Error message

Deprecated function: mysql_connect(): The mysql extension is deprecated and will be removed in the future: use mysqli or PDO instead in include() (line 40 of /var/www/upgraderfunds/htdocs/sites/default/

Fourth Quarter 2012

  Equities Flexible Income Tactical
What Worked Foreign markets began to outperform domestic in the fourth quarter, and we added foreign exposure as international leadership persisted during the quarter; our equity funds are now roughly 50% invested in foreign funds and ETFs. Sector leadership was consistent in 2012 and most of our growth portfolios continued to hold leading biotech and homebuilding funds and ETFs. Bonds continued to be strong in the fourth quarter. INCMX’s diverse exposure to different areas of the bond market worked well, and the Fund has continued to outpace its benchmark. Treasuries were weak and we replaced our 5% allocation in short-term Treasuries with strategic bond funds and a dollar-hedged foreign bond fund.
The fourth quarter brought a sharp correction that suddenly reversed course, but we managed risk in the Tactical funds in a manner that allowed us to retail substantial upside potential. Damage from the sell-off was contained by moving to cash, and we were able to recover much of the loss by year-end thanks to call options and gradually reinvesting in ETFs.
What Hurt Initially our equity portfolios were primarily invested domestically, so we didn’t immediately participate in the foreign surge. Our portfolios were focused in previously strong areas of the market like dividends and large-caps. These less volatile funds lagged in the fourth quarter and were gradually replaced with new leading foreign and small-cap funds and ETFs. More aggressive areas of the bond market like high yields and emerging market bonds continued to outperform less volatile short-term bonds. INCMX’s small position in short-term bonds didn’t do as well as the Fund’s high yield and foreign bond positions in the fourth quarter. If bond markets change, short-term bonds could buffer volatility. As we entered the quarter we were defensively positioned, missing the market’s initial up-leg, and were too quick to reinvest as the market
dropped in November. We participated in the market’s up-move in the last six weeks of the year, but it was not enough to compensate for
November’s backslide.
What Now After years of narrow market leadership focused on U.S. large-cap growth stocks, we welcome the broader leadership offered by foreign and small-cap value funds. If new leadership persists, we will continue to increase our exposure to foreign markets and small-caps. If new leadership proves short-lived, we continue to hold roughly 50% in domestic funds and ETFs. Low interest rates and yields may not last indefinitely. We believe we are prepared for (and would be encouraged to see) the bond market to shift from an environment of fear and low yields to one of renewed growth and potentially rising interest rates.  We believe that our flexible strategy has the potential to capitalize on a rising-rate trend. We are optimistic about the market and have, as in our equity portfolios, incrementally increased foreign ETF exposure based on our rankings. We have used options to generate income and to provide upside participation. Options also allow us to limit risk and hedge the portfolio in case our optimism proves false.


Publication Date: