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Performance of the Model Portfolios: September, 2011
What follows is a review of the performances of Value Line’s four Model Portfolios for the month of September. 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 declined 7.0% in September. With this as a backdrop, Portfolios I, II, and III each reported losses for the month. Nonetheless, the decline in Portfolio II was less that this benchmark, largely owing to the conservative nature of its composition. Meanwhile, Portfolio IV also recorded some red ink, with the loss in September being just slightly deeper than its benchmark, the Mergent Dividend Achievers (U.S. Broad), which fell 4.8%. (Read the description of each portfolio’s general investment strategy.)
Portfolio I reported a loss of 13.6% in September, with none of the portfolio’s holdings escaping the punishment handed out by the market. That said, its newer selections fared somewhat better than the rest, particularly those added in August, which were purchased at generally favorable prices. Our positions in the Shoe and Toiletries/Cosmetics industries would be examples in this regard. It was our holdings in the Diversified Metals & Mining and Diversified Chemical industries that were accorded the worst treatment and, hence, did the most damage to Portfolio I’s market value. This effect became quite pronounced in the wake of the market’s decline in mid-September. There were two trades in the last month of the third quarter. Members of the Auto Parts and Retail Automotive industries were added, replacing Darden Restaurants (DRI) and Esterline Technologies (ESL). Both stocks were sold at modest losses, with the trades occasioned by a decline in these shares’ respective Timeliness ranks to 3 (Average).
Portfolio II ended the month of September with a loss of 5.7%. On balance, the overall quality of the portfolio’s holdings worked to cushion the effect of the market’s wide swings in September. Indeed, our positions in the Beverage and the Restaurant industries generally held up well, as did our selections from the Drug and other healthcare-related sectors; our position in a large semiconductor maker also was an advantage. On the other hand, our holdings in the Telecom Utility and Electrical Equipment industries fared less well, as investors worried over the financial problems in the European Monetary Union and the threat of a new recession at home. There were no trades in September, in keeping with our goal of keeping the portfolio’s turnover low.
Portfolio III once again found the going tough, posting a loss of 11.0% in September. Falling energy prices, combined with the threat of a global economic slowdown, weighed heavily on the portfolio in the final month of the third quarter. Despite the cushioning enjoyed from our more defensive holdings from the Pharmacy Service, Food Processing, and Non-Invasive Medical Supplies industries, weakness in the Steel, Apparel, and energy-related sectors held sway. As a result, we decided to lighten our exposure to the energy business and sold our position in Ensco plc (ESV) at a modest gain, replacing it with a stock from the Auto Parts industry. 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 loss of 4.9% in September. Although it certainly faced challenges as the month progressed, the portfolio’s focus on current income and its emphasis on quality stocks—many of its holdings are ranked 1 (Highest) or 2 (Above Average) for Safety—worked to lessen the effect of the market’s volatility. On point, the portfolio’s exposure to the Electric Utility and Power industries was a plus, as was its singular holding hailing from the Property Management sector. Our selection from the Tobacco business also worked to cushion the market’s swings. At the end of September, Portfolio IV’s yield on cost basis was about 4.8%, which is quite favorable. We continue to believe Portfolio IV should remain of interest to investors focused on current income.
Although the Model Portfolios found September to be trying, three of the four remained ahead of their respective benchmarks through the first nine months of the year (Portfolio III fell behind its benchmark). That said and at this writing in mid-October, it appears that the investment markets are taking a more optimistic tone, suggesting that the environment for equity investors and the Model Portfolios may improve. Nonetheless, corporate earnings for the third quarter will soon begin to be released, which may or may not confirm the current optimism. Adding it all up, 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.