Insightful Investing Newsletter July 2011
2nd Quarter 2011 Financial Market Review
After setting new highs early in the quarter, troubling economic news and continued worries about sovereign debt issues in both in the United States and Europe weighed on the stock market in the second quarter of 2011. Thanks to this difficult economic environment, stocks were down 8% from their peak before news that the European Union and International Monetary Fund agreed to another bailout of Greece in return for further austerity measures. That good news pushed US stocks up enough in the final week of June to break even for the quarter.
In spite of a worse June than any other asset class, with a loss of 3.0%, REITs turned out to be the place to be not only for the second quarter of 2011, but also the first half of 2011. While the housing market showed little sign of improvement, these securities gained 3.7% in the second quarter and 9.7% for the first half of the year.
Domestically, Small Cap Growth stocks were the leaders of the pack with a gain of 2.0% for the quarter and 11.3% for the first half, while their Small Cap Value counterparts were the laggards, with a drop of 2.2% this quarter and a gain of only 4.0% in the first half of 2011. While larger stocks did little more than break-even for the quarter, Mid Cap Stocks were up 8.5% in the first half of the year, while Large Cap Stocks picked up 6.0% over the same time period.
The sovereign debt issues in Europe actually had less impact overseas than it did at home, as developed market stocks were actually up 1.8% for the second quarter of 2011 to hold on to 5.4% gains for the first half of the year. The laggards were actually Emerging Market Equities, which fell 1.0% for the quarter, leaving them with a gain of only 1% for the first half of 2011. It was the news of a slowdown in these emerging economies, in particular for China which was down 2.8%, that took down commodity prices, led by Silver's drop of 8.0% for the quarter.
All of this bad news for stocks and commodities turned out to be good news for bonds. Interestingly, both TIPS and Long-Term Government Bonds matched the returns of REITS with a gain of 3.7% in this quarter. As we've said many times before, its always good to have some Bonds in your portfolio, if nothing else as a hedge against economic troubles having a negative impact on the stock market.
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2nd Quarter 2011 Mutual Fund Performance and ETF News
The second quarter of 2011 was one in which some active investment managers earned their keep, as some of our funds significantly outperformed their benchmark indexes. Given the difficulties overseas, it was a little surprising to find that our top two funds were Driehaus International Small Cap Growth (DRIOX), which added 4.5%, and Wasatch Emerging Markets Small Cap (WAEMX) with a 4.4% gain. On the other hand, a gain of 4.0% by Neuberger Berman Real Estate (NBRFX) and 3.7% by Cohen & Steers Realty Shares (CSRSX) might have been expected given the strong performance by REITs this quarter.
It was a good quarter for Bonds, as Payden Emerging Markets Bond (PYEMX) led the way with a 3.7% return this quarter, followed closely by Fidelity New Markets Income (FNMIX) with a gain of 3.4%, and Fidelity Inflation-Protected Bond (FINPX), which gained 3.3%.
Probably our biggest surprise this quarter was the Yacktman Fund (YACKX) picking up 2.5% this quarter, while most Large Cap Values funds actually lost money. The managers of Brown Capital Small Company (BCSIX), which gained 3.1%, Fidelity Low-Priced Stock (FLPSX), which earned 2.2%, Scout Mid Cap (UMBMX), which added 2.2%, and FMI Large Cap (FMIHX) which was 1.8% gainer, all earned their management fees this quarter.
It was a good quarter to be in funds that are more concerned with protecting your capital than maximizing returns as manager John Hussman finally earned his keep. The Hussman Strategic Growth Fund (HSGFX) gained 2.7% and Hussman Strategic International (HSIEX) earned 2.3% this quarter. On the other hand, Royce Micro-Cap (RYOTX) lost 4.3%, While Dreyfus Opportunistic Small Cap (DSCVX) and Parnassus Small-Cap (PARSX) both lost 4.1%.
