2011 Year in Review

We looked back at how our equity, fixed income and tactical portfolios fared in 2011 and below, we consolidated our observations into three categories: what worked, what hurt and what now?

  Equities Flexible Income Tactical
What Worked Our Upgrading strategy prompted us to sell out of emerging markets and foreign funds. We also gradually sold mid-caps that had been leading in favor of large-cap U.S. growth and dividend focused funds. We also sold energy and small-cap funds in favor of utilities, consumer staples and technology. The flexibility to shift our portfolios to domestic funds made the biggest difference.
 		 For two-thirds of the year, high-yield and emerging market bond funds produced strong results. A powerful reversal in the third quarter spurred a flight to quality and led us to shift out of more aggressive funds in favor of higher quality intermediate-term and short-term bond funds. These higher quality funds helped us avoid what could have been painful losses. The flexibility to allow for a variety of short-term outcomes and our strategy, which adds market exposure into declines and reduces exposure into advances, worked well through the roller-coaster ride of 2011. Our ability to buy and sell options also helped the Tactical Upgrader Fund (TACTX) outpace both its Morningstar Long/Short peer group and its benchmark in 2011.
What Hurt As the year progressed, the leading funds we held – foreign funds, mid-cap funds, and energy funds – began to lag and – as happens in periods of transition – they dragged down our equity performance. The sudden reversal late in the year fully eroded our relative outperformance versus the benchmark and, despite our active strategy, our Flexible Income portfolios lagged in 2011. We managed to keep volatility in check for most of 2011 and TACTX produced a respectable return. That said, 2011 was rarely smooth sailing and we faced several whip-saws.
What Now We close 2011 holding domestic, diversified portfolios of dividend-focused funds, growth funds and defensive sector funds. We have modest exposure to more conservative high-yield bond funds, more meaningful exposure to intermediate-term funds, and an allocation to short-term bond funds. We seek to benefit from higher quality funds including Treasuries without fully settling for their paltry yields. We hold positions that we believe stand to benefit if the market advances and others that have the potential to benefit if the market declines. We are cautiously optimistic based on valuations, sentiment, monetary conditions and recent market action.

 

Performance data quoted represents past performance; past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance of the fund may be lower or higher than the performance quoted. Performance data quoted is current to the most recent month end. Returns shown are cumulative, unless otherwise noted. Performance data shown does not reflect the 2.00% redemption fee imposed on shares held within 30 days. If it did, total returns would be reduced.

The Morningstar Long/short category returned -3.21% for the year ending December 31, 2011. Each Morningstar category average represents a universe of funds with similar investment objectives. Click here for standardized performance.

  •  Investments in foreign securities involve greater volatility and political, economic and currency risks and differences in accounting methods.
  • Investments in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities.
  • Investments in options have the risks of unlimited losses of the underlying holdings due to unanticipated market movements and failure to correctly predict the direction of securities prices, interest rates and currency exchange rates. The investment in options is not suitable for all investors.
Publication Date: 
Upgrader Quarterly: Winter 2012