As we explained in SMI's January cover article, Fund Upgrading Gets Upgraded: Adapting to an Ever-Changing Market Landscape, this flagship strategy got a bit of an overhaul going into 2021. Naturally we're all watching it closely to see how these changes are performing.
While we only have a month (plus two days) to evaluate the new process, the early signs are encouraging. The newsletter version of Stock Upgrading earned +2.78% in January, while The SMI Fund (SMIFX) earned +2.73%, close enough to reasonably use the fund as a proxy for Upgrading's early-2021 experience. That's helpful because it allows us to easily peer into February to see what the significant market rally of the past two days has added to Upgrading's return picture.
(SMIFX is the ticker symbol for the original Sound Mind Investing Fund. Launched in 2005, this fund follows a similar — but not exactly identical — approach to Stock Upgrading. The SMI Funds, advised by SMI Advisory Services, are a separate business from the SMI newsletter. See disclosures at the bottom of this post.)
We can turn to Morningstar.com to see the year-to-date data that includes the first two rally days of February. (This helpful link will take you to the SMIFX performance page there; this page is worth bookmarking because you can easily change the ticker symbol at the end of the URL from SMIFX to any other fund ticker to easily access return data on any other fund. For example, this link can easily be changed to SMILX to perform the same analysis for the SMI 50/40/10 Fund. Note that these returns are updated every day, so the returns shown below will change as soon as today's new data is added.)
It's an impressive picture:
The first row shows the SMIFX data across the various time intervals, while the second row shows the return of the benchmark Wilshire 5000 index and the third row shows the return of SMIFX's fund peer group (which is the "Allocation – 85%+ Equity" category).
The two columns to the far right are the two we're most interested in. These show that year-to-date through last night (Tuesday, 2/2), Stock Upgrading was beating the Wilshire 5000 by a margin of +7.19% to +2.84%. It's only a month and two days, but so far so good!
The 1-year column at the far right is interesting for a totally different reason. That column shows the return comparison going back exactly one year, from February 3, 2020, through last night's close. The market didn't peak until February 19, roughly two weeks later, but this is pretty close to showing how Stock Upgrading has performed since the market peaked a year ago.
A bit of background for the benefit of any newer members or visitors reading this: Stock Upgrading has defensive protocols built into it that are designed to trigger only at times of significant deep bear-market risk. Last year, those protocols triggered, which resulted in us shifting part of our Upgrading portfolio to cash. Unfortunately, because the 2020 bear market was the fastest in history, that shift didn't happen until after the worst was over. As a result, Stock Upgrading was partially in cash while the market roared back, which was a drag on its returns from April-July.
So it's interesting to see that one year out, the fact that we were "overly cautious" in protecting against further downside isn't even detectable in Upgrading's returns. SMIFX is up +29.57% over the past year, while the Wilshire 5000 index (which obviously offered no downside protection had the bear market turned out differently) is up +24.24%. The average fund in SMIFX's peer group is up even less at +19.17%.
The takeaway? Stock Upgrading offered significant downside protection at the point of maximum risk last Spring but still was able to pivot sharply enough to post market-beating returns over the full year from the market top.
Again, it's still way too early to draw any sweeping conclusions about the new changes to Upgrading. But the early returns are encouraging.
You should carefully consider the investment objectives, potential risks, management fees, and charges and expenses of the Funds before investing. The prospectus contains this and other information about the Funds, and should be read carefully before investing. You may obtain a current copy of the Funds' prospectus by calling 877-SMI-FUND or visit smifund.com.
The SMI Funds are distributed by Ultimus Fund Distributors, LLC (member FINRA). Investing involves risk, including loss of principal. There is no guarantee that the funds will meet their investment objectives.
Per the prospectus dated 2/28/20, the gross expense ratio (which includes the expenses of the underlying funds) of the SMI Fund (SMIFX) is 1.94%, and the adjusted expense ratio (which excludes the expenses of the underlying funds) is 1.18%.