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August 2012 Performance Review

September 1, 2012

In the absence of scary economic news, stocks drift higher – like the roughly 2.25% gain in August. We would expect this to continue if we avoid a deep recession and any debt market shocks that drive rates higher. The most likely outcome for coming years is not one where interest rates and inflation take off and stocks tank, but one where U.S. stocks climb to high valuations to match the already high valuations in the bond markets: the 2% stock market dividend yield goes to, say, 1.5% while the long-term government bond yield actually stays under 2% and moves closer to 1% - the Japan scenario. The main reason to avoid playing it too safe – lots of cash and short term bonds and minimal stocks is the danger of this - is permanently high plateau for asset prices.

Bonds were essentially flat in total with safer longer-term bonds sinking about 1% and higher risk bonds rising just over 1%.

This move to riskier assets led to tepid performance in our portfolios as we don’t own much high credit risk bonds and our safer categories like Utilities (which have done well in recent years) lagged. Financial sector funds did well. 

In August, the Conservative Powerfund Portfolio was up 0.36% while our Aggressive portfolio was up 0.85%. The benchmark Vanguard 500 (VFINX) fund delivered a 2.24% return for the month while Vanguard Total Bond Index (VBMFX) was up 0.05%. Foreign stocks, as measured by Vanguard Tax-Managed International (VTMGX), were up 3.15% for the month. Emerging market stocks, as measured by Vanguard Emerging Markets Stock Index (VEIEX), were up 0.43%

Europe rebounded as fears of a euro collapse dwindled, and Vanguard MSCI Europe ETF (VGK) gained 4.68%. Financial services did well, sending Royce Financial Services (RYFSX) up 2.92% for the month. U.S. Large cap stocks proved tough to beat once again, and the 500’s 2.24% return beat many of our stock funds. 

Notably weak were recent good performers Healthcare and Utilities. Health Care SPDR (XLV) was up just 1.17%, while American Century Utilities Inv (BULIX) dropped almost 3% - worse than most Utilities funds. BULIX has big stakes in AT&T (T), Verizon (VZ), PG&E (PCG), and Exelon (EXC) all down pretty hard last month. The biggest loser or course was ultra-shorting crude oil which has been on a big rebound in recent months as fears of a global collapse have waned. 

In bond action Doubline (DLTNX) once again had a big month, and we have to question if some of this is just massive inflows pushing up the same picks. Metropolitan West Total Return Bond (MWTRX)  with some more credit (default) risk than other bond funds in our portfolio had a good month, while all our longer term government bond heavy funds did poorly as money left safe and longer term rates crept up. 

The strongest stock categories last month included precious metals funds, up just over 10%, followed by technology sector funds, up 4.4%, with small and mid-cap U.S. growth funds up in the 3.6% range. European stocks were the best foreign stock area with 3.6% returns. The worse areas included funds that short, down over 3% and utilities funds down 1.6%. China was the worst area abroad with negative 0.5% returns with most emerging markets not doing much better.

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

Stock Funds1mo %
Vanguard European ETF (VGK)4.68%
Vanguard International Index (VTMGX)3.15%
Vanguard Europe Pacific ETF (VEA)3.29%
Royce Financial Services Fund (RYFSX)2.92%
Vanguard 500 Index (VFINX)2.24%
PRIMECAP Odyssey Growth (POGRX)2.47%
Homestead Value Fund (HOVLX)2.13%
Satuit Capital Micro Cap (SATMX)1.92%
Scout International Discovery (UMBDX)1.81%
Jensen Value J (JNVSX)1.69%
Vanguard Value ETF (VTV)1.48%
Health Care Select SPDR (XLV)1.17%
iShares MSCI Japan Index (EWJ)0.78%
Vanguard Emerging Markets Stock Index (VEIEX)0.43%
Vanguard Telecom Services ETF (VOX)-0.04%
PowerShares DB US Dollar Index (UUP)-1.81%
American Century Utility Income (BULIX)-2.96%
PowerShares DB Crude Oil Dble Short (DTO)-19.31%
Bond Funds1mo %
Doubleline Total Return Bond (DLTNX)1.10%
Metropolitan West Total Return (MWTRX)1.07%
American Century Core Plus (ACCNX)0.19%
Vanguard Total Bond Index (VBMFX)0.05%
American Century Government Bond (CPTNX)-0.09%
Vanguard Long-Term Bond Index ETF (BLV)-0.69%
Vanguard Extended Duration Treasury (EDV)-2.54%