2007 Year End Review (III): Performance and Asset Allocation

This is the third part of our Year End Review, in which I have so far gone through financial moves we made in 2007 and how what we have done affected our net worth, which includes both new money and price appreciation of our existing investments. The latter is the subject of this part of the review.

Stocks and ETFs

I bought several stocks last year as mentioned in the first part of this review. Overall, it was a mixed bag when it comes to performance of our stock/ETF investments. Of our 19 holdings, 10 had positive returns while 9 were in the negative territory. Interestingly, all the top gainers were related to China, with E-House Holdings (EJ) leading the way with a gain of 72%, followed by PowerShares China ETF (PGJ) with 68.4%. The last two months of 2007, however, weren’t particularly pretty for Chinese stocks. My favorite, China Life Insurance (LFC) surrendered a big chuck of its gain to end 2007 with more than 50% increase in value.

On the other hand, there were not short of big losers, such as Xinhua Finance Media (XFML), which dropped more than 53% since its IPO and Nortel Networks (NT), a stock that I don’t even want to talk about. I did manage to unload some shares of these two stocks last year when the prices were much higher than where they are right now. Should have sold them all.

We also have two Chinese stocks traded on Hong Kong Stock Exchange, Industrial and Commercial Bank of China (1398.HK) and Alibaba.com (1688.HK), which returned 15.25% and -28.73%, respectively.

Mutual funds

For quite a while, Dodge & Cox International Fund (DODFX) was my top mutual fund performer, getting big returns and doubling our investments faster than other funds. That, however, is not the case in 2007, the year featuring near $100 oil.

The biggest gainer in 2007 among mutual funds we invested in was CGM Focus Fund (CGMFX), which returned nearly 80% over the past twelve months. Another fund, T. R. Price New Era (PRNEX), which also invests heavily in oil related companies, came at second with 40.7%. I am surprised that despite the 31% return of gold, our investments in Tocqueville Gold Fund (TGLDX) only rose a moderate 12.4%. Probably I should have bought gold ETFs to get exactly the same return. That said, the only gold coin I bought in March did appreciate nicely

Among disappointments, our biggest decliner is, not surprisingly, Third Avenue Real Estate (TAREX), which lost more than 8%. Actually, the loss wasn’t that bad compared to another real estate fund in our IRA account. In addition, small-cap funds performed poorly last year after leading large-cap stock funds for years. Two of our small-cap funds, Buffalo Small-cap (BUFSX) and T. R. Price Small-Cap Value (PRSVX) both down slightly for the year. Then, there’s Dodge & Cox Stock Fund (DODGX), which also had a bad year in 2007, gaining a miserable 0.1%

The asset allocation of our mutual fund investments is shown in the following chart. As of December 31, 2007, we have 67% in large-cap, 17% in mid-cap, and 17% in small-cap. This allocation is skewed a little because I didn’t take any ETF into consideration. Last year when I bought Vanguard Small-Cap ETF (VBR), the goal was to boost the small-cap part of our taxable investments.

IRA accounts

Unlike funds in our taxable accounts which are all actively managed, we took the index approach in our IRA accounts, with 3 out of 9 funds being Vanguard index funds. Again, other than small-cap and real estate funds, the performance of our IRA accounts in 2007 was fine.

Another difference is that we have no specific bond fund in our taxable account, but bonds are a rather significant portion in our IRA accounts. At the end of last year, more than 22% of our IRA assets are in bonds. The high bond allocation mainly came from three components: Vanguard Inflation Protected Securities (VIPSX), Interm-Term Bond (VBIIX), and D&C Balanced Fund (DODBX). For the equity part, we had 62% in large-cap, 19% in mid-cap, and 19% in small-cap.

Though the bond funds have performed quite well in 2007, I am thinking of rebalancing the portfolio to increase the exposure to international stocks, which is currently at only 13%. I would like that it goes up to about 20% and that will be done by shifting money from bond funds to International Stock (VGTSX)