Our most aggressive core strategy, Fund Upgrading is a “momentum” strategy premised on the idea that recent past performance tends to persist. The strategy has you diversify your portfolio across five stock fund “risk categories” and up to four bond fund categories. You then buy the funds SMI objectively determines to have the highest momentum, occasionally replacing lagging funds with those showing stronger momentum. With only monthly maintenance, Fund Upgrading has generated considerably better long-term returns than the overall market. This article explains the changes to put in place for the coming month.
In the Small/Value group, Bogle Small Cap Growth is not being replaced. This fund was slightly below the quartile at the end of July, when small-company stocks were slumping. But, the fund has recovered sharply in August, rising back near the top of the small/value group. As a result, we are continuing to hold it.
In the Large/Growth group, Baron Partners Retail (BPTRX, 11/2013) is being replaced. When Baron Partners was recommended last fall, small-company stocks had been outperforming their large-company brethren all year. The 2013 return for SMI's small/growth group was 42.6%, vs. "only" 30.7% for large/growth. In that environment, Baron Partners looked like an appealing option for the large/growth group. As a mid-cap fund that can fit reasonably well into either group, it's smaller-than-average size meant we were adding a little of that smaller-stock size advantage to our large/growth group.
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