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September 2012 Performance Review

October 2, 2012

2012 is turning out to be a good year for stocks and bonds. With September’s 2.58% increase in the S&P 500 equities are up just over 16% since Jan 1. The YTD total bond market fund is up 4% through the end of September. This in the face of on-again-off-again Euro death spiral news and a domestic economy that, while not stalling, is sputtering or at least misfiring outside of technology.

Our Conservative Powerfund Portfolio was up 0.71%. Our Aggressive portfolio was up 2.37%. Benchmark Vanguard index funds for September: Vanguard 500 Index (VFINX) up 2.58%, Vanguard Total Bond Market (VBMFX) up 0.11%, Vanguard International Index (VTMGX) up 2.82%, Vanguard Emerging Markets Stock Index (VEIEX) up 5.32%

One reason for the hot month is attractive valuations - stocks are still below peak levels seen before the last crash. Another factor is probably the Federal Reserve's continued monetary support, delivering a boost while the Federal Government remains gridlocked.

The Fed’s money creation to buy primarily mortgage bonds is keeping interest rates in general at ultra low levels, boosting after-debt income to households and corporations alike. All this money magic (some would say mischief) without much inflation. This may sound counter to prevailing logic, but if you can essentially make money out of thin air and not cause inflation, why the heck wouldn’t you do it? 

Somebody must be getting richer from those billions of new bucks being pumped into the economy each week. That somebody is basically asset holders as all this cash is making investments go up. The Fed creates what some call, high level money. They don’t just add $100 to everyone’s checking account. The spending benefits to economy are indirect, or trickle down, from the bond buying schemes of the Fed. 

Yet much of the money still fears stocks and is favoring bonds and bond funds. We’re not quite ready to throw in the towel on most bond funds, but there are certainly some oddities brewing, notably in foreign bond markets. Emerging market bond funds had another great month, up around 2%. The five year annualized return is not about 9% - ahead of every bond and stock category except long term treasuries. The 10 year and 15 year returns are equally awesome at just shy of double digit annualized. We get it; rates are way down, pushing bond prices up. The additional kicker is that emerging market bonds were a scary out of favor area back in the late 1990s when investors were all about US growth stocks. 

Where this leaves us today though is with emerging market bonds yielding barely more than already low-yielding U.S. corporate bonds. J.P. Morgan USD Emerging Markets Bond Fund (EMB) yields 3.52% after fees. For about the same duration (interest rate sensitivity) and better credit rating iBoxx $ Investment Grade Corporate Bond Fund (LQD) sports a 2.9% yield (though the fees are lower here so the pre-fee yield of EMB is a little higher). 

That doesn’t seem like much reward to EMB owners considering the fund’s top five holdings are debt from the Philippines, Peru, and Brazil, Indonesia, and Uruguay. Top credit profile Johnson & Johnson stock yields the same 3.5%, and it’s (for now) taxed much more favorably.

The strongest areas in September were precious metals funds, up about 14% on renewed fears Fed money making will be good for gold prices. Emerging markets in general were strong, up 4.4% lead by India-focused funds up over 13%. Funds that invest in healthcare stocks were the best U.S. sector, up 4.67%.

Powerfund holdings in September from best to worst, compared to benchmark index funds:

Stock Funds1mo %
PowerShares DB Crude Oil Dble Short (DTO)9.70%
Vanguard Telecom Serv ETF (VOX)5.96%
Vanguard Emerging Markets Stock Index (VEIEX)5.32%
Scout International Discovery (UMBDX)4.88%
Satuit Capital Micro Cap (SATMX)4.69%
Royce Financial Services Fund (RYFSX)3.94%
Health Care Select SPDR (XLV)3.30%
Vanguard International Index (VTMGX)2.82%
Vanguard 500 Index (VFINX)2.58%
American Century Utility Income (BULIX)2.38%
Jensen Value J (JNVSX)2.32%
Vanguard Value ETF (VTV)2.23%
Homestead Value Fund (HOVLX)1.78%
iShares MSCI Japan Index (EWJ)1.21%
PRIMECAP Odyssey Growth (POGRX)1.18%
Vanguard European ETF (VGK)0.62%
Vanguard Europe Pacific ETF (VEA)0.58%
PowerShares DB US Dollar Index (UUP)-1.70%
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)0.11%
American Century Government Bond (CPTNX)-0.09%
Vanguard Long-Term Bond Index ETF (BLV)-0.69%
Vanguard Extended Duration Treasury (EDV)-2.54%