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Performance of the Model Portfolios: December, 2011
What follows is a review of the performances of Value Line’s four Model Portfolios for the month of December. 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 1.0% in December. Although each of the three portfolios benefited from the market’s upswing as December drew to a close, only Portfolio III ended the month outperforming the S&P 500 Index. Meanwhile, Portfolio IV recorded its third consecutive gain in December, with the advance nicely ahead of its benchmark, the Mergent Dividend Achievers (U.S. Broad), which rose 1.7%. (Read the description of each portfolio’s general investment strategy.)
Portfolio I reported a loss of 1.1% for December. Although the portfolio was able to stay even with the market through the first half of December, it did not fully participate in the upward move that began midway through the final month of 2011. Of note in this regard, was our two holdings hailing from the Retail Store and Industrial Services industries. There were two trades in December. Our holdings in RPC, Inc. (RES) were sold and replaced with a stock from the Drug industry. The shares of the oilfield services company did not perform badly in December, but the large loss sustained in the third quarter would have been very difficult to recover. We also sold TE Connectivity (TEL) shares, taking a modest loss. The open position was taken by a stock found in our Maritime industry.
Portfolio II recorded a return of 0.9% for the month of December, just short of its S&P 500 benchmark. Still, the December performance made it three gains in a row for the growth and income portfolio. The overall quality of the group’s holdings and the resulting lower risk profile tend to set the tone for this portfolio. Nonetheless, tempered forecasts from positions in the Semiconductor and Basic Chemical industries sent a bit of a ripple through Portfolio II. And although the decision of our holding in the Telecom Utility business not to raise its dividend this year and next was disappointing, investors took it in stride. Meanwhile, there was one trade in December. We sold our position in Darden Restaurants (DRI) shares at a modest loss after the company reduced its earnings forecast for its fiscal year ending in late May. Darden was replaced by a stock from the Railroad industry, which has performed well since being added.
Portfolio III posted a gain of 1.9% in December. Although developments on the geopolitical and macroeconomic front kept investors on edge, at times, the portfolio’s commodity and energy-related holdings nonetheless picked up market support during the final month of 2011. In particular, our holdings in the Oilfield Services and Steel industries benefited. Elsewhere, our position in the Pharmacy Services business also found renewed interest. There was one trade in Portfolio III in December. We decided to sell our holdings in Kellogg (K) shares, in the wake of the cereal maker’s disappointing third-quarter financial results. The sale netted a modest gain. We replaced Kellogg with a position in a company from the Basic Chemical business.
Finally, Portfolio IV registered a gain of 2.1% in December, with the group’s concentration in high-yielding stocks once again working to cushion the effect of the market’s swings. In general, the portfolio’s holdings performed pretty much as expected, notwithstanding disappointing financial results from its holding in the Restaurant business and a reduced earnings forecast from our position in the Basic Chemical industry. We made no changes to the portfolio’s composition in December. As 2011 drew to a close, Portfolio IV was well positioned for current income and should remain of interest to investors focused on that objective. As the month of December ended, Portfolio IV’s yield on cost basis was 4.9%, which is quite favorable.
Although the results for the Model Portfolios were mixed in December, each easily outdistanced their respective market benchmarks in 2011. We think this speaks well for our models, especially when their performance is put into perspective with a year that most investors would just as soon forget. Meanwhile, at this writing in mid-January, market sentiment seems to be on the optimistic side, reflecting better prospects for economic growth in the United States and the hopes that any recession in Europe will turn out to be moderate. Still, much can happen between now and the end of 2012, as the events of 2011 attest. That said, 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.