In what follows, we review the performances of Model Portfolios I, II, III, and IV for the three, nine, and 12 months that ended on December 31, 2010. With the exception of Portfolio IV, which was created in January, 2009, we also include annualized returns for the past three, five, and ten years. We also show the portfolio’s annualized returns since their respective inception dates (April, 1995 for Portfolios I, II, and III). A table summarizing each Model Portfolio’s performance over the time periods mentioned is included below. We note the performance figures represent total return (i.e., price change plus dividend income), and our calculations do not include transaction costs or taxes.
Portfolio I recorded a gain of 13.0% in the final quarter of 2010, nicely ahead of its market benchmark, the S&P 500 (adjusted for dividends). Although the portfolio’s performance was lackluster in the month of December, reflecting a degree of profit taking in select issues, the returns posted in October and November were particularly strong, as most of our group benefited from broad market support. The performance in the December period completed what had already been a good year for Portfolio I, with the gain for 2010 coming in at 26.5%.
That said, it was a very busy quarter. We made 11 trades, which, on a historical basis, is high. As a result, the turnover rate for the portfolio for 2010 was 145%, about 15% higher than the norm. The higher level of trading resulted primarily from two factors. Although we have a degree of flexibility when it comes to making selling decisions, there was a higher-than-usual turnover among timely stocks, which forced our hand on a number of occasions. In addition, we took the opportunity to take profits in a group of holdings where we had accumulated large gains.
We do not forecast the portfolio’s performance. However, we believe we are well positioned for the year ahead. We note that much depends on the level of economic growth in 2011, though, since the portfolio’s current composition is tied more to the general business cycle than has been the case in the past.
Portfolio II finished what was somewhat of a roller-coaster year on a decent note. After some of our more high-profile names came under pressure in November, our stocks, on the whole, bounced back in the final month of the year. In total, the portfolio recorded a return of 4.7% in the fourth quarter of 2010, which matched its return for the full year. In relative terms, however, a more-conservative makeup made it difficult to keep up with our broader market benchmarks, such as the S&P 500 Index. In turn, we have widened our search for potential candidates, looking to capture greater growth opportunities, while maintaining a focus on income-generating, high-quality stocks. In the fourth quarter, we added some names that fit the bill, including a Telecom Utility and a Financial Services firm. Both businesses are on the rebound, and their shares were purchased well below recent highs, offering substantial growth potential. A company operating in the Air Transport industry was also added. To make room for these stocks, we sold our stakes in Toronto Dominion (TD), 3M Company (MMM - Free 3M Stock Report), and Clorox (CLX), registering nice profits in the latter two positions. The portfolio’s turnover was around its norm of 50% (annualized) in the term.
Portfolio II maintained a healthy income component throughout 2010, with most companies increasing their quarterly payouts at least once during the year, a trend we expect to persist in 2011. At yearend, the portfolio’s average dividend yield was 3.3%, well above the Value Line median. At the same time, our holdings consisted primarily of top-notch issues, with 80% ranked 1 (Highest) for Safety, and all but two with betas in line with or lower than the market average.
Portfolio III, focusing on stocks with good long-term appeal, closed 2010 in fine fashion. In fact, the group increased 14.2% in value during the December interim, a period that was good to U.S. equity investors. This performance, coming on the heels of a strong third-quarter showing, compared favorably to the more moderate 10.8% gain (adjusted for dividends) registered by the S&P 500 Index. Noteworthy, too, is that the portfolio has outpaced the S&P 500 by more than two and a half percentage points (on an annualized basis) since making its debut back in April of 1995.
The biggest winners in the fourth period came from the commodity/energy space, where our holdings jumped on inflation expectations (the Federal Reserve is moving ahead with its second round of quantitative easing) and signs of improvement in the broader global economy. Other significant advancers included our two selections from the Recreation and Telecom Services industries. Despite still-high unemployment rates across the country, these economically sensitive issues benefited from a gradual pickup in spending by both consumers and businesses.
The negative side of the ledger was fairly light during the final months of 2010, with the exception of our holding from the Telecom Equipment industry, which was hurt by a surprising drop-off in demand from cable operators and municipalities in the United States and Europe.
There was only one addition to Portfolio III in the fourth period. The Telecom Services company mentioned above replaced fertilizer giant Potash Corp. (POT) We took profits in that quality name after it had had a big run.
Portfolio IV produced a 10.2% total return in the fourth quarter of 2010 (including dividend reinvestment), materially better than the 6.8% gain achieved by the Mergent Dividend Achievers index. The full-year return was 21.6%. We think the government’s two-year extension of dividend tax cuts encouraged purchases of income stocks.
Leading the price gainers for the quarter were shares of from the Food Processing industry, which jumped 30% thanks to a buyout offer (subsequently rejected) and a favorable earnings outlook. Also, our holdings in members of the Diversified and Specialty Chemical industries soared more than 20% over the last three months of 2010. In contrast, a cooling rate of return from four electric utilities and one natural gas distributor limited the portfolio’s overall advance.
Purchases for the model portfolio in the period included a Property/Casualty insurer and Semiconductor industry participant. Both stocks have fared decently since their addition, each advancing 15% at December 31st.
For the first quarter of 2011, we are optimistic about the prospects for high-yielding equities. A continued market run up would likely allow Portfolio IV’s value to ascend nicely, while providing attractive dividends and below-average risk. A few technology stocks, in favor of late, are positioned to participate. Overall returns will also hinge a bit, though, on the performances of less cyclical utility and food stocks.
At the time of this article’s writing, the author did not have any positions in any of the companies mentioned.