July IMF Performance: Back In Front Of The S&P 500

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Includes: DUG
by: Ian Bezek

Summary

The IMF retakes the lead against the S&P 500 and global stocks.

Solid post-Brexit European gains lead the IMF back ahead of the ETF competition.

How is the IMF doing with yield, and how will dividends be reinvested?

This article is part of my series keeping tabs on my public portfolio, Ian's Million Fund "IMF." It aims to be a better index fund, outperforming the S&P 500 by 1-2% a year through stock selection and timing.

Each month's buys are published here at Seeking Alpha (see July's buys), and I periodically review how things are going on a broader scope in these month-end articles. First things first, let's check how the fund is doing against the market.

Back Ahead of the Indices

As of the close of business August 1st, the IMF posted a total gain of $652 on its $7,500 of investments to date. That's a gain of 8.7% on all capital invested. That comes in slightly ahead of the competition, with the exception of Illuminati Investment's Apple (NASDAQ:AAPL) portfolio. Here's the IMF against all control portfolios:

  • Apple - 77.99 shares, $106.05 price, $8,271 value +10.3%
  • IMF $8,162 value, +8.7%
  • SPY - 37.33 shares, $216.94 price, $8,098 value +8%
  • VT - 133.68 shares, $60.25 price, $8,054 value +7.4%
  • Berkshire - 54.81 shares, $143.93 price, $7,889 value +5.2%

Don't feel too bad for Berkshire Hathaway (NYSE:BRK.B) trailing the pack, however. With its earnings beat on Friday, it appears likely it will make up some ground next month. Remember, these prices were as of August 1st.

As of the last portfolio update, my IMF had fallen slightly behind the S&P 500 (NYSEARCA:SPY) and Vanguard Total World Stock ETF (NYSEARCA:VT). I'm pleased to say that this lag to the market has closed. The IMF is now up 8.7% on investment, versus 8% for SPY and 7.4% for VT.

The IMF benefited from the post-Brexit British recovery, with IMF largest position Diageo (NYSE:DEO) and large holding Astrazeneca (NYSE:AZN), among others, ramping higher. Earnings beats from relatively large positions - among them Texas Instruments (NYSE:TXN) and Fidelity Southern (NASDAQ:LION) also helped. Finally, Peru's marvelous run continued. The IMF's chunky position in Credicorp (NYSE:BAP) is almost a double now, and the smaller position in Graña y Montero (NYSE:GRAM) is up close to 250%.

As of August 1st, only two positions, Computer Programs & Systems (NASDAQ:CPSI) and Aviva (NYSE:AV) were down more than 10% from my cost basis. It's been a strong market for stock pickers - more than 90% of the IMF is in the green, and even the losses are minor.

In all, the IMF should be crushing the market, however, I hedged the portfolio several months ago, buying the ProShares UltraShort Oil & Gas ETF (NYSEARCA:DUG) to hedge. I felt the market was straining from a valuation standpoint, and oil stocks were particularly vulnerable.

Despite oil careening back into the 30s since then, oil stocks remain at lofty valuations, oblivious to falling profits and a weakening macro outlook. As a result, the IMF finds itself with a loss of almost 25% on the DUG position. Without the hedge, the IMF would be up 13.2% for the year, instead of the 8.7% it is actually up.

Obviously, I'm irritated to be down that much on a hedge; the IMF should be crushing the market this year, instead it's only slightly ahead of the indices. However, I continue to foresee weakness in the energy patch, and the market as a whole is ever-more overbought. I see no reason to fold the hedge at this point. The IMF as a whole is fairly exposed to commodities through its overweight exposure to emerging markets - particularly Peru and Colombia - so short energy is something that pairs nicely with the rest of the portfolio.

Dividends - How's The Yield?

One question many people have asked about the IMF is how it is doing in producing dividends. So far, it has outyielded the S&P 500 by a decent margin. Here's dividends received by month:

  • January - No dividends received
  • February - $3.33
  • March - $7.26
  • April - $5.63
  • May - $24.37
  • June - $10.24
  • July - $8.74

May's bumper dividend remains hard to top. That month brought annual or semi-annual dividends from many foreign firms that don't pay quarterly. One of the IMF's largest positions, Grupo Aeroportuario del Pacifico (NYSE:PAC), paid a full $6 to the IMF in May, which really biases that month in comparison with the rest of the year.

July appears to be a trough month for dividends - only Washington Trust (NASDAQ:WASH) and CIBC (NYSE:CM) represent meaningful positions with high yields that pay in July. However, there are quite a few big IMF positions that pay in July with smaller starting yields, among them Brown Forman (NYSE:BF.B) and McCormick (NYSE:MKC), so expect this month to see nice growth rates in future years as these firms continue to boost their dividends.

In total, the IMF has collected $59.57 in dividends so far this year. The control S&P 500 portfolio has collected $53 in dividends over the same time span. While the primary goal of the IMF isn't to generate a high current yield, I believe a selection of good stocks is likely to out-yield the S&P 500 in most situations.

A New Wrinkle For The IMF

So far, I've let dividends hit the cash line of my Motif account without using them. I'd been deciding what I should do with them - reinvest them as if they were normal cash or do something special.

I decided to use dividends to buy an "ETF of the month" to allow me access to things I can't get through Motif directly. Since Motif doesn't allow trading of foreign exchange-listed or pink sheet stocks - only ADRs - my ability to invest globally is somewhat limited.

Thus, my ETF of the month is likely to, in most cases, be some foreign country ETF where my selection of individual stocks in that country is rather limited. I'm rather US-bearish in comparison with the rest of the world on a valuation basis, so I'm eager to add more foreign exposure - however, in many cases, you have fewer than 10 US-listed ADRs from a country to pick from. Even for large countries, such as Germany, this is true.

So look for the IMF to be reinvesting its dividends in country ETFs. I'll select whatever looks most attractive that month, and use the dividends received over the previous month to fund the purchase. In a way, this will be interesting, since we can track how much of the IMF's overall growth comes from dividends, since they'll be segregated in ETFs, while the actual capital paid into the fund is all in common stocks. I have already made August's IMF buys, so look for this policy to go into effect in September.

Going forward, the IMF is hopeful the market will finally have a correction, preferably driven by oil, so that the portfolio hedge will work out, and also so stocks can be purchased cheaper.

It's nice seeing virtually all the stocks in the portfolio show profits. However, it is increasingly difficult to find stocks to buy each month at attractive valuations. A broad market correction would do a lot to restock the pond with more attractive prospects. It's easy to get the sense that we're merely pulling forward returns from future years at this point.

Disclosure: I am/we are long ALL COMMON STOCKS MENTIONED EXCEPT AAPL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: No position in SPY or VT either.