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Small Caps Lead the Way

The S&P 500 index climbed 2.3% in October, although it was far from a smooth ride. There was a sell-off in the early-to-mid part of the month, but the markets rebounded strongly from those lows. This could indicate strong buyer interest sitting on the sidelines waiting for an opportunity to buy in, which would be bullish, but the signs are far from clear. Instability across the globe continues to be an issue. We have seen defaults that are not defaults in Argentina and a shortage of, well, everything in Venezuela. Despite all this uncertainty, or perhaps because of it, the oil glut pushed prices down even more, and $3 per gallon gas was a welcome surprise for many Americans. While all stock styles performed well last month, small caps outpaced large-cap stocks. Whether this signifies a return of the small caps is unclear. The Model Fund Portfolio climbed 3.0%, while the Model Shadow Stock Portfolio, which is heavily concentrated in small-cap stocks, rose 3.2% during October.

The Model Shadow Stock Portfolio’s 3.2% gain for the month trailed its comparison benchmarks: The Vanguard Small Cap Index (NAESX) was up 4.5%, and the DFA US Micro Cap Index fund (DFSCX) was up 6.5%. Year-to-date, the Model Shadow Stock Portfolio has declined 7.4%, also trailing the Vanguard Small Cap Index fund (up 5.0%) and the DFA US Micro Cap Index fund (up 0.3%). The Model Shadow Stock Portfolio has a compound annual return of 17.1% since 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’s 3.0% gain in October compares to a gain of 2.7% for the Vanguard Total Stock Market Index fund. Year-to-date, the Model Fund Portfolio is up 8.3%, while the Vanguard Total Stock Market Index fund is up 9.8%. The Model Fund Portfolio has a compound annual return of 9.4% since inception in June of 2003, matching the performance of the Vanguard Total Stock Market Index fund over the same time period.

NEW THIS MONTH

In the Model Shadow Stock Portfolio, Medical Action Industries (MDCI) was acquired by Owens & Minor Inc. (OMI) on October 1, 2014, triggering its removal from the portfolio. Additionally, after the close of the market on October 31, 2014, Kimball International (KBAL) spun off its electronics division, resulting in shares of Kimball Electronics that trade under the symbol ‘KE’ in the portfolio. For the present time, these new KE shares will remain in the portfolio.

As previously announced, there were two changes to the Model Fund Portfolio in October. FMI Common Stock (FMIMX) was removed from the Model Fund Portfolio based on underperformance compared to its high fees. With the proceeds, First Trust US IPO (FPX) was added to the portfolio. FPX is an exchange-traded fund that tracks an index of larger U.S. initial public offerings.