The model portfolio is composed of international investments and is priced in US dollars.  All foreign currency holdings are converted to US dollars, based upon closing currency valuations as of 12/31/10.  Views are solely that of the author, and will differ materially from conventional analysts as well as the investing public at large.  The purpose of the model portfolio is to monitor performance of investments written about in this blog, and is not to be construed as research. The blog is written for entertainment purposes only, and does not represent investment advice in any way, shape or form.  Always consult an advisor prior to engaging in any investment activity.

Please DO NOT send me information about personal investmen that you are researching or that you presently hold.  I do not respond to inquiries outside of the scope of the blog model portfolio. 

Ticker Share Shares Share  Dividends    Gain/Loss
Symbol Price  Held Price paid Q4 in Q4
30/09/10 31/12/10         7.10  3073    6.36  332  -10.4
APFC 4.42 3817 5.75 30
MFW 24.35 1989 23.1 -5.1
PAC 34.44 1335 40.61 17.9
KALU 42.79 800 50.09 192 17.1 1.5 3900 1.25   -16.7
BJCHF 0.526 61454 0.535   1.7
AKZA.AS 61.81 741 62.22 236.53 1
KEG 9.51 6967 12.98   36.5 81.72 453 79.07   -3.3 14.5 1707 14.95 358.4 3.1
PVD 62.91 1200 79.71   26.7
KAZ.l 22.84 7000 25.21 421.06 10.4
GSH 18.57 1598 19.55   5.2
ASR 47.48 822 56.45   18.9
TRI 37.53 928 37.27 269.12 -1
NVO 98.44 598 112.57   14.3 38.99 935 46.24   18.6
CAJ 46.72 900 51.34   9.9
DEG 72.36 488 73.71   1.8 69.76 528 73.68   5.6 34.24 1698 39.58 241.36 15.6 51.35 1197 57.03   11.1
FMX 50.73 1238 55.92 391.45 10.2 15.66 6540 19.26   23
MA 224 300 224.11 33.6 0
TSO 13.36 2333 18.54   38.8 1.102 80680      1.276      1280.4        15.8 
CHL 51.13 604 49.62 -2.9
CVI 8.25 6232 15.18   84
SNY 33.25 1150 32.23   -3
KMG.L 17.66 2536 19.79   12.1 3.89 14000 3.9 0  
KSU 37.41 2147 47.86 27.9
CBD* 34.51 1458 41.98 59.5 21.6
BYD 7.25 6000 10.6 46.2
BFM 13.5 1440 14 288 3.7
cash 8694.46
Value on 09/30/10 1817673    
Value on 12/21/10 2100270
gain/loss in quarter   15.50%  

The blog model portfolio generated a 15.55% return for Q4, 2010.

On the heels of 3 consecutive quarters of "worse than peer"  performance, the account generated first quartile returns for the 4th quarter of 2010.  In absolute terms, the portfolio was #3 of 16 total funds in the representative peer sample for Q4, 2010.  BLUEX (large cap domestic) and CGMFX (large cap domestic) produced superior performance to the blog model account.  Among international funds, the blog model account was #1 for the quarter.

At the start of 2010, the blog model portfolio was valued at $1,791,806.  At the close of 2010, after all commissions, fees and foreign dividend withholding taxes, the account was valued at $2,100,270. 

7 securities fell during the quarter.  While this represented 18.4% of the total number of securities, losers accounted for just 10.2% of the account based on weightings.   CBD (up 21.6% in Q4) and  NVO (up 14.3% in Q4) were the two top performing large cap securities in the account during the final quarter of 2010.

Kansas City Southern (KSU) advanced by 27.9% in the 4th quarter, and moved from mid-cap to large cap status at year end.   The #1 performer among class one rails in North America during 2010,  Kansas City Southern was highlighted as a strong buy in the blog portfolio report for the fiscal quarter ending June 30th, 2010.

Four funds bested the blog model account during 2010.

NTKLX (up 24.54% on year) and OSMAX (up 37.19%) posted superior numbers in the sample. NTKLX and OSMAX are small cap internationally themed funds.  Small cap international funds were the #1 performing subcategory among internationally themed accounts.

PRMSX (up 18.75% on year) and BLUEX (up 18.76% on year), also bettered the blog model account.   BLUEX is a purely domestic fund and PRMSX is a purely emerging markets fund. 

Returns and portfolio turnover of the representative peer group for the quarter and for 2010 were as follows.

