Trading Indexes Newsletter 2004-4
January 27, 2004
Dr. Ben Buckner, Editor
 
FTI System Trades and Returns for 2003 -- Part 2
 
Brokerage-Available Fund Trades Using Revised Rules and Fund Selection Procedures
 
The following are 2003 trades for each of the three methods used in the Guided Approach for Brokerage-Available mutual funds, using the trading signal of 0.30 TI difference for the entire year and current standards for selecting funds.  These are different than the trades cited last week, those being actual and these being hypothetical (what WOULD HAVE BEEN had we used current rules and procedures).  These are followed by trades for the annuities, using the revised rules.
 
As with the trades shown last week, each strategy is assumed to have started with $100,000 on 12/31/02.  Brokerage fees are assumed to be $35 per exchange ($70 for a complete trade).  Anyone having copies of the Weekly Trading Indexes and Weekly Reports for 2003 can verify these trades as based on the FTI System trading scheme, using a 0.30 TI difference.  However, using the new procedures for fund selection QRACX is omitted, FAGIX is included since we are now assuming a Fidelity brokerage account for trading, CNZLX is excluded for various reasons related to difficulty in getting information on this fund, and all Rydex funds are excluded for reasons related to volatility.  The upper limits on risk factors are now 4 for the Aggressive, 3 for the Moderate, and 2 for the Conservative.  Redemption-fee funds are included here for the Conservative, whearas they were excluded in the actual returns shown last week.  Also, funds having RS and SP style are included for the Conservative.
 
These changes were NOT just arbitrarily made so as to manipulate and find a combination that yielded higher returns.  They were made after a comprehensive system of back-testing, study of the risks of certain styles of funds, weighing of risk factors of certain funds in comparison to others of the same style, and experiences in having difficulty obtaining information from some fund companies.  This all led to adoption of revised procedures for 2004, which had been essentially decided by early December.  It was not known how using these procedures would affect the 2003 returns.  It was an afterthought to "run the numbers" on these.  The result shows that we are on the right path to improved returns.
 
NAVs can be checked through www.bigcharts.com (historical).  When a trade is signaled for a mutual fund, we assume that the sale is made on the Monday following the trade signal and the proceeds (minus the trading fees) used to buy the new fund on Tuesday.  For the annuities, the unit values are available in graph form for the Fidelity VIP and in tables for all VALIC funds (if you have a VALIC account).  There are no trading fees for annuities and trades are made "same day", on the Monday following a trade signal.  Anyone having kept the weekly lists of TIs for the mutual funds would be able to check the TI differences and justification for trades.  Those subscribing to the annuities report for the first half of 2003, and all subscribers for the second half of the year (when we added the annuites to the weekly TIs) will be able to check the annuity trading signals.
 
If dividends were declared during a holding period, the number of shares increase at each distribution of dividends.  Since PEMDX has a monthly dividend, the shares are increased monthly.  The number of added shares is the dividend divided by the share price, multipled by the number of shares.  If there was a short-term redemption fee, the shares are reduced.
 
PEMDX was used on 12/31/02 instead of SITEX, even though the latter had a slightly higher TI.  This is because PEMDX had already been purchased in 2002 and this was carried over into 2003.
 
The year-to-date gains are shown in percent at each transaction point to mark the progress of each strategy. 
 
Brokerage-Available Funds
 
Aggressive Growth:
 
12/31      Holding PEMDX at $9.25    10810.811 shares      $100,000
05/19      Sell PEMDX at $10.83       11095.158 shares      $120,161      (shares increased for 5 months dividends)
05/20      Buy RKRGX at $12.09         9933.049 shares      $120,091      +20.1%
08/25      Sell RKGRX at $15.26                                       $151,578
08/26      Buy OBEGX at $24.50        6184.013 shares       $151,508      +51.5%
09/29      Sell OBEGX at $25.24                                        $156,084
09/30      Buy SASPX at $8.10         19261.048 shares       $156,014      +56.0%
11/03      Sell SASPX at $8.78                                          $169,112
11/04      Buy USCOX at $6.10         27711.804 shares       $169,042      +69.0%
12/31      Holding USCOX at $6.56    27928.981 shares       $183,214      +83.2%   (shares increased for dividend)
 
The trades from 5/19 forward are identical to the actual trades cited last week, but the activity between 12/31 and 5/19 is significantly different, all of the difference in returns being attributed to the changes in TI difference for trading signal and new standards on fund selection.   The result was having a lot more money on 5/20 to buy shares in RKGRX.
 
