Small-Cap Stocks Lag

August AAII Model Portfolio Update is now available online.

Performance in July varied significantly among the major indexes, with large-cap stocks outperforming small-cap stocks. The S&P 500 index’s total return was up 2.1%, which was similar to the performance of larger-capitalization indexes for the month of July.

The Model Fund Portfolio declined by 0.7% in July, while the Model Shadow Stock Portfolio, which invests in micro-cap value stocks, was down 6.0%.

The Model Shadow Stock Portfolio’s underperformed both of its comparison benchmarks: The Vanguard Small Cap Index fund (NAESX) declined 0.3% and the DFA U.S. Micro Cap Index fund (DFSCX) was down 2.4%. The Model Shadow Stock portfolio was hurt by weak performances in July from Rex American Resources (REX), SigmaTron International (SGMA) and Universal Stainless & Alloy (USAP); these three companies accounted for more than half of the portfolio’s decline in July. Year to date, the Model Shadow Stock Portfolio has declined 2.6%, while the Vanguard Small Cap Index fund is up 3.8% and the DFA U.S. Micro Cap Index fund is up 1.7%. Since its inception in 1993, the Model Shadow Stock Portfolio has a compound annual average return of 16.3%, while the Vanguard Total Stock Market Index fund (VTSMX) has gained 9.3%.

The Model Fund Portfolio’s 0.7% decline in July compared to a 1.6% 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 8.9%, slightly trailing the Vanguard Total Stock Market Index fund over the same time period, which gained 9.4%.

July Updates
There are no changes to the Model Shadow Stock Portfolio this month. Thirty-one stocks passed the screen at the end of July. The portfolio is reviewed only four times and year and changes, if any, are announced in September, December, March and June. Also, because this is an actual and fully invested portfolio, no new stocks are added without the removal of a current holding.

Six stocks in the portfolio qualified for purchase at the end of July: L.S. Starrett Co. (SCX), Rocky Brands (RCKY), Salem Media Group Inc. (SALM), Universal Stainless & Alloy (USAP), Vishay Precision Group (VPG) 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.) Among that group, Universal Stainless & Alloy and Vishay Precision Group were recent additions as of June 2015.

No stocks currently in the portfolio are approaching their value or size limit. Furthermore, no stocks are currently on probation for producing negative earnings over the last four quarters. Were a stock on earnings probation or approaching a value or size limit, it would be a potential sell candidate at the next quarterly review in September.

Click here to see the current purchase and sell rules. The size and value rules are subject to revision depending on prevailing market conditions.

There were no changes to the Model Fund Portfolio this month. The portfolio’s quarterly review will occur in October.