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January 05, 2008

Fundamental Portfolio Gives Itself A Makeover
by Bill Rempel

Fundamental is a moderately low-beta, moderately low-turnover trading plan for stocks traded on major U.S. exchanges. It focuses on providing above-market returns over the longer term while keeping a variability of returns that is similar to the market's risk profile.

Information is as of the close on January 4, 2008.

Model Allocation

Based on beginning with a $100,000 portfolio at inception, these are the current weights and holdings. The initial target was a buy of 5% weights per position. See my previous post on this system. Sort is alpha order by ticker and weights are rounded to the tenth of a percent.

Affiliated Mgrs Grp (AMG) - 4.4%
Amphenol Cp (APH) - 5.2%
Cpfl Energia Sa Ads (CPL) - 4.4%
Diamond Offshore Drl (DO) - 6.0%
Greenhill & Co. (GHL) - 4.4%
Garmin Ltd. (GRMN) - 5.1%
Gymboree Corporation (GYMB) - 3.8%
Infosys Technologies Limited (INFY) - 5.0%
Jones Lang LaSalle (JLL) - 4.0%
Kinetic Concepts Inc (KCI) - 4.4%
Mobile Telsys Ojsc (MBT) - 5.1%
Mcdermott Int Panama (MDR) - 5.2%
Microsoft Corporation (MSFT) - 5.1%
Mechel Oao Ads (MTL) - 5.7%
Nvidia Corporation (NVDA) - 4.5%
Partner Communications Co. Ltd. (PTNR) - 5.5%
TransOcean Inc (RIG) - 5.6%
Sap Aktiengesell Ads (SAP) - 4.8%
SEI Investments Company (SEIC) - 4.9%
Schlumberger Ltd (SLB) - 5.1%
Cash - 2.1%

Returns

Based on beginning with a $100,000 portfolio at inception.

Equity: $100,018.84
Gain, Past 4 Weeks: -6.55%
Gain, Year to Date: -5.27%
Gain, Since Inception: +0.02%

The following stocks in the Fundamental portfolio went ex-dividend in the past four weeks. I include the number of shares that would have been bought, if the plan were executed with a starting capital of $100,000, in order to calculate the return from dividends.

APH - $0.015 per share @ 121 shares held = $1.81
SEIC - $0.07 per share @ 166 shares held = $11.62

Total dividends = $13.43 on the tracking portfolio. This amount has already been added to the returns shown above. Dividends paid will remain in cash until needed for a new purchase, which, incidentally, won't be long. Note, commissions are expensed at $10.00 per trade when accounting for returns.

Changes To Model Allocation

Fundamental screens for stocks that meet basic criteria, then ranks them by ROE to hold the top 20. As a result of this regular four-week evaluation, the portfolio is giving itself quite a makeover this month, with five positions being exited, and five replacements being added.

Remove the following five stocks from the list:

Affiliated Mgrs Grp (AMG) - 4.4%
Gymboree Corporation (GYMB) - 3.8%
Jones Lang LaSalle (JLL) - 4.0%
Mechel Oao Ads (MTL) - 5.7%
Nvidia Corporation (NVDA) - 4.5%

Including the cash percentage of 2.1%, this allows approximately 24.5% of the portfolio to be allocated equally to the five new purchases, with a target of 4.9% of equity.

Add the following five stocks to the list:

Accenture Ltd. (ACN) - 4.9%
Giant Interactive Ads (GA) - 4.9%
Lan Airlines Sa Ads (LFL) - 4.9%
Perini Cp (PCR) - 4.9%
United Therapeutics Corp (UTHR) - 4.9%

If this system were to be initiated today, the target allocation would be a buy for 5% weight holdings of the twenty stocks listed in Model Allocation, with the five substitutions listed above.

Tracking

Shares of AMG, GYMB, JLL, MTL, and NVDA will be sold, market at open on Monday. Based on portfolio total value and closing prices on January 4, 2008, enough shares of ACN, GA, LFL, PCR, and UTHR to comprise a 4.9% allocation to the portfolio will be bought, market at open on Monday. Since the portfolio has little room for full allocations, I will round down any fractional shares in the share calculation for buys.

Bill Rempel
The Rempel Report

Disclaimer: Nothing at The Rempel Report, or any communication from The Rempel Report or its author, should be construed as personal advice, on investing or anything else, and at all times you are responsible for your own actions and you should perform your own due diligence. I'm not an investment professional, and you should probably consult with one, in addition to doing your own due diligence, before making any investment decisions.

I may have a beneficial position in any potential investment I mention. My positions in, and opinions of, those potential investments may change over time. I have no obligation to reveal those positions, and if I should reveal those positions, I am under no obligation to notify you, though this site or through any other means, if I change those positions.

While I do try to verify much of the data presented, I can make mistakes. I rely on third party vendors for data, and sometimes that data could be incorrect. Therefore, I cannot and will not be held liable for incorrect or erroneous data presented in text, table, chart, or other format. This is one more reason why you should consult with an investment professional, in addition to doing your own due diligence, before making any investment decisions.

Modeling is prone to error, and no statistical model is perfect. The output from statistical or predictive modeling should be viewed with skepticism.

Fundamental analysis is based on examinations of company filings such as income and cash flow statements, balance sheets, quarterly and annual filings, proxies, and other such items. Even though a company appears fundamentally sound today, that doesn't imply they actually are, or will remain, fundamentally sound. Fundamentals can change over time, and there is always the possibility that the company filed information that was either fraudulent or incorrect. I might make an oversight or error when examining company filings. In many cases, I will rely on a third party's presentation of filing data, such as a stock screening program's output, without actually reviewing the filings personally.

Technical analysis is based on the study of historical price, volume, and sentiment data over time. Past performance is no guarantee, and there are no certainties hidden in patterns, charts, indicators, or formulae.

FundaTechnical analysis involves those items which mix elements of Fundamental and Technical analysis, including valuation metrics such as the Price/Book or Price/Earnings ratios. Therefore all the warnings for both Fundamental and Technical analysis apply.

Take responsibility for your own actions. You should consult with an investment professional, in addition to doing your own due diligence, before making any investment decisions.

Copyright © 2005-2008 Bill Rempel

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