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Few Newsletter Model Portfolios Stand Out In Volatile Half

By Werner Renberg

If your diversified mutual fund or all-equity fund portfolio did little better or worse than break even in the somewhat turbulent stock market of 2000's first six months, you may wonder whether -- and if so, why -- others may have achieved better results.

Thanks to the mid-year sharp-pencil work of Mark Hulbert's The Hulbert Financial Digest, an Annandale, VA newsletter that monitors the performance of mutual fund newsletters' model portfolios, you now have proof that you were not alone.

Moreover, as if you need more data, you also have fresh proof that it is not easy to consistently beat an equity index, such as the Wilshire 5000 Total Stock Market Index (or a fund managed to match it).

Consider the June 30 semi-annual performance report in HFD's latest issue.

Only 13 of approximately 125 model fund portfolios with a minimum of 5-year track records, recommended by about 40 newsletters, topped the 22.5 percent average annual total return of the Wilshire 5000 for the latest 5 years.

As many as 6 model portfolios had negative returns for the period -- not even keeping up with the modest inflation rate of 2.5 percent. Another 9 could not match the 4.9 percent average return for money market funds, as calculated by Lipper, and 23 others failed to reach 10 percent.

For the first half of 2000 -- albeit, a period too short to serve as the basis for a worthwhile opinion on the performance of a fund or a model fund portfolio -- results were worse.

As many as 38 portfolios had negative returns, as, of course, did the Wilshire 5000, with minus 0.8 percent; one of the money losers was down over 30 percent. Another 38 had barely positive returns, falling short of money market funds' average 2.7 percent. (Among the many portfolios with records shorter than 5 years, few had positive returns.)

Among newsletters with two or more models with above-average 5-year records, four stood out: Ron Rowland's All Star Fund Trader of Austin, TX; Dennis Slothower's On the Money of Provo, UT; Janet Brown's NoLoad Fund*X of San Francisco, and Thurman L. Smith's Equity Fund Outlook of Boston.

Did their models and those of other leading newsletter models have a lot in common? Not really.

Some editors practiced market timing, selling equity funds and going into money market funds when they expected stocks to slide and reversing the procedure when they expected stocks to rise. Leaders, obviously, did this more successfully than the laggards. Others remained fully invested.

Some were invested in diversified equity funds -- more risky or less risky -- while others were concentrated in sector funds, principally Fidelity's 38 Select Portfolios. The importance of selection among the Select is illustrated by the ranges of returns: for the first half, from 42.3 percent for Energy Service to minus 19.1 percent for Industrial Materials; for 5 years, from 47.7 percent for Electronics to minus 9.5 percent for Gold.

Rowland's four models' returns ranged from an annual average of 44.0 to 24.0 percent for the last 5 years and from 35.7 to 10.2 percent for the first half.

He credits his 2000 performance to switching out of funds that were in small-cap aggressive growth, technology, biotechnology, or Internet stocks -- or that had performed closely in line with the NASDAQ Index -- between March 21 and April 5. "We didn't start moving back into the market until June, after the NASDAQ bottomed out in late May," he says.

Rowland points out that his strategy of switching within sectors and styles, as well as between equity and money market funds, can generate highly taxed short-term capital gains, making it more suitable for tax-deferred accounts or people in lower tax brackets.

Slothower's four older portfolios averaged from 32.7 to 9.4 percent annually for the last 5 years and returned from 48.7 to a mere 1.0 percent for the first half. He has tended to invest his top-performing Aggressive model in funds with above-average volatility that could be expected to produce above-average results. This year, it's been in small-company stock funds. His Conservative model owes its recent lagging returns to his keeping it in high-yield bond funds.

Like Rowland, Slothower has been in and out of the market this year. He began to go into money market funds on March 15, switched the rest on March 24, and bought back in mid-June. (In early August, he issued a "sell" signal again.)

A hypothetical calculation by Hulbert indicates that the two market timers have been good fund pickers.

To get a sense of market timing skill, Hulbert assigns each market timer's portfolio a hypothetical return based on the Wilshire 5000 for a period it's in equity funds and another hypothetical return based on 90-day Treasury bills for a period it's in cash. This, then, enables you to compare their hypothetical returns with actuals.

For All Star Fund Trader's No-Load Lone Star Portfolio, for example, Hulbert calculated that on a timing-only basis, the model would have returned 7.6 and 18.7 percent for the first half and last 5 years, respectively. It actually scored 35.7 and 44.0 percent, respectively, because of Rowland's superior fund choices.

On the Money's Aggressive model returned 7.2 and 17.1 percent for the same periods on a hypothetical timing-only basis. Slothower's fund selections boosted those figures to 48.7 and 32.7 percent, respectively.
Like a number of other editors, Brown and Smith, on the other hand, remained fully invested. They owe their returns to their fund selections. Period.