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MODEL FUND PORTFOLIO SPECIAL ALERT

There are two changes to the Model Fund Portfolio. As of October 1, 2014, we removed FMI Common Stock (FMIMX) from the Model Fund Portfolio. Underperformance compared to its high fees was the primary driver to sell, along with the risk associated with the fund operating as a closed fund.

We are replacing FMIMX with First Trust US IPO (FPX). First Trust US IPO is an exchange-traded fund that tracks an index of larger U.S. initial public offerings. It modifies the capital weighting so that very large capitalized companies do not dominate.

If you are following the Model Fund Portfolio, then all existing holdings, including the new holding, should be equally weighted (nine if you own the closed fund CHTTX, or eight if you don’t). You can accomplish this easily by selling FMI Common Stock fund and putting the proceeds into the First Trust US IPO fund.

If you follow the All-ETF Portfolio, the weights should be changed to adjust for the new ETF holding. The weights are: 20% in FPX, 20% in RSP, 20% in RFV, 20% in RZV, 10% in FM, and 10% VNQ. The Guggenheim S&P 500 Equal Weight fund (RSP) is split from a 40% weighting to a 20% weighting since it is also a large-cap fund. That allows a 20% weighting for the new purchase of FPX. The Guggenheim S&P MidCap 400 Pure Value fund (RFV) and the Guggenheim S&P SmallCap 600 Pure Value fund (RZV) remain at their current weighting of 20% each. The iShares MSCI Frontier 100 fund (FM) and the Vanguard REIT Index fund (VNQ) remain at their existing weighting of 10% each.

James Cloonan provides a more thorough discussion of the changes in the forthcoming November AAII Journal.

As previously mentioned regarding 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.


This Way and That Way

The S&P 500 index declined 1.6% in September, although it was still within striking distance of its all-time highs going into October. Is this the much-talked-about pullback? Nobody knows. We’ve had some sharp declines followed by sharp rallies, so it doesn’t make sense to guess. We may sound like a broken record, but global instability continued to be a negative for the market last month. Still, oil prices continued their post-summer decline, and parts of the country are seeing $3 per gallon gas at the pumps. The market had few company earnings releases to digest, so it spent the month in a tight range of less than 45 points, with similar tight volume. While all stock styles underperformed, large-cap stocks fared better than small caps. This negative momentum is what weighed down the model portfolios for September. The Model Fund Portfolio was down 4.1%, while the Model Shadow Stock Portfolio, which is heavily concentrated in small-cap stocks, fell 11.6% for the month. The Model Shadow Stock Portfolio experiences greater short-term volatilities because it is made up of stocks trading in the “shadows” of Wall Street, which are more likely to be mispriced. While there may be negative periods in such a portfolio (as in September), 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.

The Model Shadow Stock Portfolio’s -11.6% return for September trailed its comparison benchmarks: the Vanguard Small Cap Index (NAESX) declined 5.3%, and the DFA Micro Cap Index fund (DFSCX) fell 5.7%. For the year-to-date, the Model Shadow Stock Portfolio has declined 10.3%, also trailing the Vanguard Small Cap Index fund (up 0.5%) and the DFA US Micro Cap Index fund (down 5.8%). The Model Shadow Stock Portfolio has a compound annual return of 17.0% since its inception in 1993, while the Vanguard Total Stock Market Index fund (VTSMX) has gained 9.3% annually over the same period.

The Model Fund Portfolio fell 4.1% in September. In comparison, the Vanguard Total Stock Market Index fund was down only 2.1%. For the year-to-date, the Model Fund Portfolio is up 5.1%, while the Vanguard Total Stock Market Index fund gained 6.8%. The Model Fund Portfolio has a compound annual return of 9.4% since inception in June of 2003, and the Vanguard Total Stock Market Index fund has gained 9.2% annually during the same time period.

NEW THIS MONTH

There were no changes to the Model Fund and Model Shadow Stock Portfolios in September. However, on October 1, 2014, Medical Action Industries (MDCI) was acquired by Owens & Minor Inc. (OMI), triggering its removal from the Model Shadow Stock Portfolio.