As is often the case, there was a lot more action in the world of ETF this quarter. The big winners were all sector ETFs as SPDR S&P Biotech (XBI) gained 9.5%, Health Care Select Sector SPDR (XLV) gained 7.8%, and Utilities Select Sector SPDR (XLU) gained 6.1%.
It paid to be invested in some country ETFs this quarter as iShares MSCI Switzerland Index (EWL) earned 7.4%, and iShares MSCI Germany Index (EWG) and iShares MSCI Chile Index (ECH) both added 6.3%.
There were several Bond ETFs that were strong performers this quarter with SPDR Barclays Capital Intl Corp Bond (IBND) gaining 4.5%, PowerShares Emerging Markets Sovereign Debt (PCY) earning 4.0%, iShares JPMorgan USD Emerging Markets Bond (EMB) adding 3.8%, iShares Barclays 7-10 Year Treasury (IEF) picking up 3.9%, and iShares Barclays TIPS Bond (TIP) returning 3.4%.
Only a few US stock ETFs were winners this quarter, the best of those were all Growth ETFs, as iShares S&P SmallCap 600 Growth (IJT) earned 1.9%, while iShares Russell Midcap Growth Index (IWP) and iShares S&P 500 Growth Index (IVW) both gained 1.5%.
On the other side of the ledger, ELEMENTS Rogers International Agriculture ETN (RJA) lost 13.3%, iShares S&P Global Timber & Forestry Index (WOOD) fell 13.1%, iShares Silver Trust (SLV) fell 8.0%, and Market Vectors Russia ETF (RSX) dropped 7.4%.
Portfolio Changes and Asset Allocation for 3rd Quarter 2011
It has been 8 years since we started the Insightful Investing Newsletter, so we could not leave our Asset Allocation unchanged. Heading in to the second half of 2011, we have added a 2% allocation to Micro Cap stocks in our Small Cap allocation, and added a 2% allocation to International Small Cap in our International Allocation. In order to do this we are reducing our allocation to Cash and Short Term Bonds by 2% each.
It is also the time of year for us to make significant changes to our list of Mutual Funds and Model Portfolios. We have reduced the number of funds on our list in an effort to simplify your choices by having at most one Fidelity and two additional No Load Mutual Funds for you to consider for your portfolios. While you may not have any of these funds available to you in a particular account, remember that it is more important to have a good asset allocation than to have every one of the best funds in your investment portfolio.
Another change you will notice is that we have changed the 'Combined Mutual Fund Portfolio' to be the 'Fidelity NTF Mutual Fund Portfolio'. That resulted in a few funds that we consider to be our top choice in a particular category being replaced by either a Fidelity Fund or a fund available on the Fidelity NTF platform. That being said, while our top fund choice for each category is still listed in the 'No Load Funds Model Portfolio', every fund in our Mutual Fund list is a fine selection for your investment portfolio. One fund note here is that the Invesco Balanced-Risk Allocation Fund (ABRIX), may be considered in a Fidelity Mutual Fund Portfolio, even though there is a transaction fee, if you do not have access to this fund from another brokerage account.
A few of the new funds included on our Mutual Fund List are Managers Intermediate Duration (MGIDX), Loomis Sayles Global Bond (LSGLX), Fidelity Focused Stock (FTQGX), Jensen (JENSX), Westcore Micro Cap Opportunity (WTMIX), Fidelity International Growth (FIGFX), Manning and Napier International (EXITX), Westcore International Small Cap (WTIFX), Marketfield Long/Short Equity (MFLDX), and Highland Long/Short Equity (HEOZX). Another note, the Lazard Emerging Markets Fund (LZOEX) joined the Artisan Mid Cap Value Investor Fund (ARTQX) as the second fund on our list that is closed to new investors, so if you are not in that one, you may not be able to get in at this time, which is why we have give you additional choices in this category.
Mutual Fund Portfolios July 2011
ETF Investment Portfolios July 2011
