid Cap Value (ARTQX) all have earned that much in the first 6 months of the year. The winners so far in 2007 are Wells Fargo Advantage Discover(STDIX) with a 15.7% return and Kinetics Small Cap Opportunity (KSCOX) with 15.5%. Julius Baer International Equiy (BJBIX) again lead a strong international contingent with a 14.3% return.

In the second quarter, our only double digit winner was Marsico 21st Century (MXXIX) with a 10.3% return. Fidelity Small Cap Independence (FDSCX) was not too far behind, earning 9.5% for the quarter.

On the other end of the spectrum, Third Avenue Real Estate Value (TAREX) was the big winner of our Real Estate Funds. It only lost 1.6% for the quarter. As often happens in down markets, this was one of those periods where fund managers earned their money by losing less than the Benchmark.

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

Asset Allocation for 3rd Quarter 2007

We added Long / Short as a new category of funds this quarter. While we have been including Alpha Hedged Strategies (ALPHX) in our model portfolio for a couple of years, there are now enough ‘experienced’ funds in this category to add another to our list. The best reason for including these funds is to provide some downside protection to a portion of your portfolio. We’re adding 1st Source Monogram Long/Short (FMLSX). We did not remove any funds from our recommended list this quarter.

The combination of the lowering of short term interest rates by the FED and continued financial market uncertainty have led us to a more conservative approach to our Asset Allocation for the 4th quarter of 2007. We have taken 2% from Large Cap, Mid Cap, Small Cap, and Real Estate and added 4% each to Short Term Bonds and Intermediate Bonds.

Asset Allocation July 2007

The first half of 2007 has been reasonably good to investors, though you might have felt a little sea sick with the roller coaster ride stocks have taken to obtain the 6.3% return for the quarter and 7.0% for the past 6 months. While it looked like both March and June might be the start of significant corrections, so far those have both proven to be good opportunities to buy into this market at better prices. The market has shown considerable resilience, which is somewhat surprising given the recent stumbles in the Chinese stock market, sub-prime loan problems, higher energy prices and the housing market slowdown. We feel its time to approach the markets with some degree of caution.

The big results news for the last quarter was the 9% hit that Real Estate took. For the first time in a long time, not only was Real Estate not the place to be, being there was actually a little painful. Those experts that have been telling us for the last year or two that Large Cap Growth was the place to be were finally right. A 6.9% return for the big boys in the second quarter easily outdistanced Small Cap Value’s 2.3%, though Small Cap Growth’s 9.3% return so far in 2007 is even better than Large Cap Growth’s 8.1%. It looks like the Growth vs. Value decision was more important than the Small vs. Large so far this year. Do not be surprised if that continues the rest of this year.

The Fed continued to hold short term interest rates steady while longer term rates slowly started to move up. That helped to yield curve to move towards its normal orientation. Unfortunately for bond investors, those higher interest rates pushed down the value of the broader bond market. That resulted in slightly better than break even earnings in the first half of 2007 for the Intermediate Bonds and only 1.5% for shorter maturities.

Investment Returns June 2007