Moderate Growth:
 
Fund 1 of 2:
 
12/31      Holding PEMDX at $9.25      5405.405 shares      $50,000
05/19      Sell PEMDX at $10.83         5547.579 shares       $60,080   (shares increased for 5 months dividends)
05/20      Buy RKGRX at $12.09         4963.629 shares       $60,010     +20.0%
08/25      Sell RKGRX at $15.26                                        $75,745
08/26      Buy OBEGX at $24.50         3088.775 shares      $75,675      +51.3%
09/29      Sell OBEGX at $25.24                                        $77,961
09/30      Buy  FPSCX at $12.15         6410.755 shares      $77,891      +55.8%
11/24      Sell FPSCX at $12.64          6346.648 shares       $80,222                (shares decreased for 1% redemption fee)
11/25      Buy DEMCX at $10.50         7633.488 shares       $80,152      +60.3%
12/31      Holding DEMCX at $11.43    7728.907 shares       $88,341      +76.7% (shares increased for dividend)
 
The trades above are all different, as compared to the actual ones.  When PEMDX was held until 5/19 in the above, this avoided several trades and resulted in being in RKGRX instead of OBEGX in May.  With the elimination of the more volatile Rydex funds, a summer trade was avoided.  There are other differences in holdings, the result of the way TI comparisons will re-direct the decisions on trading and holding according to what is held on any particular week.
 
Fund 2 of 2:
 
12/31      Holding FAGIX at $6.28        7961.783 shares       $50,000
05/19      Sell FAGIX at $7.46             8191.933 shares        $61,112     (shares increased for 5 months dividends)
05/20      Buy CHTTX at $16.47          3706.243 shares        $61,042     +22.1%
06/16      Sell CHTTX at $18.46                                          $68,417
06/17      Buy HRTVX at $40.06         1706.122 shares         $68,347     +36.7%
08/18      Sell HRTVX at $42.76                                          $72,954
08/19      Buy SASPX at $7.45           9783.057 shares         $72,884     +45.8%
11/03      Sell SASPX at $8.78                                            $85,895
11/04      Buy USCOX at $6.10          14069.711 shares        $85,825     +71.7%
12/31      Holding USCOX at $6.56     14179.976 shares       $93,021     +86.0% (shares increased for dividend)
 
The above trades during the first four months are all different, as compared to the actual ones for Fund 2.  This is primarily because of the use of FAGIX at the beginning of the year.  The change in rules regarding 0.30 TI difference also affected the trades.  After 5/19, the trades are identical to actual.  The number of shares in CHTTX was much larger in the above because of the change in direction in the early months.
 
        Moderate Growth gains = $88,341 + $93,021= $181,362 = +81.4% YTD 
 
Conservative Growth:
 
Fund 1 of 3:
 
12/31      Holding PEMDX at $9.25     3603.603 shares      $33,333
05/19      Sell PEMDX at $10.83         3698.386 shares     $40,054      (shares increased for  5 months dividend)
05/20      Buy KSCOX at $12.17         3285.416 shares      $39,984      +20.0%
06/30      Sell KSCOX at $12.65                                        $41,561
07/01      Buy AEMGX at $11.44         3626.793 shares      $41,491      +24.5%
10/20      Sell AEMGX at $14.23                                       $51,609
10/21      Buy FPSCX at $13.37          3854.844 shares      $51,539      +54.6%
11/24      Sell FPSCX at $12.64          3816.296 shares      $48,238            (shares decreased for 1% redemption fee)
11/25      Buy EEQFX at $16.85          2858.634 shares      $48,168      +44.5%
12/31      Holding EEQFX at $16.80     3004.806 shares      $50,481      +51.4%   (shares increased for dividend)
 
The trades above are all different, as compared to the actual ones.  When PEMDX was held until 5/19 in the above, this avoided several trades.  Also, since RKGRX had already been purchased in the Fund 3 track, KSCOX was purchased in Fund 1 track in May.  This started an entirely different series of sells and buys for the rest of the year than had been the case with the actual trading.
 
Fund 2 of 3:
 
12/31      Holding FAGIX at $6.28        5307.855 shares       $33,333
05/19      Sell FAGIX at $7.46             5461.288 shares        $40,742     (shares increased for 5 months dividends)
05/20      Buy CHTTX at $16.47          2469.412 shares        $40,671     +22.0%     MN
06/16      Sell CHTTX at $18.46                                          $45,585
06/17      Buy HRTVX at $40.06         1136.179 shares         $45,515     +36.5%
08/18      Sell HRTVX at $42.76                                          $48,583
08/19      Buy SASPX at $7.45           6511.815 shares         $48,513     +45.5%
11/03      Sell SASPX at $8.78                                            $57,174
11/04      Buy USCOX at $6.10           9361.268 shares        $57,104      +71.3%
12/31      Holding USCOX at $6.56      9434.633 shares        $61,891      +85.7% (shares increased for dividend)
 
This series of trades is the same as those used in Fund 2 track of the Moderate Growth Strategy.  The percent return was slightly lower simply because the fixed trading fees have more effect with lower account balance. 
 
