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Race to the Top

The S&P 500 index climbed 4.0% in August, pushing past any resistance to trade at new all-time highs. Eventually, the bears will be right and there will be a pullback, but it hasn’t happened yet. While global worries ranging from war in Ukraine, Syria and Iraq to a possible European Union recession continued to dominate headlines last month, these concerns didn’t slow down the indexes like they did in July. Data continued to point to a slowly strengthening economy, and with Fed chair Janet Yellen insisting that the Federal Reserve is in no rush to raise interest rates, the market’s climb had little to oppose it. Earnings were overall better than expected and supported the story of a strengthening economy. The positive momentum carried over to both the Model Shadow Stock Portfolio and the Model Fund Portfolio, although only the Model Shadow Stock Portfolio beat its benchmark in August. The Model Fund Portfolio was up 3.6% for the month, while the Model Shadow Stock Portfolio, which concentrates on small-cap stocks, rose 6.4%. The Model Shadow Stock Portfolio can experience greater short-term volatilities because it is made up of stocks trading in the “shadows” of Wall Street, and are therefore more likely to be mispriced. While there may be negative periods in such a portfolio, over time the portfolio tends to significantly outperform the S&P 500. Short-term volatility is the price to be paid for higher long-term expected returns. While in July this worked against the Model Shadow Stock Portfolio, in August it turned in the portfolio’s favor.

The Model Shadow Stock Portfolio’s 6.4% return for August was better than Vanguard Small Cap Index fund (NAESX), which increased 5.0%, and the DFA US Micro Cap Index fund (DFSCX), which was up 4.5%. For the year, the Model Shadow Stock Portfolio is now up 1.4%, trailing the Vanguard Small Cap Index fund, which is up 6.2%, but beating the DFA US Micro Cap Index fund, which is down 0.1%. The Model Shadow Stock Portfolio has a compound annual return of 17.8% from its inception in 1993, while the Vanguard Total Stock Market Index fund (VTSMX) has gained 9.4% annually over the same period.

The Model Fund Portfolio climbed 3.6% in August. In comparison, the Vanguard Total Stock Market Index fund (VTSMX) was up 4.2%. For the year, the Model Fund Portfolio is now up 9.6%, ahead of the Vanguard Total Stock Market Index fund, which has gained 9.2%. The Model Fund Portfolio has a compound annual return of 9.6% from inception in June of 2003, while the Vanguard Total Stock Market Index fund has gained 9.1% annually over the same time period.

NEW THIS MONTH

There were no transactions in the Model Shadow Stock Portfolio or the Model Fund Portfolio during the month of August.