Changes to Model Shadow Stock Portfolio Announced

June AAII Model Portfolio Update is now available online.

As we discuss below, several stocks are being added to and deleted from the Model Shadow Stock Portfolio. In addition, the buy and sell rules are being modified.

The Model Fund Portfolio was up for the month by 0.2%, while the Model Shadow Stock Portfolio, which invests in micro-cap value stocks, was down 3.3%.

The Model Shadow Stock Portfolio’s 3.3% decline for May atypically trails both of its comparison benchmarks: The Vanguard Small Cap Index fund (NAESX) gained 2.0% and the DFA US Micro Cap Index fund (DFSCX) gained 1.4% in May. Year to date, the Shadow Stock Portfolio has gained 1.2%, while NAESX is up 5.0% and DFSCX is up 2.5% over the same time period. Since its inception in 1993, the Model Shadow Stock Portfolio has a compound annual average return of 16.7%, while the Vanguard Total Stock Market Index fund (VTSMX) has gained 9.4% annually over the same period.

The Model Fund Portfolio’s 0.2% gain in May compared to a 1.4% increase for the Vanguard Total Stock Market Index fund. Since its inception in June of 2003, the Model Fund Portfolio has a compound annual average return of 9.2%, slightly below the Vanguard Total Stock Market Index fund over the same time period, which gained 9.5%.

June Updates

There are eight changes to the Model Shadow Stock Portfolio this month: four additions and four deletions. The three new additions were CDI Corp. (CDI), Ultra Clean Holdings, Inc. (UCTT) and Vishay Precision Group (VPG). With excess funds, we also added to our position in Salem Media Group (SALM), as it passed the screen this month and was underweighted in the portfolio. We sold Five Star Quality Care, Inc. (FVE), International Shipholding Corp. (ISH), Kimball International (KBAL) and Mitcham Industries, Inc. (MIND).

Twenty stocks passed the screen at the start of June. When choosing among qualifying stocks when the portfolio has insufficient funds to buy them all, we will consider transactions costs measured by the bid/ask spread. Additionally, going forward we will be giving preference to U.S. stocks. Four stocks in the portfolio qualified for purchase at the start of May: Salem Media Group (SALM), SigmaTron International (SGMA), Universal Stainless & Alloy (USAP) and Willis Lease Finance Corp. (WLFC). Qualified stocks are companies held within the Model Shadow Stock Portfolio that currently meet the purchase rules. (They are designated as “qualified” in the notes column of the Model Shadow Stock Portfolio table.)

No stocks in the portfolio are currently approaching their value or size limit. No stocks are currently on probation for producing negative earnings over the last four quarters. Stocks on probation are potential sell candidates at the next quarterly review in September.

Click here to see the current purchase and sell rules. Because the average price-to-book ratio has been increasing in recent years, we are raising the price-to-book qualifying rule from 0.80 to 1.00. This also means that the sell rule based on the price-to-book ratio reaching to three times the initial criterion rises to 3.00.

There were no changes to the Model Fund Portfolio this month. The portfolio’s quarterly review will appear in the August issue of the AAII Journal, which will be posted at AAII.com at the beginning of August. Any changes will be reported in next month’s Model Portfolio Update email.