Fundamental Portfolio Struggling YTD

By: | Sat, Mar 29, 2008
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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%


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.


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.



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