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Performance of the Model Portfolios: October, 2011
What follows is a review of the performances of Value Line’s four Model Portfolios for the month of October. The effects of recent market action and any changes to the Model Portfolios’ respective holdings are found in each week’s Selection & Opinion (free sample here). Portfolios I, II, and III share a common benchmark, the S&P 500 Index (adjusted for dividends), which rose 10.9% in October. Portfolios I and III advanced nicely, with each outperforming its benchmark. Portfolio II also fared well, though its conservative composition limited its progress, to a degree, and it finished behind the S&P 500 Index. Meanwhile, Portfolio IV found the going much more to its liking in October, recording a gain nicely ahead of its benchmark, the Mergent Dividend Achievers (U.S. Broad), which rose 5.5%. (Read the description of each portfolio’s general investment strategy.)
Portfolio I reported a gain of 17.2% in October. The stock market’s sharp decline in late July and the choppy trade through August and September left most of the portfolio’s holdings at favorable valuations relative to their growth prospects. Portfolio I was then in a good position to benefit, as the shift in investor sentiment became evident as October began. Indeed, support for most of its selections was strong through the month, with advances from positions held in the Auto Parts, Oilfield Services, and Trucking industries being notable examples. In addition, the third-quarter earnings season was largely positive for the portfolio, adding to the general support. There were two trades in October. Kaman Corp. (KAMN) was sold at a loss and replaced by a stock from the Retail Store industry. Meanwhile, Herbalife (HLF) shares, which netted a substantial profit, were exchanged for a holding from the Metal Fabricating business.
Portfolio II recorded a return of 9.8% for the month of October. Just as the overall quality of the portfolio’s holdings worked to cushion the effect of the market’s wide swings in September, it tended to temper its rise in October. Still, the performance is quite respectable, in our view, when it is cast in relation to the portfolio’s lower risk profile. Although the ongoing sovereign-debt problems in Southern Europe loomed in the background, the third-quarter earnings season was generally a good one for Portfolio II. In this regard, we note that reports from our holdings in the Beverage, Semiconductor, and the Aerospace/Defense industries made for good reading. There were no trades in October, in keeping with our goal of keeping the portfolio’s turnover low.
Portfolio III got back on the plus side in October, posting a return of 13.6%. Trading in the some of the portfolio’s selections remained volatile during the month, as investors worried over a range of economic data and the sovereign-debt problems in Europe. Nonetheless, an improvement in commodity prices tended to bring a degree of support to our energy-related holdings, which was a welcome change from the showing in September. Meanwhile, our positions in the Medical Services and Food Processing industries continued to offset some of the swings in the portfolio’s riskier stocks. On balance, the third-quarter earnings season was a positive for Portfolio III. The financial report from our holding from the Internet industry was particularly well received. We made no changes to Portfolio III in October, tough, as always, we remain on watch for quality companies whose stocks are selling at favorable prices relative to their underlying long-term growth prospects.
Finally, Portfolio IV recorded a gain of 8.3% in October. In contrast to their weak performance in the last couple of months, it was the portfolio’s holdings in the Basic Chemical, Aerospace/Defense, and Paper/Forest Products industries that played an important role in its October performance. Renewed support for one of our positions from the Electric Utility industry also made a notable positive contribution to our group’s return for the month. We made no changes to the portfolio’s composition in October. We continue to believe Portfolio IV should remain of interest to investors focused on current income. As the month of November opened, Portfolio IV’s yield on cost basis was nearly 4.8%, which is quite favorable.
Compared with the month of September, the Model Portfolios found October provided a more profitable environment, with three of the four recording monthly returns ahead of their respective benchmarks. Moreover, as of the end of October, each of the Model Portfolios has outperformed its benchmark for the year. At this writing in mid-November, investor optimism seems to be prevailing over concerns ranging from the sovereign-debt problems in Europe, the prospects of slower growth in China, and the sluggish economy and stubborn unemployment situation in the United States. Whether the positive market sentiment remains in place is an open question, in our view. Whatever the case, the portfolios should continue to appeal to a range of investors with varying appetites for risk and return desiring exposure to the equity markets. Alternatively, the Model Portfolios can serve as a source of some of our best investment ideas.
As of this article’s writing, the author did not have positions in any of the companies mentioned.