Model Portfolio 2007: YTD Update

Now that Q3 is over, as promised, here is readout on how the model portfolio (on paper) I constructed and published at start of 2007 year is doing.

Investment	Quantity	1/5/2007		9/30/2007
		Rate	Amount	Rate	Amount	%Gain
UUPIX	156	32.09	$5,006	57.85	$9,025	80.3%
FXI	47	105.94	$4,979	180	$8,460	69.9%
FSESX	80	62.69	$5,015	100.67	$8,054	60.6%
TABRX	397	12.61	$5,006	17.73	$7,039	40.6%
VEIEX	211	23.68	$4,996	32.75	$6,910	38.3%
VGTSX	573	17.46	$10,004	20.67	$11,844	18.4%
CSCO	527	28.48	$15,010	33.13	$17,460	16.3%
VDMIX	803	12.46	$10,005	14.28	$11,467	14.6%
VFINX	77	129.87	$10,000	140.61	$10,827	8.3%
VSTCX	492	20.31	$9,992	21.28	$10,470	4.8%
$$CASH	1	5000.00	$5,000	5000	$5,000	0.0%
VWEHX	804	6.22	$5,000	6.07	$4,880	-2.4%
YHOO	180	27.76	$4,996	26.84	$4,831	-3.3%
VGSIX	198	25.21	$4,991	23.86	$4,724	-5.3%
Total ($):			$100,000		$120,990	21.0%

I am extremely happy how my recommendations turned out with overll portfolio return of 21% over 9 months. In comparison major indexes are doing as follows:

Nasdaq: 11.8%
DOW: 11.5%
S&P 500: 7.6%

So my model portfolio is well on track to beat S&P by more than 3% points. Even during summer market turmoil in Aug, it was doing very well with about 2% above S&P. Here is recap of some of the best performers of this portfolio:

The portfolio got biggest boost from recommendations related to emerging markets like UUPIX, FXI, VEIEX and TABRX. It also got boot from timely recommendation in Fidelity Select Oil and Services (FSESX).

The worst performers (relatively speaking since they are also down only a bit) are no surprise - Yahoo and Vanguard real estate (VGSIX).

I am still bullish on overall composition of the portfolio and if markets trajectory remain upwards, it can touch returns of over 25% for 2007. Not bad for first year record

Next update on model portfolio would be in Jan 2008 with recap from 2007 and new model portfolio for 2008

/Shyam

Commentary on Markets

Finally long-awaited interest rate cut is here and that also came with big bang. For many folks and even for stock market which tracks every word of Ben Bernanke, this looked like surprise. IMO, this was very much expected move and one of the reasons I wrote my previous article "is it time to buy", it was clear that mid-Aug provided ideal opportunity to make some bets. Here is report-card on how my recommendations did over 5 weeks - pretty good record considering one returning over 50% and only one in negative (which is housing stock and looks like we have yet to find the bottom of housing market)

Symbol	Price on Aug 17	Price on Sept 21	% Gain
UUPIX	33.56	52.57	56.6%
FXI	119	168.48	41.6%
IBN	38	50	31.6%
APPL	117	144.15	23.2%
AA	32	37.4	16.9%
LLNW	7.56	8.47	12.0%
VGTSX	18.02	20.16	11.9%
BX	23	25.32	10.1%
FISMX	25.58	27.98	9.4%
FLVCX	30.96	33.57	8.4%
WCI	7.76	6.96	-10.3%

When I was watching CNBC, my 9-yr old son Yash asked me question about who is Ben Bernanke and why they keep on talking about him. I explained to him that after President Bush, Ben Bernanke is the most powerful person in the world and how his talk can move markets around the world. I was telling him that uncle Ben is going to give a gift on Tuesday Sept 18 (and I ended up explaining him how:-)

So now that rate cut is behind us and markets around the world has responsded enthusiastically, what's next ? Is it still time to buy or sell ?

Here are my predications:

1. US markets would close at least another 5% higher by year end putting DOW above 14000 and S&P closer to 1600
2. Emerging markets would continue to head higher with BSE Sensex closing above 17000 and Shanghai Index closing above 5600
3. There would be few more causalities due to subprime and housing markets but by year end, housing market would start showing some trend reversal with housing stocks rebounding by at least 10-15 % from today's levels
4. Technology and Internet stocks are going to have a great year-end finish
5. And most importantly, Fed interest rate remaining at 4.75% for rest of year

So with these macro-economic predictions, it is upto individuals if they still want to take fresh positions.

Now coming to India stock recommendations:

Reliance companies keep on marching higher and higher. Every company with Reliance name and Ambani connection is going higher. I won't be surprised if Ambani brothers become world's richest men in 10 years. For now, here are two recommendations from Reliance group:

1. Reliance Petroleum: This is building biggest refinery in the world and did IPO at Rs 60 about 10 months back. Today it is at Rs 154. Since there is so much under-investment in refinary around the world, this company has great potential. It is supposed to be going online in 2009 and I won't be surprised if it hits Rs 250 in 18 months (for 64% return)
   
2. Reliance Natural Gas: This is little-bit speculative play which have tripled from Rs 24 to Rs 76 in last 6 months (with 35% coming in on Friday Sept 21). However due to its Reliance and Natural Gas connection, it would easily cross Rs 100 in 12 months (for 31% return)

On US my recommendations are same as Model Portfolio I published at start of year in previous arcticles. I will be providing YTD returns next week when Q3 ends. Despite ups and downs of summer, I promise that it would be a positive surprise.

