January 2012 Just a Do-Over "Life isn't simple. But the beauty of it is, you can always start over." -- Alacia Bessette   O MATTER HOW WILD THE RIDE, a rollercoaster always ends back right where it started. The same could be said for 2011's performance of the S&P 500. Up steeply in April and early July, only to fall even more rapidly in June, August, and September. Then, in the final month and a half of the year, a slow drift back to the starting point. Despite the drama, the index finished the year within 0.04 of a point of where it started. From a broad perspective, it's as if 2011 didn't really matter. LARGE CAP AND SMALL CAP SECTORS 2011 Price Performance Data Source: S&P From a more narrow perspective, however, it mattered a lot. While the overall market might seem calm when focusing on its two endpoints, it looked much different to individual portfolios. With the credit crisis in Europe, political standoffs domestically, continuing high unemployment and a stalled housing market, investors had more than enough reason to seek the safety of stodgy old Consumer Staples and Utilities. As you'll notice from the chart below, these were two of the three S&P's leaders in 2011. Surprisingly, with the full impact of Obama Care pushed off into the future, Healthcare managed to rise from the ashes to double-digits returns. Investors in all three of these sectors were rewarded not only with steady and/or rising prices, but also with a consistent dividend stream. After years of predicting it, dividends were finally back in vogue. At the other end of the spectrum, Financials and Materials were the big losers. (Telecom was also down, but that sector is so small (3.1% of the S&P 500), it's basically just an afterthought.) It was easy to see why Financials were off just shy of 20%, they were the scapegoat for all the world's ills. Europeans think Wall Street should be taxed for transactions, President Obama believes greedy bankers were the sole cause of the credit crisis, the collapse of Lehman Brothers, high unemployment, and everything else it's getting harder to blame George W. Bush for. Wall Street itself was the first to be "occupied" in the autumn sit-ins although the only accusation there was that those who actually worked seemed to make money. Materials were a more interesting story. Up early in the year as commodities soared to new highs, the sector took it on the chin when commodity prices fell in the second half of the year. As many market watchers charged, much of the early year run-up was the work of speculators who were long gone by September. Unlike the S&P 500, however, commodities never really fell back to 2010 year-end prices and remain somewhat elevated as we enter 2012. RISING AND FALLING TOGETHER Data Source: S&P ComStock For the first time in years, growth led value. Large cap growth added 2.8% while small cap value fell roughly the same amount. Also for the first time in a long while, large caps were the place to be. Small and mid-cap stocks finished the year in the red while the Dow Industrials added 5.5%. As further evidence that dividends were back in style, the Dogs of the Dow were market leaders. Foreign stocks actually trailed domestic equities. Few predicted this a year ago, thinking as weak dollar and stronger foreign economies would make investing abroad a winning strategy. Instead, the sovereign credit crisis filtered through the European Union, leaving the euro at it's 2011 low against the dollar on December 29 ($1.2858) with little reason to expect it to reverse course in the coming months. One of two things will happen this year: Either the credit crisis will continue to weigh on European economies allowing the dollar and the U.S. economy to slowly chug ahead or foreign markets will stabilize and pent-up demand will drive European shares ahead of their domestic counterparts. Investors can benefit from either outcome as long as they remain on the correct side of the trade. That's easier said than done. This year looks to be another turbulent one. The presidential election will keep investors on edge, at