Fundamental is a moderately low-beta, moderately low-turnover trading plan for stocks traded on major U.S. exchanges. It focuses on providing above-market returns over the longer term while keeping a variability of returns that is similar to the market's risk profile.

Information is as of the close on February 1, 2008.

Model Allocation

Based on beginning with a $100,000 portfolio at inception, these are the current weights and holdings. The initial target was a buy of 5% weights per position. See my previous post on this system. Sort is alpha order by ticker and weights are rounded to the tenth of a percent.

Accenture Ltd. (ACN) - 5.2%
Amphenol Cp (APH) - 5.2%
Cpfl Energia Sa Ads (CPL) - 4.8%
Diamond Offshore Drl (DO) - 5.5%
Giant Interactiv Ads (GA) - 4.2%
Greenhill & Co (GHL) - 5.5%
Garmin Ltd. (GRMN) - 4.4%
Infosys Technologies (INFY) - 5.6%
Kinetic Concepts Inc (KCI) - 4.7%
Lan Airlines Sa Ads (LFL) - 5.4%
Mobile Telsys Ojsc (MBT) - 4.9%
Mcdermott Int Panama (MDR) - 4.7%
Microsoft Corp (MSFT) - 4.9%
Perini Corp (PCR) - 4.8%
Partner Communications (PTNR) - 6.0%
Transocean Inc (RIG) - 5.3%
SAP AG (SAP) - 5.0%
SEI Investments Comp (SEIC) - 5.1%
Schlumberger Ltd (SLB) - 4.4%
United Therapeutics (UTHR) - 4.3%
Cash - 0.1%

Returns

Based on beginning with a $100,000 portfolio at inception.

Equity: $92,793.45
Gain, Past 4 Weeks: -7.22%
Gain, Year to Date: -12.11%
Gain, Since Inception: -7.21%

Drawdown is the reduction in equity from peak to trough, when a system or strategy is losing money.

In backtesting, the Fundamental portfolio experienced a maximum drawdown of 14.6% over the ten-year test period. In backtest, the system equity was evaluated once every four weeks, so it is possible that the system experienced a slightly higher mid-month drawdown.

Currently the Fundamental portfolio has a drawdown of 13.3%, evaluated at four-week intervals. If I were to evaluate the drawdown at one-week intervals, it would have reached 17.5% on the week ending January 18, 2008.

Clearly the poor performance of the Fundamental portfolio in the last few weeks is very similar to the poorest performance of the system in backtest, which would have occurred in February 2003. Given the recent and extreme negative price action in the overall stock market, I believe it is too early to conclude that the system action is a significant deviation from expected, based on backtesting.

The following stock in the Fundamental portfolio went ex-dividend in the past four weeks. I include the number of shares that would have been bought, if the plan were executed with a starting capital of $100,000, in order to calculate the return from dividends.

LFL - 369 shares at $0.354 per = $130.62

Total dividends = $130.62 on the tracking portfolio. This amount has already been added to the returns shown above. Dividends paid will remain in cash until needed for a new purchase. Note, commissions are expensed at $10.00 per trade when accounting for returns.

Changes To Model Allocation

Fundamental screens for stocks that meet basic criteria, then ranks them by ROE to hold the top 20. As a result of this regular four-week evaluation, the portfolio is making some minor changes.

Remove the following two stocks from the list:

Perini Corp (PCR) - 4.8%
SAP AG (SAP) - 5.0%

Including the cash percentage of 0.1%, this allows approximately 9.9% of the portfolio to be allocated equally to the two new purchases, with a target of 4.9% of equity.

Add the following two stocks to the list:

Western Digital Cp (WDC) - 4.9%
Companhia Sider Ads (SID) - 4.9%

If this system were to be initiated today, the target allocation would be a buy for 5% weight holdings of the twenty stocks listed in Model Allocation, with the two substitutions listed above.

Tracking

Shares of PCR and SAP will be sold, market at open on Monday. Based on portfolio total value and closing prices on February 1, 2008, enough shares of WDC and SID to comprise a 4.9% each allocation to the portfolio will be bought, market at open on Monday. Since the portfolio has little room for full allocations, I will round down any fractional shares in the share calculation for buys.