Jul

21

Portfolio Review: June 2008

By Teresa | Filed Under Announcements | Start a Discussion 

June 2008 capped a quarter that most mutual and hedge fund managers would like to forget. According to Bloomberg, last month saw “the Dow Jones Industrial Average to its worst June since the Great Depression, as record oil prices, credit-market writedowns and a slowing economy threatened to extend a yearlong profit slump.”

DIVERSIFICATION REDISCOVERED
By any measure, our portfolios have weathered the storm, performing well in a very difficult environment. 2008 has affirmed our investment policy: a disciplined and diversified portfolio strategy is the light that shines on an otherwise barren investment landscape when markets experience a protracted downturn.

Performance as of June 30, 2008
Model Portfolio
June 2008
Year To Date
S&P 500 (Total Return)
-8.43%
-11.91%
InVivo Strategic Performance
-0.01%
+15.10%
InVivo Ex-U.S.
-4.34%
+7.84%
InVivo Conservative Retirement
-1.43%
-1.04%
Wiener Conservative
-7.10%
-8.80%
Wiener Growth
-7.80%
-10.10%
American Funds CWGIX
-9.09%
-11.41%
American Funds AGTHX
-6.51%
-6.73%
Fidelity Contrafund FCNTX
-4.91%
-9.08%

OPPORTUNITIES FOR NIMBLE TRADERS
June 2008 was a gift for traders. The volatility and range seen in most markets was breathtaking, providing endless opportunities for aggressive swing and intraday trading. As the market came to life, I personally had the most fun and exciting month in a long time, all the while knowing that capital set aside for my retirement was preserved.

TOUGH SLEDDING FOR MANAGERS
For mutual funds, the slaughter was across the board: value investors were stung by financial stocks, Bill Miller’s Legg Mason Value Trust continued to take a pounding while the 40 largest public pension funds had a tough fiscal year.

Hedge funds posted a decent second quarter even though June was a rough month. Morningstar reported that June marked a bad end to a good quarter.

Most hedge fund indexes managed to beat other indexes. In particular, nervous investors flocked to “so-called hedge funds of funds, where managers prepare a portfolio of individual hedge funds aimed at reducing risk.” Yes, that’s right; even in the hedge fund universe, diversification saved the day.

DEFY “COLLECTIVE IGNORANCE”
The lesson investors re-learned is that while cowboys have their day in bull markets, bear markets separate the men from the boys. The key, as Yale University’s Chief Investment Officer David Swensen put it so eloquently, is to “diversify against the collective ignorance”:

For most people, he recommends a very basic approach: use index funds, exchange-traded funds and other low-cost instruments, and stick to your long-term asset allocation — even when the markets are in tumult. Don’t be distracted by market forecasts, he said. “You have to diversify against the collective ignorance,” he said. “I think nobody is in a position to react to these big macro-issues. Where is the dollar going to be or what is G.D.P. growth going to be in China? For every smart person on one side of the question, there is another smart person on the other side.” — Keep It Simple, Says Yale’s Top Investor

Satellite Portfolios

We provide a number of number of model portfolios for the individual investor. For details about the composition of each one, please refer to portfolio strategy.

While our typical client allocates a certain portion of their retirement account to our model core portfolio (Invivo Conservative Retirement), the amount allocated to our model satellite portfolios (InVivo Strategic Performance and the InVivo Ex-U.S.) depends on his or her individual circumstance.

For discussion purposes, we review the model satellite portfolios against two well-known and appropriate benchmarks:

  1. The S&P 500 Index on a total return (gross cash dividends reinvested) basis.
  2. The MSCI Hedge Invest Index, a benchmark used by many hedge fund of funds.

STRATEGIC PERFORMANCE
This chart shows the performance (in percent) of our Strategic Performance model portfolio (green line) against the S&P 500 Index (red line) and the MSCI Hedge Invest Index (blue line) since formation.

june-strategic.gif
Strategic Performance Portfolio (50% Margin Used) to June 30, 2008

EX-U.S.
This chart shows the performance (in percent) of our Ex-U.S. model portfolio (green line) against the S&P 500 Index (red line) and the MSCI Hedge Invest Index (blue line) since formation.

june-exus.gif
Ex-U.S. Portfolio to June 30, 2008

Core Portfolios

For discussion purposes, we review our model core portfolios against the S&P 500 Index and the S&P 500 Total Return Index. The reason for doing so is because many managers compare their performance to the cash index (the one you see in the newspaper, before dividend reinvestment), effectively overstating their fund’s performance relative to the index.

CONSERVATIVE RETIREMENT
This model is for retirement accounts where the plan administrator severely limits investment choices and restricts rebalancing activities. To implement this strategy, your account must be able to buy and sell the equivalent of four exchange traded funds: SPDR S&P 500 ETF, MSCI EAFE Index Fund, Lehman 7-10 Year Treasury Bond Fund, and Lehman TIPS Bond Fund.


