MarketGrader Indexes 2009 Report Card

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After a bruising 2008 the MarketGrader Indexes returned to form in 2009, posting all-around strong results relative to their benchmarks and to actively managed fund averages. To those of you not familiar with our indexes here’s a brief history:

MarketGrader published its original index, the MarketGrader 40, in 2003 concurrently with our new research web site, the first MarketGrader.com. The index was launched as a model portfolio in order to show the site’s visitors and potential subscribers how effective MarketGrader’s research could be when applied to their investment process in the context of a well diversified, disciplined stock portfolio. We therefore designed a series of index rules to ensure the index maintained such discipline and structure. First, we weighted all components equally and based their selection on their overall MarketGrader grade, essentially making it a “merit-based” index. Second, we ensured no more than 30% of the stocks in it belonged to the same sector and no more than 15% to the same sub-industry. Third, we also applied market cap filter rules to make sure no more than ten stocks (25%) were small caps and that at least ten were large caps. Finally, and perhaps most importantly, we planned a rebalance schedule that requires that the portfolio be reconstituted once a quarter on the back end of every earnings season. This, which inevitably leads to a relatively significant component turnover, was not done in order to make it a “trading” index designed to chase hot stocks or market trends but to apply the sort of discipline many investors lack. By reconstituting the index quarterly we developed a mechanism by which investors could take gains off the table after any given stock had had a nice run (even if the index re-selected the stock it would cut it back to an equal weight to match all other selections,) drop losing positions unemotionally and to ensure the index always had the best underlying fundamental quality possible.

MG 40 ended 2003 with a 76.9% return for the year compared to 26.4% for the S&P 500 index and 50.0% for the Nasdaq Composite (all price-only returns.) The index would then go on to be licensed in Europe and the U.S. as the basis for several investment products. This will be discussed in more detail in future columns. In the ensuing years, between 2003 and 2007 MarketGrader built the rest of its index family using the same basic methodology as MG 40. Today we publish 14 indexes that include three Core, three Market Cap and eight Sector indexes.

In September 2007 Barron’s launched the Barron’s 400 Index, which is based on MarketGrader’s research methodology and shares the same attributes as MG 40 and our other Core indexes. MarketGrader, Dow Jones Indexes and Barron’s jointly built the Barron’s 400 Index. You may expect to see regular write-ups about our indexes in the future in this column.

Back to 2009’s index results it is worth mentioning that for the full year the MarketGrader 100 index was the top performer among our Core indexes, up 41.0% for the year, beating the S&P 500 Index’s 23.5% by almost 18 percentage points. Perhaps more impressive was the Barron’s 400 full year return of 39.1%, remarkable for an index four times the size of MG 100. When looking at the last five years, on an annualized basis, MG 100 has returned (price-only) 2.53%, the Barron’s 400 1.70% and the S&P 500 -1.65%. The average five-year annualized return of all domestic mutual funds in the Multicap Core category as reported by The Wall Street Journal was 0.86%. Among our Market Cap indexes the year’s best performer was MarketGrader Mid Cap, up 38.3% to the S&P 400 Index’s 35.0%. Yet in that category the five-year leader is MarketGrader Large Cap with an annualized return of 2.77%, significantly higher than the 0.45% average gain of all mutual funds in the Large Cap category tracked by The Wall Street Journal. Among our Sector indexes MarketGrader Technology, a perennial out performer, gained 66.6%, besting the S&P 1500 Information Technology ‘s 59.4%. And while MarketGrader Financials’ 9.9% gain trailed both the S&P 500 Financials’ 14.8% and the S&P 1500 Financials’ 12.7%, this can be explained by virtue of the fact that the MarketGrader index never owned any of the names that led the sector’s decline in the financial crisis of 2007-2009 such as Fannie, Freddie, Citi or AIG. It therefore didn’t get the big bounce many of those names got after the March 2009 bottom. On the other hand, MG Financials fell by 35.2% in 2008 compared to 57.0% and 54.0% for the S&P 500 Financials and the S&P 1500 Financials indexes respectively.

Please click on the link below for our complete 2009 report card or visit the MG Indexes section of MarketGrader.com for more information on our indexes.

MG Indexes_Report Card 2009

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