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March 29, 2008

Fundamental Portfolio Struggling YTD
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 March 28, 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.

Amphenol Cp (APH) - 5.0%
Best Buy Co Inc (BBY) - 4.8%
Cf Ind Hldgs Inc (CF) - 4.5%
Coach Inc (COH) - 4.9%
Cpfl Energia Sa Ads (CPL) - 5.5%
Fmc Technologies Inc (FTI) - 5.1%
Gymboree Corporation (GYMB) - 5.1%
Infosys Technologies (INFY) - 4.9%
Kinetic Concepts Inc (KCI) - 4.4%
Mcdermott Int Panama (MDR) - 5.6%
Microsoft Corp (MSFT) - 4.7%
Noble Corp (NE) - 5.0%
Nvidia Corporation (NVDA) - 4.7%
Perini Cp (PCR) - 4.9%
Partner Communications (PTNR) - 6.5%
Companhia Sider Ads (SID) - 5.3%
Schlumberger Ltd (SLB) - 5.0%
Strayer Education, Inc. (STRA) - 4.9%
Terra Inds Inc (TRA) - 4.2%
Vimpel Commun (VIP) - 4.3%

Cash - 0.5%

Returns

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

Equity: $88,415.98
Gain, Past 4 Weeks: -4.54%
Gain, Year to Date: -16.26%
Gain, Since Inception: -11.58%

Drawdown is the reduction in equity from peak to trough, when a system or strategy is losing money.

In backtesting, the Fundamental portfolio experienced a maximum drawdown of 14.6% over the ten-year test period. In backtest, the system equity was evaluated once every four weeks, so it is possible that the system experienced a slightly higher mid-month drawdown.

Currently the Fundamental portfolio has a drawdown of 17.4%, evaluated at four-week intervals. If I were to evaluate the drawdown at one-week intervals, it would have reached 18.0% on the week ending March 21, 2008.

Clearly the poor performance of the Fundamental portfolio in the last few months is very similar to the poorest performance of the system in backtest, which would have occurred in February 2003. Given the recent and extreme negative price action in the overall stock market, I still believe it is too early to conclude that the system action is a significant deviation from expected, based on backtesting.

The following stock in the Fundamental portfolio went ex-dividend in the past four weeks: APH.

Total dividends = $1.81 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. 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, such as earnings and revenue growth, earnings quality, and debt-to-capital rations, then ranks them by ROE to hold the top 20. As a result of this regular four-week evaluation, the portfolio is making the following changes.

Remove the following six stocks from the list:

Best Buy Co Inc (BBY) - 4.8%
Cpfl Energia Sa Ads (CPL) - 5.5%
Gymboree Corporation (GYMB) - 5.1%
Perini Cp (PCR) - 4.9%
Companhia Sider Ads (SID) - 5.3%
Vimpel Commun (VIP) - 4.3%

Including the cash percentage of 0.5%, this allows approximately 30.4% of the portfolio to be allocated equally to the six new purchases, with a target of 5.0% of equity.

Add the following six stocks to the list:

America Movil, S.A.B (AMX)
Greenhill & Co (GHL)
Syntel, Inc. (SYNT)
Terra Nitr Co Com Ut (TNH)
Western Digital Cp (WDC)
Waddell&Reed Fin Inc (WDR)

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 six substitutions listed above.

Tracking

Shares of the six stocks listed above will be sold, market at open on Monday. Based on portfolio total value and closing prices on March 28, 2008, enough shares of the six replacements to comprise a 5.0% each allocation to the portfolio will be bought, market at open on Monday. Since the portfolio has tight 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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