1.     TWWDX ($17.23).  4.8% in 4th quarter.  12.47% for 2010.  59.2% turnover.

2.     ABIYX ($13.92).   2.9% in 4th quarter.  3.73% for 2010.       48% turnover.

3.     DODGX (($107.76).  10.9% in 4th quarter.  13.49% for 2010.  18% turnover.

4.     DODFX ($35.71).  6.5% in 4th quarter.  13.69% for 2010.  21% turnover.

5.     ANCFX ($36.70).  9.6% in 4th quarter. 14.05% for 2010.  30% turnover.

6.     FCNTX ($67.73). 8.9% in 4th quarter.  16.93% in 2010.  58% turnover.

7.     BLUEX ($25.64).  17.8% in 4th quarter. 18.76% in 2010. 212% turnover.

8.     UMBWX ($32.38).   6.4% in 4th quarter.  13.17% in 2010.  12% turnover.

9.     TGVAX ($28.03).   7.8% in 4th quarter.  13.7% in 2010.  22% turnover.

10.   HAINX ($60.55) . 6.9% in 4th quarter.  11.98% in 2010.  22% turnover.

11.   CGMFX ($34.80).  23.1% in 4th quarter.  16.94% in 2010.  464% turnover.

12.   OSMAX ($24.65).  11.1% in 4th quarter.  37.19% in 2010.  107% turnover.

13.   PRMSX (35.28).  4.9% in 4th quarter. 18.75% in 2010. 37% turnover.

14.   NTKLX ($40.19). 10.8% in 4th quarter. 24.54% in 2010. 103% turnover.

15.   SAHMX ($11.08). 6.1% in 4th quarter.   10.02% in 2010. 20% turnover.

Overall, the peer group sample closed out 2010 with an average return of 15.96%.  The peer group outperformed all major global indexes.

For 2010, the blog model portfolio, with a one year return of 17.22%, was #5 among the 16 total funds.  The 4th quarter results propelled  the blog model portfolio to #1 in 2010 in the international large cap developed market sector.

The blog model portfolio’s policy of NOT chasing performance, and of maintaining very low turnover, paid off nicely at the close of 2010.

At the end of Q3, 2010, the portfolio had fallen to 4th quartile performance vs peers.  All the while, a great majority of individual companies contained within the account were quietly reporting record EBITDA and operating margins.   There is a temptation during periods of underperformance to switch good businesses for the next "hot' thing.  The blog model portfolio, in contrast, did not sell a single security in Q4, 2010.

Portfolio turnover of the blog model portfolio in 2010 was 3%.  Such a turn was, by far, the lowest among all mutual funds in the sample.  It was also considerably lower than most passive index funds and exchange traded funds (ETF). Retail investors operate under an assumption, promoted heavily by ETF managers, that exchange traded funds feature low fees and low turnover.  In order to maintain accurate weighting on indexes, and to properly balance inflows and outflows, management trading within ETF baskets is sometimes shockingly high.

It takes conviction to act rationally in reportedly irrational times.

There is a certain irony that comes about in reporting above average performance with a buy and hold portfolio, precisely at a time when mainstream financial press pronounces long term investing "may be dead".

Thankfully, many managers in the peer group are refreshingly indifferent to fads and trends.  When evaluating potential purchases, professionals often agonize about possible impacts of adding new investments to an existing portfolio. They reflect upon balance and are generally quite cognizant of the fact that within an account, one investment may perform well at the direct expense of another company in the fund.  Security selection, style drift and sector allocation are taken very seriously in top mutual funds.

Low portfolio turn results in reliability of taxation.

For fiscal 2010, high turn funds have every potential to surprise (shock) investors with a significant realized capital gains tax.  For 2010, the two highest performing funds among the sample, NTKLX and OSMAX, reported portfolio turns of 107% and 103% respectively.  BLUEX, a domestic outperformer vs the blog model portfolio, reported a ripping 212% turnover rate. CGMFX, one of the two funds that outperformed the blog account in Q4, reported an astonishing 464% turn, and completely shifted category, moving from international large cap to domestic large cap.  

Only PRMSX, with an 18.76% return for 2010, and a 37% turn, could be considered as a reasonably close proxy to the blog model account, insofar as style is concerned. 

With the exceptions of China and Japan, global markets posted respectable performance for 2010.

The Nasdaq posted a one year return of 16.9%.

The Nikkei posted a one year return of -3%

The FTSE posted a one year return of 9.3%

The S&P 500 posted a one year return of 12.8%

The Dow Jones Industrial Average posted a one year return of 11%

The TSX composite index posted a one year return of 14.5%

The MSCI Asia Pacific-ex Japan index posted a one year return of 14.3%

The Shanghai composite index posted a one year return of -14%

DIY (do it yourself) or professional management?  

