The year 2007 was a below-average year for the general market—and it was exceptionally low for a pre-election year.
The average return for the S&P 500 during the year before an election is 21.7%; for all years, the average is 10.4%. However, this past year the S&P 500 came in below both figures at 5.5% (coincidentally, the Vanguard Total Stock Market Index fund, our benchmark in Figure 1, also returned 5.5% in 2007). The Model Mutual Fund Portfolio did considerably better at 10.2%, but there was wide disparity within the portfolio.
The superior performance of the Model Mutual Fund Portfolio was due to one fund—CGM Focus CGMFX—which was up an astounding 80% in 2007.
At the other extreme, the two small-cap value funds, Tamarack Microcap Value “S” TMVSX and Northern Small Cap Value NOSGX had negative returns for the year. In fact, contrary to long-term performance, the greater the value focus and the smaller the capitalization focus, the worse the 2007 performance.
This happens every so often for a year or sometimes two—and that is why we don’t put only small-cap and heavy value-focused funds in our portfolio, even though we expect their long-term performance to outperform the market and most funds. Our decisions about buying and selling funds are based on five- and 10-year performance unless there are three down years in a row.
I am not making any changes in the portfolio at this time, although the American Century Equity Income Fund TWEIX will be watched closely because its longer-term performance is weakening.
However, the maximum size allowed for the different categories of funds, as measured by net assets, was adjusted to keep up with rising prices of stocks (see Selection Rule number five on the box).
|Annual Return (%)||
|American Century Eq Inc (TWEIX)||Low Value||Giant-Cap||1.8||1.8||7.6||9.7||4,316.3||0.97||37||9.1|
|CGM Focus (CGMFX)||Very Low Value||Large-Cap||79.9||79.9||37.4||26.1||5,460.5||1.02||104||20.7|
|Manning & Napier Pro-Blend Ext A (MNBAX)||Low Value||Giant-Cap||6.9||6.9||10.5||8.5||587.6||1.14||35||13.6|
|Meridian Growth Fund (MERDX)||Very Low Value||Mid-Cap||5.4||5.4||7.0||11.3||1,871.1||0.84||60||6.6|
|Meridian Value (MVALX)||Low Value||Mid-Cap||7.8||7.8||9.6||16.1||1,593.3||1.08||55||9.3|
|Madison Mosaic Mid-Cap (GTSGX)||Low Value||Mid-Cap||8.6||8.6||8.3||10.5||147.6||1.25||50||8.5|
|Northern Small Cap Value (NOSGX)||High Value||Small-Cap||–8.7||–8.7||5.9||8.9||929.0||1.00||75||5.3|
|Royce PA Mutual/Inv (PENNX)||Moderate Value||Small-Cap||2.8||2.8||9.9||12.1||3,157.7||0.87||67||8.6|
|Tamarack Microcap Value “S” (TMVSX)*||Very High Value||Micro-Cap||–9.2||–9.2||5.9||10.6||301.8||1.07||72||5.3|
|Funds now closed to new investors but still listed for those who hold them|
|FMI Common Stock (FMIMX)||Moderate Value||Small-Cap||–2.0||–2.0||7.9||9.6||420.9||1.20||64||7.2|
|Avg of Funds in Model Fund Portfolio†||
|Substitute for closed fund|
|Mairs & Power Growth (MPGFX)||Very Low Value||Large-Cap||4.9||4.9||6.5||10.1||2,613.9||0.69||49||6.6|
|Actual Fund Portfolio Performance††||
|Vanguard Tot Stock Mkt Idx (VTSMX)||Low Value||Giant-Cap||5.5||5.5||8.9||6.3||50,183.0||0.19||52||8.9|
*James Cloonan has been an advisor to the TMVSX fund since its inception as the Babson Shadow Stock Fund in 1987.
† A simple average of all funds in the actual Model Fund Portfolio.
†† Performance of actual portfolio since inception including reinvested dividends.
Source: S&P Micropal, RiskGrades.com. Data as of 12/31/2007.
I have had several questions about why the actual portfolio result is different from the average fund performance or the results members may have obtained.
For the Model Fund Portfolio, we don’t rebalance on a regular basis, so our performance is based on holdings that are not equal. If we receive dividends that can’t be reinvested automatically, we would invest them in the fund with the lowest weight. We would suggest you do that also, if you have fresh money to invest. But don’t sell and buy just to rebalance.
If you based your outlook for 2008 on historical performance, the long-term election year average for the S&P 500 is 12.9%.
However, the volatility in the beginning of the year and the poor early January performance hints at an unusual year.
I will cover the Model Fund Portfolio again in the August issue of the AAII Journal. In the meantime, you can follow it on a more frequent basis at www.aaii.com.
We categorize mutual funds by both the size and style of their stock holdings. Size is measured by the average market capitalization (share price times the number of shares outstanding) of the stocks held by the fund, and style is based on the price-to-book value ratios (price per share divided by net assets per share) of the underlying stocks. Here is how we break down these categories:
Size Category Market Cap
Giant-Cap $15 billion and greater
Large-Cap $7 billion to $14.9 billion
Mid-Cap $2.5 billion to $6.9 billion
Small-Cap $700 million to $2.4 billion
Micro-Cap $300 million to $699 million
Nano-Cap $0 to $299 million
Style Category Price-to-Book-Value Ratio
Very High Value 1.79 and below
High Value 1.80 to 2.29
Moderate Value (Blend) 2.30 to 2.54
Low Value (Growth) 2.55 to 2.99
Very Low Value (High Growth) 3.00 and above