Fund 3 of 3:
 
12/31      Holding PSAFX at $11.69      2851.441 shares      $33,334
03/24      Sell PSAFX at $11.49                                         $32,763
03/25      Buy LLINX at $22.52             1451.734 shares      $32,693      -1.9%
04/28      Sell LLINXX at $23.66                                          $34,348
04/29      Buy RKGRX at $11.62           2949.916 shares      $34,278     +2.8%
10/27      Sell RKGRX at $16.69                                         $49,234
10/28      Buy PTEMX at $10.69           4599.074 shares      $49,164      +47.5%
12/31      Holding PTEMX at $11.88      4624.087 shares      $54,934      +64.8%  (shares increased for dividend)
 
This series of trades varied a little from the actual, primarily because of how choices in the first two tracks affected the third choice.
 
         Conservative Growth gains =  $50,481 + $61,891 + $54,934 = $167,306 = +67.3% YTD
 
Summary:
 
Aggressive Growth:      +83.2% with 4 trades   (compared to +60.7% actual, with 7 trades)
Moderate Growth:        +81.4% with 8 trades   (compared to +41.6% actual, with 16 trades)
Conservative Growth:   +67.3% with 11 trades  (compared to +47.4% actual, with 14 trades)
 
Discussion of Brokerage-Available Mutual Fund Returns:
 
We feel that the returns above are more representative of the potential of the system.  They are more in line with the back-testing conducted last Spring using essentially the same guidelines and rules as used above.  With the refinements made in the system during 2003, we should be in a position to do much better in the future, in comparison with the market indexes.  All strategies improved with the new rules, the Moderate Growth method nearly doubling.  What were already good returns were raised to another level.
 
One comparison we commonly make is with the market indexes, which are listed as follows for 2003:
 
DJIA                   +25.3%
S&P 500             +26.4%
NASDAQ            +50.0%
Russell 2000       +45.4%
Midcap 400         +34.0%
BARRA Value     +29.0%
Wilshire 5000      +29.4%
Balanced            +19.9%
 
The above returns, using our new rules, even those for the Moderate and Conservative, easily beat all market indexes.  Another type of comparison that we have not used much is to compare with mutual funds themselves.  Top mutual funds generally always beat most of the indexes.  Various sources list the 2003 returns of mutual funds as follows:
 
All diversified mutual funds  +33.4%
Growth funds                     +37.4%
Value funds                       +32.0%
 
There were a handful of funds with returns over the 83.2% maximum FTI gain.  Virtually all of these funds are not used in the FTI System because of high volatility and other factors.  Had they been used, there would have been too much trading, with consequent reduction in returns.  In fact, most funds that gained over 60%, representing a very small percentage of available funds, are not acceptable for use in our system.  We do not expect to beat all funds.
 
Annuities:
 
We compute weekly trading indexes of two sets of annuity funds:  The Fidelity Variable Annuity Investment Plan (VIP) and the VALIC (Variable Annuity Life Insurance Company) funds.  In 2003, we used 29 of the available VIP funds, excluding sector and money market funds.  There are three subsets of VALIC funds.  One is a typical 401a plan for college professors, available in some locations.  The particular one we track has 21 of VALIC's 63 funds available of which we use 18 funds.  The second is VALIC's 403b plan which utilizes all 63 of the available funds.  The third is the VALIC Non-Qualified Variable Annuity which uses 35 of the 63 variable funds.  It is available to anyone.  We exclude money market and fixed funds from consideration.
 
All returns for annuities are calculated using a 1-fund system.  The upper limit on RF = 4.  The following are the trades and returns:
 
Fidelity Variable Investment Plan (VIP):
 
12/31    Holding MS Emerging Markets Debt at $12.490323       8006.194 shares         $100,000
05/19    Trade  MS Emerging Markets Debt at $14.23111          8006.198 shares          $113,937     +13.9%
              for  CS Small Cap Growth fund at $8.002426             14237.810 shares         $113,937
09/29    Trade  CS Small Cap Growth at $9.501175                  14237.810 shares         $135,276     +35.3%
              for MS Emerging Markets Equity at $9.342179          14480.126 shares         $135,276
12/31    Holding MS Emerging Markets Equity at $11.017142    14480.134 shares       $159,429      +59.4%
 
VALIC 401a:
 
12/31    Holding Vanguard LT Corporate Bond at $1.587258      63001.73 shares         $100,000
03/24    Trade Vang. LT Corp Bond at $1.593957                     63001.73 shares         $100,422     +0.4%
               for TRP Science & Technology at $1.498557            67012.50 shares         $100,422
08/11    Trade  TRP Science/Technology at $1.768082             67012.50 shares         $118,484     +18.5%
               for Ariel Appreciation at $1.241581                           95429.61 shares        $118,484
08/25     Trade Ariel Appreciation at $1.263298                        95429.61 shares         $120,556     +20.6%
               for CS Small Cap Growth at $0.685309                    175914.86 shares        $120,556
12/31     Holding CS Small Cap Growth at $0.769216               175914.86 shares        $135,317     +35.3%
 
