Taking Stock at The Half-Year Mark

Since its inception on Feb. 17, 2006 until the end of the second quarter of 2012, The Global Investment Strategist Model Portfolio has outperformed the Morgan Stanley Capital International All-Country World Index (MSCI World Index) and the S&P 500 over the same period. During this period, the Portfolio returned 103 percent, the MSCI World Index gained 13 percent and the S&P 500 gained 22 percent.

For the first half of the year, our Portfolio is up 14 percent, with the S&P 500 up 9.5 percent and the MSCI World up 6.3 percent, including dividends. That said, for the second quarter of this year, our Portfolio lost 12 percent while the S&P 500 gained 5.5 percent and the MSCI World lost 3.8 percent. (See chart, below.)

All returns include dividends. However, please note that the Portfolio’s returns do not include returns generated by the recommendations in the Permanent Hedges category of the Model Portfolio. The Portfolio is long-only and does not hold cash. These restrictions provide a clearer gauge of the Portfolio’s overall performance relative to its benchmark indexes, because the major indexes also are all long-only.

The Portfolio’s strategy is focused on profiting from vibrant, long-term opportunities by investing in fundamentally strong companies. We also balance the long-term risks and opportunities facing global markets with hedges recommended in our Permanent Hedges Portfolio.

Source: Bloomberg

The four permanent hedges—US Treasury bonds via iShares Barclays 20+ Year Treasury Bond (NYSE: TLT); gold via SPDR Gold Trust (NYSE: GLD); the short on US consumers via Consumer Discretionary SPDR (NYSE: XLY); and the long recommendation on corporate credit via iShares iBoxx $ Investment Grade Corporate Bond Fund (NYSE: LQD)—continue to perform respectably as a whole.

Since we added these recommendations to the Portfolio, the long Treasury pick has produced a 49 percent return. Gold has gained 167 percent since recommended here; being long on US corporate credit has given us a 36 percent return; and shorting the American consumer has turned a loss of 24 percent. This last position is a leveraged hedge against any long-only, Asia-focused portfolio.

Top Gainers and Losers

After big gains in our recommendations, we often advise that you take profits off the table. We made this recommendation twice during the course of the first half. See the alert section on the website for more details.

The best way to take profits off the table is to sell enough stock to pocket all your gains while letting your initial investment run. This is a time-honored approach to securing returns while maintaining exposure to multiyear investment themes.

During the first half of 2012, the top gainers (including dividends) of the The Global Investment Strategist Model Portfolio were:

Naga Corp (HK: 3918, OTC: NGCRF), up 82 percent.

Tata Motors (NYSE: TTM), up 30 percent.

HDFC Bank (NYSE: HDB), up 25 percent.

Mitsubishi Estate (Japan 8802, OTC: MITEY), up 24 percent.

PT Telekomunikasi Indonesia (NYSE: TLK), up 19 percent

This brings us to the laggards. I don’t suggest selling any of these stocks; they still continue to offer value and growth potential.

The Portfolio’s five biggest laggards in the first half of the year were:

Beijing Enterprises Water Group (Hong Kong: 371), down 30 percent

Banco Bradesco (NYSE: BBD), down 14 percent.

China Petroleum & Chemical (NYSE: SNP), down 12.2 percent.

Gazprom (OTC: OGZPY) down 11 percent.

LG Display (NYSE: LPL) down 10 percent.

Finally, the five core stocks around which you should build your portfolio, in order of preference are China Construction Bank (Hong Kong: 0939), top pick because of its attractive valuations, with a dividend yield of 5.4 percent; Gazprom (OTC: OGZPY) with a dividend yield of 2.5 percent; KB Financial Group (NYSE: KB); with a 1.9 percent dividend yield; Tata Motors (NYSE: TTM) with 1.6 percent dividend yield; and PT Telekomunikasi Indonesia (NYSE: TLK), offering a dividend yield of 3.8 percent.

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