Conservative Retirement Portfolio to June 30, 2008

This chart shows the performance (in percent) of our Conservative Retirement model portfolio (yellow line) against the S&P 500 Cash Index (pink line) and the S&P 500 Total Return Index (blue line) since formation.

THRIFT SAVINGS PLAN, CONSERVATIVE
This model portfolio is for individuals participating in the Thrift Savings Plan, a retirement savings plan for civilians who are employed by the United States Government and members of the uniformed services. The conservative version excludes the G fund.


InVivo TSP (Conservative) Portfolio to June 30, 2008

This chart shows the performance (in percent) of our Thrift Savings Plan, Conservative model portfolio (yellow line) against the S&P 500 Cash Index (pink line) and the S&P 500 Total Return Index (blue line) since formation.

THRIFT SAVINGS PLAN, INCOME
The income model portfolio uses all of the funds offered (G, F, C, S, I) by the TSP.


InVivo TSP (Income) Portfolio to June 30, 2008

This chart shows the performance (in percent) of our Thrift Savings Plan, Income model portfolio (yellow line) against the S&P 500 Cash Index (pink line) and the S&P 500 Total Return Index (blue line) since formation.

Reference

Here are a collection of videos and articles to memorialize the quarter that was (or wasn’t).

  • Hedge Fund Legends Speak [WATCH VIDEO]
    A look at the future of the stock market and the economy, with Michael Steinhardt, WisdomTree Investments and Paul Roth, Schulte, Roth and Zabel
  • Hedge Fund Pioneers [WATCH VIDEO]
    Insight on the Treasury’s rescue plan for Fannie & Freddie, with Michael Steinhardt, WisdomTree Investments and Paul Roth, Schulte, Roth and Zabel
  • Hedge Funds Suffering [WATCH VIDEO]
    The hedge-fund industry had a rough first half of 2008 with profit proving elusive to many. Ken Heinz from Hedge Fund Research says the June was a particularly bad month.
  • Hedged Hammered [WATCH VIDEO
    Hedge funds turn in their worst first-half performance in nearly twenty years, with Ben White, Financial Times and Ken Heinz, Hedge Fund Research
  • Hedge Funds Face Difficult Times [WATCH VIDEO]
    The pace of hedge fund launches in the US over the first 6 months of 2008 was at its lowest in years, according to, Stuart Feffer, co-CEO of LaCrosse Global Fund Services. He expects European hedge funds to show an even slower launch trend.
  • Hedge Fund Summit [WATCH VIDEO]
    Discussing Fannie & Freddie’s danger of failing, with Mark Yusko, Morgan Creek Capital Management and John Burbank, Passport Capital
  • Hedge Hunter [WATCH VIDEO]
    What it takes to be the best, with Mark Yusko, Morgan Creek Capital Management CEO and CNBC’s Becky Quick
  • Edhec Alternative Indexes see mostly negative returns in June
    In this challenging context, eight of the 13 hedge fund strategies in the Edhec Alternative Indexes posted negative returns. Emerging markets, one of May’s best-performing styles, was the worst performer with a decline of 2.58 per cent, heavily influenced by the poor performance of the stock markets. Long/short equity lost 1.45 per cent and event-driven funds were down by 1.32 per cent. By contrast, short selling outperformed all other styles, returning 8.08 per cent, while other positive performers were CTA global (3.33 per cent), equity market neutral (1.92 per cent), global macro (0.93 per cent) and distressed securities (a bare 0.05 per cent).
  • HFN Averages Performance Report — June 2008
    Equity and credit markets experienced severe conditions in June and 2008 has been one of the more difficult years in recent memory. It is during times like these that hedge funds have historically separated themselves from other asset classes to produce positive long term outperformance. That hedge funds are negative in 2008 is less important than the fact that the average hedge fund has outperformed the S&P 500 TR by more than 1000 basis points through June.
  • Morningstar, Inc. Reports Second-Quarter 2008 Hedge Fund Performance and Asset Flows
    “Equity markets suffered steep declines in June,” said Morningstar hedge fund analyst Nadia Van Dalen. “Volatility returned to levels not seen since March, amid fears of recession and rising inflation. Most hedge funds are not immune to these economic shocks, despite what their name might imply.”
  • Stop Worrying, and Learn to Love the Bear
    When you bought into the gospel of “stocks for the long run,” did you have any idea how long the long run can turn out to be? Exactly 10 years ago, the Standard & Poor’s 500-stock Index was at 1164; it closed Friday at 1239. That’s an annualized average return of 0.63%. At that rate, it will take you 111 more years to double your money in the stock market.
  • Market’s Swoon Prods Investors To Try Options
    Gyrating markets and eager brokerage firms are driving small investors into complex options trades, which can help hedge against stock-price swings, generate income and boost overall returns. But options can also present huge risks.
  • How Bad Will It Get on Wall Street?
    It has been a year since the global credit markets first seized up, and four months since the dismantling of Bear Stearns.

Questions and Comments

Portfolio Strategy clients: Please log in to join the discussion if you do not see the text box below.