One pervasive sentiment among retail investors is that it is less expensive in the short term to manage one's own capital independently and to bypass mutual funds.  Statistics are then trotted out at discount brokerage firms which confirm mutual funds underperform representative indexes overall, ex fees. 

The statistics are accurate; the conclusions drawn from such data are tragically flawed.  Marketing departments of discount firms do a terrible disservice to the truly excellent managers in the industry, and likely the investing public at large.  The sole purpose of immense databases built up globally, is to sift through the myriad of funds and identify those demonstrating long term relative outperformance.   The studies were never meant to represent a view  that DIY efforts will generate superior returns vs professionals.  THAT myth has been carefully and artfully crafted by discount brokerage firms over time.  

We now live in an era where DIY investors, almost universally, carry some innate belief that they, and perhaps they alone, possess the skills to outperform pros.  Generally armed with little more than rudimentary, error riddled and badly out of date stock screeners, retail investors assume, in an era of streaming information, that the playing field has now been levelled.  What most stubbornly fail to acknowledge is the fact that ALL have access to basic screens.  There is no quantifiable edge derived from using the primitive tools, which is why such data is generally offered free of charge.  

Where ARE the studies on individual investor performance to support DIY over professional management?

Braggadocios tend to talk up performance of one or two companies within a portfolio and ignore the overall return, style or concentration of their account; retail investors seldom critique their personal  (pet) picks as harshly as they do those of professional managers.  The few comparative reviews on individual investor performance vs. mutual funds tend to get buried as quickly as they are released.  Any detailed reports that do come to the surface invariably show that DIY accounts underperform average mutual funds by a wide margin.

A 20 year definitive study of individual investor returns concluded that retail stock buyers badly underperform every asset class, in every category, vs. indexes.

Kids, don't try this at home.

The conclusions of the studies are troubling; the corollary even more so. 

1.       The average mutual fund underperforms comparative indexes. 

2.       The average retail investor underperforms comparative mutual funds. 

Ergo, the average retail investor does themselves a great disservice in attempting to manage their own portfolio. On the whole, findings are succinct and to the point; investors will be better off, when trying to generate above average long tem performance, in simply allocating investment capital among a number of managers with a demonstrated ability to generate above index returns.  

Considering the challenges that seasoned professional managers must overcome to beat indexes year in year out (ex fees), the only explanation that comes to mind for the average DIY investors' attempts to manage their own portfolios, insofar as personal stock selection and asset allocation, are vanity and hubris. 

The hazards of DIY are numerous.

In home renovations, DIY work is often easy to identify; poor quality materials, haphazard workmanship, inattention to building and safety codes and gobs of cheap glossy paint, liberally applied, to cover up mistakes.  Very often, when touring a DIY home for sale, the common question that comes to mind was "what on earth were they thinking"?   

Like the do it yourself home renovation, the typical DIY investment portfolio is often badly unbalanced and saddled with poor quality faddish companies.  It is my contention that an overwhelming percentage of DIY portfolios lack one critical attribute that ultra-wealthy investors require of their accounts, that being durability.

I would suggest investors refer to data detailed in the last blog portfolio report, for the end of Q3, 2010.   During the first 9 months of 2010, in a clearly bullish market, retail investors were in a period of net withdrawal.  They missed a powerful turn late in Q3, and have subsequently expended considerable energy and capital trying to play catch up.   Retail investors were inexplicably persistent sellers of equities since 2008.  I use the term inexplicable, because the selling was most pronounced at market bottoms and during the recovery.   Who on earth makes positive returns buying at the high and selling at the low? 

There should not be subtantial portfolio changes in the year ahead

I am largely content with the portfolio composition and mix.  Incremental investment activities will be largely done via dividend payments.  There might be a takeover or two as M&A activity heat ups.   A portfolio turn of 3% may edge up a bit in 2011 to maintain a large cap focus.  

The greatest system risk to global equity markets, in my analysis, could be a very meaningful inflation shock.

China has been batttling an inflationary environment for a year, and their major  index  (Shanghai composite) was down by 14% in 2010, despite a 10% rate of GDP growth.  A steadily growing economy and equity valuation advances are not mutually exclusive.  A spanner which can throw off the many bullish forecasts for 2011 may be inflation.  Nevertheless, after two years of merely observing the global economic expansion, retail investors will likely return en masse to equity markets in 2011.    

*CBD share price has been adjusted to reflect a 2 for 1 share split.