Reading wise, I am waiting for my Amazon delivery of Greenspan book - Age of Turbulence

/Shyam

Hidden Gems of Emerging Markets Investing

I am a student of macroeconomics and like to read about various macro-economic factors such as inflation, interest rate, labor productivity, education and how it impacts long-term prospects of a country. Based on such analysis, I like to come up with investing strategy and find out mutual funds, stocks or ETF and recommend them and invest personal money to test out these strategies (put your money where your mouth is:-)

Based on prominence of BRIC (Brazil, Russia, India and China) countries, I have been looking for ways to go beyond BRIC countries and look at other emerging countries. Countries in Laton America, Asia and Eastern Europe have been growing as fast or faster than BRIC countries and provide excellent investing opportunities.

Check out following article - top 3 countries are non-BRIC countries in emerging markets with Peru topping with 168% returns

Top 10 places to invest

However investing in one country or index poses significant risks due to political, social factors which are beyond individual investor's control.

So it is best to invest in a mutual fund focussed on large number of emerging markets. In my search for such mutual fund, I came across following two funds.

ULTRAEMERGING MARKETS PROFUND (UUPIX):
The investment seeks daily investment results that correspond to twice the daily performance of the Bank of New York Emerging Markets 50 ADR index. This fund invests at least 80% of assets to equity securities contained in the index and/or financial instruments that have similar economic characteristics as the index. This fund has YTD of over 32%. However this fund is only for investors who can tolerate swings of 10% in a DAY. But as long as your believe in macroeconomic factors of emerging countries, it provides excellent way to profit from it. I typically have a investing strategy of 35-50 for this fund means buy when it goes below $35 and sell when it goes above $50.

Vanguard Emerging Mkts Stock Idx (VEIEX):

The investment seeks to track the performance of the MSCI Emerging Markets index. The fund employs a passively managed investment approach by investing all or substantially all of its assets in a representative sample of the common stocks included in the MSCI Emerging Markets index. This index includes approximately 840 common stocks of companies located in emerging markets around the world.

This is fund for long-haul and provides an excellent way to get exposure to emerging markets at very low cost. It has YTD returns of over 22%. My recommendation is to invest in this fund with automatic investment plan which Vanguard provides.

With these two funds, even though you will not get returns of one country which may be above 100% in one year and down by 50% next year, they provide excellent diversification with lower risks and costs. It also saves you from tracking what's happening in political landscape of Pakistan or what new trick Venezuela's president Hugo Chavez is going to play

Happy (and safe) investing in emerging markets !

/Shyam

(Disclaimer: I am personally invested in both funds)

Scorecard of 11 Recommendations

In last post titled "Is it Time to Buy", I recommended 11 stocks. My post was so timely as markets have returned to normaly with discount rate cut of 50 basis points and Fed and Bush Government all assuring that they are not going to let market turmoil impact economy. Q2 GDP also came in very strong at 4%. Let's see how my recommendations did in last 2 weeks:

Recommendation	Symbol	Price on Aug 17	Price on Aug 31	2-week Gain	Target Price
Profunds Ultraemerging funds	UUPIX	33.56	45.41	35%	50
Ishares Trust FTSE/Xinhua China 25 Index	FXI	119	150.31	26%	150
WCI communities	WCI	7.76	9.32	20%	12
Apple	AAPL	117	138.48	18%	150
ICICI Bank ADS	IBN	38	44.45	17%	47
Alcoa	AA	32	36.53	14%	40
Limelight Networks	LLNW	7.56	8.25	9%	14
Fidelity International small cap	FISMX	25.58	27.68	8%	28
Vanguard Total International	VGTSX	18.02	19.43	8%	20
Fidelity Leveraged company	FLVCX	30.96	33.19	7%	35
Blackstone	BX	23	23.13	1%	28

As you can see from above table, all recommendations did pretty good with best returns by Profunds Ultraemerging Funds (UUPIX) returning 50% in 2 weeks with China based EFT FXI close second with 26% returns. Worst returns were by Blackstone just returning 1% in 2 weeks (still not bad if you annualized it:-)

So now question is: Is it still time to buy or is it too late ?

With clam returning to markets, global economy still firing on all cylinders and given fed interest rate cut, I think it is still not too late to invest in stocks and mutual funds. S&P is trading at its lowest forward PE in many years and as long as global economies (especially Europe and Asia) are doing great, I recommend putting additional money to work. Even at current prices, I stand by my earlier recommendations since at target prices I have for-casted, there is still some room to extract returns from these.

India Recommendations:

Along with global markets, India markets have also gone thru a roller-coaster ride and slowly coming to normlcy. My current picks in Indian stock markets are:

1. Hindalco (Rs 142) - strong aluminum player and its just matter of time when its valuations catches with world aluminium players. Target price if 200 in 18 months (returns of 41%)
   
2. Mindtree (Rs 560) - This was one of the high-flying IPO in Indian tech industry. It went all the way to 1000 and came back to below 600 due to rising rupee. It has potential to go above 900 in 18 months (returns of over 50%)

/Shyam