least until the potential winner clearly emerges. Oddly enough, it really doesn't matter in the short term (although it can have devastating effects as the 2008 election proved) who wins, the market typically rallies regardless given the drop in uncertainty. Let's just hope the market can hold its own until October or November. MODEL AND BENCHMARK PERFORMANCE Through 12/31/2011 With dividends and "grandmother stocks" leading the pack, it's no surprise our two value-oriented models handily beat their benchmarks. Large cap Portfolio 1 (+4.8%) and small cap Portfolio 2 (+5.8%) experienced virtually no turnover along the way. Three of our four quantitative models also managed to surpass their benchmarks. The only one failing to do so was arguably our best long term performer, Portfolio 6. It's a blended model with both stocks and bonds. It's compared to two different blended benchmarks, one buy-and-hold the other is rebalanced whenever any of its components strays more than 5% from P6's original allocation. For the first time in its history, P6 (-4.5%) trailed both (-1.6 and -1.1, respectively). P6's 30% allocation to foreign stocks held it back when the European credit crisis erupted. Nevertheless, with five of six models ahead of their benchmarks, 2011 felt like a pretty good year. We've been doing this for fourteen years now, and never -- not once -- have all models beaten their index in any given year. Given that, five out of six seems pretty good. Periodic returns are shown on the chart above and detailed characteristics of the current portfolios appear in the data below. All information is through December 31, 2011. Previous and next re-optimization dates of the four quantitative models are also shown below with the description of each model. Historical performance vs. the models’ benchmarks from their inception can be found on the Graphs page and year-to-date performance is updated weekly on the Home Page. E-mail your comments.   Portfolio 1 Inception Date: July 1, 1991 Model Design: Large Cap, Fundamental Bottom Up, Relative Value Benchmark: S&P 500 Number of Holdings: 10 Prior Two Months' Transactions: Buys: None Sells: None Top Performer(s) Year-to-Date: Pharmerica (PMC) +32.6% IBM (IBM) +25.3% Intel (INTC) +15.3% Poorest Performer(s) Year-to-Date Citigroup (C) -44.4% Corning (GLW) -32.8% PORTFOLIO 1 Ratios and Returns As of 12/31/2011 Price to Earnings (P/E) 12.2 Price to Book 4.7 Price to Sales 2.5 Est. Earnings Per Share $5.12 PEG Ratio 1.3 Market Cap ($bil.) 82.8 Beta 0.95 Price Change Quarter-to-Date 6.2% Price Change Year-to-Date 4.8% STRONG FINISH In the first days of January, P1 established a lead over the benchmark then maintained and built on through the rest of the year.   Portfolio 2 Inception Date: July 1, 1997 Model Design: Small Cap, Fundamental Bottom up, Relative Value Benchmark: Russell 2000 Number of Holdings: 10 Prior Two Months' Transactions: Buys: None Sells: None Top Performer(s) Year-to-Date: Varian Semiconductor  (VSEA) +70.2% First Cash Financial Svs. Inc. (FCFS) +13.2% Sonic Automotive (SAH) +11.9% Poorest Performer(s) Year-to-Date: Horace Mann Educators (HMN) -24.0% Diodes, Inc. (DIOD) -21.1% United Online (UNTD) -17.6% PORTFOLIO 2 Ratios and Returns As of 12/31/2011 Price to Earnings (P/E) 13.1 Price to Book 4.5 Price to Sales 1.0 Est. Earnings Per Share $1.73 PEG Ratio 1.2 Market Cap ($bil.) 0.89 Beta 0.91 Price Change From Inception (7/1997) 134.5% Price Change Quarter-to-Date 4.9% Price Change Year-to-Date 5.8% RESULTS OF A BUYOUT Applied Materials' acquisition of Varian Semiconductor set the latter's shares up 70% and propelled this ten-holding portfolio to a nice gain.   