Creating A High-Performance Fund Portfolio
If you’re a Lone Ranger type who prefers to trade according to your own rules, TradingMarkets.com gives you the tools to do just that. The FundScanner enables you to perform your own customized searches of mutual and exchange-traded funds.
But if you’d like to put part of your money to work in a model portfolio developed by one of the nation’s top hedge fund managers, check out the High Performance Global Portfolio.
The High Performance Global Portfolio was developed by Mark Boucher, manager of the Midas Trust Fund, Cayman Islands. He was recently ranked Number One in the world by Nelson’s World’s Best Money Managers, thanks to the fund’s five-year compounded rate of return of 26.6%
This is a model portfolio. Each day, Boucher scans thousands of mutual funds looking for those which are most likely either to produce powerful advances in the future as well as market sectors that are breaking down, affording an opportunity to short those areas using the appropriate funds. He updates and changes the portfolio model as needed.
Boucher’s system aims to profit from powerful trends sweeping specific industries, national stock markets and investing styles, such as small-cap growth or large-cap value. He also looks for opportunities to benefit from downtrends as well as uptrends. The trend simply must be strong enough to stack the odds in favor of the trade, long or short.
As result, the portfolio will periodically allocate some money toward short positions as well as long positions. In some cases, the model will be investing overwhelmingly in long positions. Sometimes, the model will switch to a net short allocation. However, this is rare situation. “We’re probably not going into a net short position on this portfolio until at least half of the funds have a negative performance,” Boucher said.
More often, the fund will mix the two approaches, shorting weak market areas the appear likely to break down further, while going long in strong, uptrending areas.
Boucher relies on a combination of technical and fundamental analysis, mechanical system approaches and his own final judgment, to establish recommendations listed in the model portfolio. The portfolio returned 38.7% in 1998 and 52.4% in 1999.
Relative strength and trend analysis are used to make the initial cut. To merit a long position, of instance, a fund would have to be in a strong uptrend and emerging from a sound chart pattern, as determined by Boucher. It also must display high relative strength over a number of different time frames. In other words, its Net Asset Value must have appreciated more than the vast majority of funds over the short, intermediate and long terms.
That’s just the start of the vetting process. Not only must a candidate fund be among the best performers to merit a long position, it must be in a general uptrend as evidenced by its chart. Then enough similar funds must display confirming bullish chart patterns and relative strength scores to validate the fund’s sector or category.
“So let’s say there are 25 small-cap growth funds, and only one of those funds is a top relative strength performer,” Boucher noted. “That makes the group a lot more suspect. But if more than half of the funds are in the top 50 fund, then it’s probably time to stand up and take notice.”
Finally, Boucher uses economic and other fundamental analysis to determine whether trends being reviewed for possible trades are likely to continue.
“For example, let’s say you’re deciding between large-cap funds vs. small-cap,” Boucher said. “If you foresee a slowdown in economic growth, that tends to favor large caps. In other words, large-cap growth stocks tend to outperform small-cap growth stocks in a slowing economy. If there’s going to be a growth spurt or a strong growth environment, that’s where where small-caps outperform.”
Once the model portfolio is invested in a long position, Boucher maintains a trailing stop, a price floor that trails behind a rising share price. If the fund reverses badly enough to close at or below the stop, you are to sell those shares and move into cash, unless the model portfolio indicates another investment for receipt of all or part of the proceeds from the sale.
If you decide to use the High Performance Global Portfolio, it’s important that you check it on a daily basis and follow its signals with discipline. If a fund, for example, triggers its protective stop, which will be listed each day in the model portfolio, sell that fund. Selling to lock in profits or to curtail losses is key to the overall performance of the system. Don’t jigger with the percentage allocations to cash or long and short investments. Otherwise, overall performance may suffer.
Consider the thinking behind the model portfolio’s investment in the Warburg Pincus Japan Over-the-Counter Fund (WPJPX).
The fund’s Net Asset Value (NAV ), or share price, broke out to upside from a head-and-shoulders bottom in Feb. 26, 1999, reversing a steep, three-year downtrend, and landing it in the model portfolio.
“The economy was beginning to turn around from a recession in Japan,” Boucher said. “The country had been in an economic funk since 1989. Some segments of the economy were turning around sharply, but other segments were not. The over-the-counter market had fallen about 90% from 1989 and was severely undervalued. So when it started to outperform, it was one of the few places in the market that had both decent valuation and growth potential.”
Note that this was a very targeted position. Boucher didn’t invest in an overall Japanese index fund. He consciously avoided many parts of the Japanese economy.
“The Japanese economy needed to adjust to global standards,” Boucher said. “The large companies had all kinds of regulatory reasons and other reasons getting in the way. The smaller, OTC companies would be the only ones to adjust rapidly. So there was a clear fundamental reason why the OTC area was going to outperform.”
The model portfolio sold its shares in fund on Jan. 6, 2000. By then, the portfolio had ridden that investment for a 207% gain. During that time, Boucher assigned 25% of the portfolio’s capital to the fund.
For more on Boucher’s trading and money management methods, check out Connors/Boucher Market and Mutual Fund Timing Course.