November 2008 Investment Portfolio Review

November was a good month for our members. Unfortunately for other investors, many managers repeated their October 2008 performance.

Portfolio Performance
Our model portfolios again outperformed the S&P 500 Index AND competitors with similar mandates.

CLICK IMAGE TO VIEW PERFORMANCE

NOTE: InVivo Strategic Satellite portfolio went to cash on September 25, 2008. Fully invested returns would have been +3.81% for November, -16.27% for October and -4.98% for September for a year-to-date return of -19.35% and a 12-month return of -19.13 as of 11/30/2008. Aggressive investors went back into the market on November 24, 2008. ALL core portfolios (U.S. Dollar, Canadian Dollar, and Thrift Savings Plan) were considered to be fully invested throughout. Fund data courtesy of WSJ.com.

Observations and Comments
I attended an investment conference on December 1 in Vienna, Austria. Almost without exception, fund managers were concerned with their own survival and that of their institutions. No doubt, this has been a tough year for the investment industry, but I must say that I truly empathize with clients who took a beating. After all, they were at the mercy of many top-flight managers:

• Third of Hedge Funds Face ‘Wipe Out’ After Slump
  Prime brokers, the banks that provide loans and handle fund administration, are cutting off firms they don’t expect to be profitable clients, Godden added. Hedge funds will need to manage at least $300 million in assets, up from $100 million a year ago to stay in business, Sullivan said. Funds of hedge funds, in particular, are likely to combine, Godden added. There are roughly three funds-of-funds for every single hedge fund, up from one to seven in 2001, according HFR.
• Steve Galbraith: Hedge Fund Performance 2008 [VIDEO]
• Wasik Says Pension Funds May Be Over-Invested in Stocks [PODCAST]
• Citadel Halts Withdrawals From Two Hedge Funds After 50% Drop
• Jones Concedes Errors With Bacon, Griffin in Shakeout
• The Stock Picker’s Defeat
• Deutsche Bank Woes Said to Persist on Credit Bets
• Commerzbank to Shut M&A Business, Cut Jobs in London
• UBS Freezes $6bn Property Fund
• Fortress, the Hedge Fund, Is Crumbling
• A Money-Fund Manager’s Fateful Shift
• Harvard Endowment Loses 22%

Barclays Capital summed it up nicely by saying, “We expect a substantial reduction in the size of the hedge fund industry, in the order of 70% to 80%. We believe only those funds with models that operate on near zero leverage will be those left standing.” The survivors seem to be headed back to the old global macro, forecast and pray approach. For more, check out the Reuters Investment Outlook 2009.

Invest Like a Commando
As discussed in our Trade Like A Commando podcast, while it might be intellectually stimulating to conjure up and debate a world view, it is may be foolhardy to invest based on an economic outlook in an uncertain world.

Let me give you an example. On August 4, I wrote about The Bottom, Cramer and Bonds and toyed with the idea of an unexpected plot twist few expected: commodities down, stocks down, bonds up. I reiterated the macro view in the July 2008 Portfolio Review published August 17. The scenario came to pass and even though most investors and managers are worried about the resurgence of inflation, the fact is that Treasury bonds went up a lot to the dismay of those who would rather pile into corporates, the same ones who refuse to buy commercial paper:

• European company bond sales outdo US
  European non-financial companies have sold almost $57.5bn of bonds in the last two months of the year, according to Dealogic, outstripping most previous totals for this time of year and ahead of the $41.4bn in the US. Asian issuance has also been healthy at $23.7bn. . . . Liquidity in secondary markets remains extremely limited with yields stuck at highly elevated levels. But bankers say appetite for new deals has picked up and that corporate credit looks more attractive than equity markets. . . . However, issuers had to pay to get their deals away, with US AA-rated yields averaging 290 basis points above interbank lending rates, according to S&P LCD.
• Treasuries Set for Best Month Since 1981 Amid ‘Time of Trial’
  Treasuries returned 5.07 percent this month, Merrill Lynch & Co. indexes showed. It was the most since October 1981, when former Fed Chairman Paul Volcker was battling to tame inflation that was running at more than 10 percent. Obama this week appointed Volcker, 81, to head a new White House economic board that will propose ways to revive growth. German bonds handed investors 3.8 percent this month and Japanese government securities 0.4 percent.
• Beware of Long-Term Sovereign Bonds [WATCH VIDEO]
  Beware of long-term sovereign bonds, advises Martin Hennecke, senior manager at Tyche, after he noticed many European countries withdrawing their bond options. He explains his investment rationale to CNBC’s Lisa Oake.
• Corporate Bond Market [WATCH VIDEO]
  The Fast Money traders discuss opportunities in the corporate bond market.
• Company Bonds Give Investors Best Returns Since 2003
  Corporate bonds in the U.S. and Europe gave investors the biggest returns since 2003 in November, as yields widened to a record relative to government debt.
• Monster Lurking in the Bond Market [WATCH VIDEO]
  “The monster is still coming closer and I’ve just about run out of ways of protecting myself,” Nicole Elliott from Mizuho Corporate Bank told CNBC while taking a technical look at US and Japanese bonds.
• Investing In Bonds [VIDEO]
  Discussing whether bonds deserve another look, with Kevin Ferry, Cronus Futures Management; Jeff Auxier, Auxier Asset Management; and CNBC’s Melissa Lee.

The question is this: it’s all good and well that I came up with the correct macro outlook, but what was I supposed to do with it? Bet the farm? No way!

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

As usual, we stick to our “diversify against the collective ignorance” philosophy that has served us so well. Steady as she goes…