VALIC Annuity (Non-Qualified):
 
12/31    Holding International Govt. Bond at $1.729121              57832.85 shares        $100,000
03/24    Trade International Govt. Bond at $1.773269                57832.85 shares        $102,553      +2.5%
               for TRP Blue Chip at $0.5921952                             173174.66 shares      $102,553
06/02    Trade  TRP Blue Chip at $0.663359                            173174.66 shares       $114,877     +14.9%
               for Small Cap Index at $2.207053                             52049.94 shares        $114,877
12/31    Holding Small Cap Index at $2.770089                        52049.94 shares        $144,182     +44.2%                               
 
VALIC 403b:
 
12/31    Holding International Govt. Bond at $1.729121              57832.85 shares         $100,000
03/24    Trade International Govt. Bond at $1.773269                 57832.85 shares         $102,553      +2.5%
                for TRP Blue Chip at $0.5971952                             173174.72 shares       $100,422
06/02    Trade  TRP Blue Chip at $0.663359                             173174.72 shares       $114,877     +14.9%
               for CS Small Cap Growth at $0.618030                     185876.11 shares       $114,877
09/22    Trade CS Small Cap Growth at $0.712657                   185876.11 shares       $132,466      +32.5%
09/22        for Evergreen Special Equities at $0.838203            158035.59 shares        $132,466
12/22     Trade Evergreen Special Equities at $0.862880          158035.59 shares        $136,365      +36.4%
               for Wellington Midcap Value at $2.265922                 60180.907 shares      $136,365 
12/31     Holding Wellington Midcap Value at $2.305251            60180.907 shares      $138,732      +38.7% 
 
VALIC also offers their funds through 457b plans, but I do not have their list of choices, and I suspect there would be differences among plans.
 
Discussion of Annuities Returns:
 
As with the mutual funds, the annuities performed well against the market indexes, all annities beating all indexes except the NASDAQ and Russell 2000.  The +59.4% return (2 trades) for the Fidelity VIP was the most remarkable and is classic FTI performance.  It exemplifies what the system is all about -- get on the fastest trend available, stay on it until another faster one comes along, then ride it out.  The return beat those of all available funds in the VIP, even the VIP technology sector (which we don't use).  Closest was that of the VIP Value strategies which yielded +56.6%, this fund not being added to their offerings until late September.
 
The highest VALIC returns were made by Evergreen Special Equity (+45.4%), NASDAQ 100 (+42.7%), Small Cap Index (+39.9%), Franklin Small Cap (+39.6%), Wellington Midcap (+37.2%), and MS Midcap Growth (+35.8%).  Some of these funds are unavailable in the 401a and variable annuity (non-qualified).  The non-qualified annuity beat all available funds and the 401a came close to doing so.  Considering the larger number of choices, the 403b fell short of its potential, but still beat all but four of the available 63 funds.
 
No selection of funds based on asset allocation, buy-and-hold would have come close to achieving what was acccomplished with the FTI System.  Trades were very low and results very high.
 
Summary and Invitation to Subscribe:

The Fund Trading Index System performs well, even when not operating to full potential due to mistakes in fund selection, not having a large number of funds available (as with annuities), variations in TI differences for trade signal, paying some redemption fees, occasional hesitation regarding whether to trade or not on any given week, and other variables.  Whether using the actual returns or the above which employed the new rules, returns are very high.  My goal has always been to achieve the highest potential of the system, and I feel we are arriving at that.  As an athlete wants to run his best, not just win, we have the same mentality.

I encourage anyone not yet using this system to read the sections of the website and compare your returns with those we have been enjoying (see home page).  Then, consider subscribing to this system.  Newsletters 2003-14 and 2003-15, on "Choices and the Time Value of Money" are good reading to see what a few percent difference in annual returns on investments can make in the long run.  All newsletters can be read at www.fundtradingindexes.com/historical.htm.  Procrastinating on decisions about investing for the future is unwise, as the numbers in these newsletters reveal.  Also, Chapter 19 and page 161-65 of "Using Mutual Fund Trading Indexes" is recommended reading.

To subscribe to the Weekly Trading Indexes and/or buy the book, click on www.fundtradingindexes.com/membership.htm and follow the instructions.

Note:  The development of the Historical section of the website is a work in progress.  Currently, some of the titles of newsletters are incomplete, and we have not finished adding past issues.  Use the date as a guide where title is missing.

Ben Buckner, PhD,
Creator of the Fund Trading Index System
 
 
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