Value Line manages four 20-stock Model Portfolios. They are reviewed in each week’s Selection & Opinion (free sample here). The portfolios each showed gains for September, contrasting sharply with the month of August, which presented most investors with challenges. Portfolios I, II, and III share a common benchmark, the S&P 500 Index (adjusted for dividends), which rose 8.9% for the month. Portfolios I and III outperformed this market measure in September, while Portfolio II came up somewhat short. Meanwhile, Portfolio IV, which had recorded favorable comparisons for seven of the first eight months of 2010, found September to be a bit difficult, and its return was overshadowed by its benchmark, the Mergent Dividend Achievers Index, which moved forward 7.3% for the month. For a complete description of each portfolio’s investment strategy, click here.
Portfolio I recorded a gain of 12.9% in September. As the month began, investor sentiment turned markedly in favor of the portfolio’s holdings, which are currently weighted towards the consumer discretionary and high-tech sectors, and the wind remained at the group’s back, with only a few dips on the way. Our sense is the portfolio’s outperformance reflected a reassessment regarding the chances for a so-called double-dip recession in the United States, with the resulting more optimistic view playing nicely into the group’s current composition. We made one change in September, trading an issue hailing from the Semiconductor Industry for one residing in the Environmental Industry. The portfolio’s exposure to market risk remains rather modest, given its performance orientation.
Meanwhile, the 7.6% advance posted by Portfolio II was in keeping with the trend established so far this year. The record shows that although the group’s decline has been less than its benchmark during market downturns, the returns generated during an upswing have been lower, as well. This reflects the portfolio’s composition, which, for the most part, consists of stocks ranked 1 (Highest) or 2 (Above Average) for Safety and that are rated at the upper end of the spectrum for Financial Strength. By their nature, these quality issues are less risky than others, making them well suited for inclusion in a conservative growth and income portfolio, such as Portfolio II. There were no changes made to the portfolio during the month of September.
Portfolio III saw its market value increase 9.9% during September. Although this portfolio’s investment horizon, being long-term, contrasts sharply with its performance-oriented compatriot, Portfolio I, the outperformance it registered was also linked to the change in market sentiment that was evident as the starting bell rang on the first day of September. However, this group’s composition is much more diversified, and the lessening concerns regarding a double-dip recession worked to renew support not only for its holdings in cyclical issues, but also for its positions in growth stocks. We made no changes to Portfolio III during September, and we continue to believe that it is well positioned for long-term growth.
Finally, Portfolio IV returned 5.7% in the month of September, which, as mentioned, was somewhat short of its benchmark. Although market support for most of the portfolio’s holdings was favorable thoughout the 30-day period, a disapointment in a couple of holdings from the Food Processing Industry accounted for a portion of the underperformance. Uncertainty regarding future tax rates on dividend income was likely also a factor. Nonetheless, this group should remain of interest to those investors seeking current income. Indeed, at the end of September, it yielded 5% on a cost basis. We made one trade in Portfolio IV at the end of the month, selling one of the noted stocks from the Food Processing Industry and purchasing an issue from the Tobacco Industry.
Market action during the month of September was a welcome change from the doldrums experienced in August, and Value Line’s Model Portfolios participated nicely. In addition, the effect of a particular portfolio’s investment objective was also evident, in that the returns on Portfolio II and IV, though somewhat below their market benchmarks, were seen as being consistent with their conservative orientation. Looking ahead, we think each of the portfolios is positioned well for the future, given the respective investment goals, and should continue to appeal to a range of investors with varying appetites for risk and return. Alternatively, the Model Portfolios can serve as a source of some of our best investment ideas.