Portfolio 3 Inception Date: July 1, 2000 Model Design: Portfolio 3 is a purely quantitative large cap model that holds the top 30 stocks of the S&P 500 as rated by its underlying algorithm. There is no diversification requirement across sectors or industries. For a complete listing of all its current holdings and past transactions, see Stocks of P3. Benchmark: S&P 500 Number of Holdings: 30 Last Reoptimization: December 15, 2011 Next Reoptimization: Mid-February, 2012 PORTFOLIO 3 Ratios and Returns As of 12/31/2011 Price to Earnings (P/E) 38.8 Price to Book 5.8 Price to Sales 3.2 Est. Earnings Per Share $3.92 PEG Ratio 2.9 Market Cap ($bil.) 41.5 Beta 1.06 Price Change From Inception (7/2000) -34.6% Price Change Quarter-to-Date 9.8% Price Change Year-to-Date 5.9% TIMELY MOVES Throughout 2012, P3 systematically reduced exposure to cyclical stocks and added to defensive holdings. This was the right thing at the right time as its superior performance demonstrates.   Portfolio 4 Inception Date: July 1, 2000 Model Design: P4 is a purely quantitative model that always has holdings in all ten S&P sectors. Its algorithm seeks the "best" stocks in each while matching the sector-weighting of the index. For a complete listing of all its current holdings and past transactions, see Stocks of P4. Benchmark: S&P 500 Number of Holdings: 44 Last Reoptimization: December 15, 2011 Next Reoptimization: Mid-June, 2012 PORTFOLIO 4 Ratios and Returns As of 12/31/2011 Price to Earnings (P/E) 19.6 Price to Book 4.3 Price to Sales 3.1 Est. Earnings Per Share $4.16 PEG Ratio 1.1 Market Cap ($bil.) 26.6 Beta 1.02 Price Change From Inception (7/2000) -9.2 Price Change Quarter-to-Date 12.7% Price Change Year-to-Date 0.3% IN THE BLACK -- BARELY It was a fight to the finish, but P4 ended the year 0.3% ahead of the benchmark.   Portfolio 5 Inception Date: January 1, 2002 Model Design: Portfolio 5 is a purely quantitative model that seeks to benefit from the top performing sectors and capitalizations of the domestic stock market. Inspired by Morningstar's "Style Box", P5 separates the domestic market into large, mid, and small cap stocks and then further divides each category into value, growth, and blend. Its algorithm seeks an optimal mix for the coming quarter. Holdings are limited to nine different exchange traded funds (ETFs) representing each of the nine style and capitalization categories. Benchmark: S&P 1500 Number of Holdings: 9 Last Reoptimization: October 31, 2011 Next Reoptimization: Mid January 2012 ANOTHER RAZOR-THIN VICTORY Like P4, P5 beat its benchmark by 0.3%. The only difference is the benchmark: P5's is the S&P 1500 Supercomposite rather than the S&P 500.   Portfolio 6 Inception Date: January 1, 2004 Model Design: P6 is a balanced portfolio that can hold large and small domestic stocks as well as domestic bonds and foreign stocks. Like P5, it's purely quantitative and relies solely on exchange traded funds (ETFs). There's no requirement that any specific category ever be represented, so it's conceivable that at any given time, P6 could be concentrated in one or two categories. As a blended portfolio, a pure equity or fixed income measure wouldn't be appropriate, so we created two different mixes that would be more representative. Based on 20 years' worth of data, we found that a combination of 25% government and corporate bonds, 48% domestic large cap stocks, 21% domestic small cap stocks, and 6% foreign stocks would have produced the best overall return, so we adopted that as the basis for the benchmarks. The first, simply uses this mix and is never rebalanced -- not unlike a typical "buy-and-hold" investor's portfolio. The second starts with the same mix, but rebalances back to the original targets on a quarterly basis whenever at least one category has strayed more than 5% from its target. The chart on the immediate right shows the current composition of the model as well as its benchmarks. Benchmark: (1) Buy-and-Hold Blend (see above), (2) Static Blend (see above) Number of Holdings: 5 Last Reoptimization: October 31, 2011 Next Reoptimization: Mid January, 2012 COMPOSITION COMPARISON FIRST DEFEAT P6 has been around for eight years now. 2011 was the first and only year it's finished under either of its benchmarks.   E-mail your comments. Search this site! Just enter you key word or words:   Get current quotes or follow your own custom portfolio, courtesy of E-Line Financials:   Search:TickerName Company DataQuickQuote     Homepage Return to Top