Fourth Quarter Changes 2011

Equities:

Core Funds and ETFs
In response to volatile market conditions, our equity-based portfolios became slightly more defensive in the fourth quarter.  Among the core holdings,  our rankings prompted us to move into Hussman Strategic Growth (HSGFX), a hedged stock fund whose manager is currently bearish.  That move helped lower volatility somewhat during the past three months.  

Also in the core portion of the equity portfolios, we increased exposure to large cap value funds, particularly funds that invest in high dividend-paying stocks, like WisdomTree Large Cap Dividend (DLN) and Vanguard Dividend Growth (VDIGX).  These funds  replaced more growth-oriented funds, such as Fidelity Blue Chip Growth (FBGRX) and Vanguard Growth (VUG).  

Speculative Funds & ETFs
Among the more aggressive components of our equity portfolios, we increased investments in  biotech (IBB), consumer staples (XLP) and utilities (XLU), as well as the NASDAQ 100 (QQQ).  We sold silver (SLV), Rydex S&P Midcap 400 Pure Growth (RFG) and all remaining international funds, including Ivy Asset Strategy (WASYX).  

Fixed Income

We made few changes to our flexible income portfolio during the fourth quarter.  The portfolio has been well diversified among government and corporate debt. One notable change was the sale of all remaining global bond funds (Loomis Sayles Global Bond, LSGBX), and emerging market debt (Payden Emerging Markets, PYEWX), which together had comprised 15% of the portfolio at the end of the third quarter. Non-U.S. sovereign debt has been volatile, given the crisis faced by the euro-zone.  

We also lightened up on our holdings in Loomis Sayles Bond (LSBDX), a strategic bond fund with significant exposure to lower rated corporates. These sales paved the way for higher-quality corporate bonds (Fidelity Total Bond, FTBFX) and an increase in GNMA funds (FGMNX from Fidelity and PIMCO’s PDMIX).  

Tactical

The Tactical Upgrader Fund (TACTX) aims to increase market exposure in declines and decrease exposure in advances. At first glance, TACTX’s large cash position may imply that the fund has only minimal stock market participation. But sometimes, as in these past few months, we will elect to capture market exposure through options instead of through ETF purchases. We believe this helps control downside exposure.  In the fourth quarter, we incrementally increased our exposure to dividend-focused ETFs. We bought iShares Dow Jones Select Dividend (DVY), SPDR S&P Dividend (SDY) and WisdomTree Dividend ex-Financials (DTN). Among speculative funds, we sold MarketVectors Gold Miners (GDX) in favor of SPDR Utilities (XLU).

TOTLX saw a slight increase in exposure to fixed income, up from 24% in the third quarter to 31% as of December 31, 2011.

References to other funds should not be interpreted as an offer of these securities. Fund holdings and sector allocations are subject to change at any time and should not be considered a recommendation to buy or sell any security. Current and future holdings are subject to risk. Diversification does not assure a profit or protect against a loss in a declining market.