Mutual Fund Trends & Research Newsletter

Model Portfolio Beats S&P 500 Again in 1st Qtr!

Our Model Portfolio returned a positive 1.7% during the first quarter. Our results are once again better than the S&P 500 which returned -0.1% over the quarter. Our Portfolio has been ahead of the S&P 500 since we started it in Jan of 2000.

These results were achieved with a combined allocation of stocks, bonds, and cash, and thus with considerably less risk than a portfolio of stocks alone. If, however, you just look at the stock portion of our Model, it returned 2.4% for the Qtr.

Overall Allocation

Our allocations to stocks, bonds, and cash remain unchanged (see below). While stocks as a whole have not been performing very well so far this year, by having a good percentage of your funds in the correct categories and tending to underweight the ones with mediocre prospects, you will still do significantly better, we feel, than being in either cash or bonds. (If our current stock portfolio returns of 2.4% continue on roughly the same basis for the rest of the year, we might achieve a 9 - 10% return on our stocks this year. However, we expect returns may improve this year so we hope to do even better than the 9 - 10% possibility shown thus far.)

Our Suggested Allocations for 2002 (in Effect Until Further Notice)

Class	Previous	Current
Stocks	70%	70%
Bonds	25	25
Cash	5	5

Which Fund Categories Look the Most Promising

We are making some small changes within our Model Portfolio (see Table below).

Stock Portfolio

Within the Large Cap area, we continue to favor value as opposed to growth. Since, however, there are really no signs of a true turnaround for either of these large cap categories, we are dropping our overall US Large Cap allocation to 25% of the stock portfolio from 30%.

We are raising the allocation to the Small and Mid Cap area to 35% from 30% previously. However, the Small Value and Mid Cap Value areas appear to be approaching overvaluation. Therefore, we are underemphasizing both these areas.

Real Estate funds continue to offer an interesting alternative and may still be somewhat undervalued when considered from a long-term perspective. Therefore, we are raising our allocation from 5 to 10%.

Our foreign allocation remains at 30%. However, in spite of the good potential prospects for European funds on a longer term basis, we would rather wait for more signs of an actual change in the trend, which has been to underperform for many years. Emerging markets, however, have already shown the kind of positive prospects missing in Europe. Therefore, we are putting 10% of our stock portfolio in Vanguard Emerging Markets Index as opposed to sticking with Vanguard Europe.

Bond Portfolio

In general, we don't expect bonds to do very well this year. However, for those who wish to remain diversified in the event that stocks continue to flounder, or for those who are in need of income or are saving for short-term goals, we recommend bonds that wont suffer as much in the rising rate environment that we feel lies ahead.

Our top choice right now is inflation protected bonds, although again, the returns to be achieved may not be high, just better than regular bonds. And short-term bonds should fare better than long-term bonds if interest rates and inflation go up.

We still think corporate and high yield bonds offer considerably better prospects than government bonds, although the high yields funds are riskier and we are still awaiting a turnaround for them which has so far failed to materialize.

Model Portfolio for the 2nd Qtr

The following table shows our choices and allocations for the 2nd Qtr.

Stocks

Bonds

Tom Madell, PhD

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