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July 2012 Performance Review

August 2, 2012

In July the Conservative Powerfund Portfolio was up 1.67% and the Aggressive Portfolio gained 1.32%.

The rebound in stocks at the end of June carried through to July, though with some slides along the way. It’s a market scared of another collapse, yet it keeps finding support from (probably) not much else than the trillions of dollars globally that needs to be invested and the fact that cash and bonds should be very low return assets for the next few years.

Bonds did well too, counter to the recent inverse relationship between safer bonds and riskier stocks. In a rare coincidence, the Vanguard stock and bond index funds had essentially the same return for the month. From a portfolio risk point of view this isn’t ideal because it means both can fall on the way down.

The Powerfund Portfolios held their own in this odd environment and in general are having a good year relative to the market considering our lower risk profile. Our performance is mostly due to longer term bonds benefiting from continuing slides in interest rates. We were also helped by our investment in categories investors consider safer in a global meltdown or as yield alternatives to higher risk bonds - like healthcare, utilities, and telecom.

Larger cap U.S. stock funds beat all the other U.S. broad groupings (small cap value, mid cap, etc.) but the real story is that the S&P 500 beat about 85% of larger cap funds. This means picking an actively managed mutual fund that beat the index over the last year was very difficult. We have three actively managed U.S. broad category (non-sector) funds and only one (POGRX) is beating the S&P 500 (with dividends) so far in 2012. Our Aggressive portfolio is up 9.02% for the year as opposed to the 10.91% return of the index in 2012.

Much of this index outperformance is simply because indexes aren’t weighed down by high active management fees, some is the result of smaller cap stocks getting overpriced over the last decade or so. But some may be because money is flowing into ETFs which are usually market cap weighted. This means more money is flying into larger stocks by formula, pushing up the prices. Eventually this will lead to opportunities in smaller cap and non-market cap weighted funds, as it did in 2000. 

Last month we only beat the S&P 500 Index with large cap value stocks in our value ETF VTV, utility stocks (BULIX) and telecom stocks (VOX) (the latter two funds beat the index by a wide margin as investors are looking for some mix of safety and yield). Utility stocks are getting a little pricy here, but if hot summers like this one are here to stay electricity selling could be a growth industry again. Once again foreign stocks lagged U.S. stocks, notably Japan (EWJ). Jensen Value had a down month; smaller cap value stocks are underperforming and the fund has a position in Strayer Education (STRA) that fell about 30% in recent weeks. The entire ‘for profit’ education area has been sliding recently as it is finally coming to light how this industry takes advantage of the government student loan system.

Bonds had another great month as rates headed ever downward, and you can really see the effect in longer term bonds. Four of our six bond funds beat the index – which by nature of the entire bond market is primarily short to intermediate term bonds. Doubleline Total Return (DLTNX) had a rare month underperforming the index. This fund may have brought in too much money for the out performance to continue. In the short run inflows help a fund outperform by pushing up the fund holding’s prices.

Our funds in July from best to worst, compared to benchmark index funds:

Vanguard Telecom Serv ETF (VOX) 4.50%
American Century Utility Income (BULIX) 4.05%
Vanguard Value ETF (VTV) 1.88%
Vanguard 500 Index (VFINX) 1.37%
PowerShares DB US Dollar Index (UUP) 1.07%
Homestead Value Fund (HOVLX) 1.05%
Health Care Select SPDR (XLV) 1.01%
PRIMECAP Odyssey Growth (POGRX) 0.73%
Vanguard Emerging Markets Stock Index (VEIEX) 0.64%
Vanguard European ETF (VGK) 0.33%
Vanguard International Index (VTMGX) 0.30%
Vanguard Europe Pacific ETF (VEA) 0.25%
Scout International Discovery (UMBDX) -0.11%
Royce Financial Services Fund (RYFSX) -0.32%
Satuit Capital Micro Cap (SATMX) -1.24%
Jensen Value J (JNVSX) -1.57%
iShares MSCI Japan Index (EWJ) -4.46%
PowerShares DB Crude Oil Dble Short (DTO) -5.85%
Vanguard Extended Duration Treasury (EDV) 6.52%
Vanguard Long-Term Bond Index ETF (BLV) 4.30%
Metropolitan West Total Return (MWTRX) 2.04%
American Century Core Plus (ACCNX) 1.64%
Vanguard Total Bond Index (VBMFX) 1.39%
Doubleline Total Return Bond (DLTNX) 1.22%
American Century Government Bond (CPTNX) 0.96%

The best performing stock fund categories last month were telecom up 3.40%, energy up 3.00%, and utilities up 2.20%. Japan funds were at the bottom down 3.3%, followed by China funds down 1.6%, precious metals funds down 1.6%, and technology funds down almost 1%.