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Introducing the SMI Balanced Fund (SMILX)© Sound Mind Investing | January 2011
Five years ago, the original Sound Mind Investing Fund (SMIFX) was created to simplify the task of implementing the Fund Upgrading strategy. SMIFX was immediately popular, racing past $100 million in assets in just a matter of months. The fact that it has more than $300 million in assets today shows that it clearly meets a need: the desire by many to pursue Upgrading but be free of the monthly task of implementing the strategy themselves. This month, we're pleased to announce the next logical step in the process of making investing easier for Upgraders. Over the past five years, many readers and SMI Fund investors have inquired about SMI Advisory Services managing their bond money for them. Those requests will soon become reality, as the new Sound Mind Investing Balanced Fund is set to open in January! The SMI Balanced Fund (SMILX — smile!) will be invested with a roughly 60/40 allocation. The 60% in stocks will be managed using the same Upgrading approach as the flagship SMI Fund. The 40% bond side will be managed by Reams Asset Management Company, one of the nation's premier bond management shops. Veteran readers may remember that long ago, the newsletter used to Upgrade bond funds just as we do stock funds today. At the end of 2002, we concluded that Upgrading wasn't adding value on the bond side, so we switched to using the Vanguard bond funds instead. They have worked pretty well for us since making that change in 2003, consistently ranking highly among their bond fund peers. However, we concluded the Dec. 2002 article announcing that change with the following sentence: "We plan to keep looking for a way to add value to the bond side of an Upgrading portfolio, and if we find one, we'll surely pass it along." While we didn't expect that answer to look quite like this, we nonetheless feel that this new SMI Balanced Fund will add value on the bond side of an Upgrading portfolio. There are two primary reasons to be excited about having Reams manage the bond portion of this balanced portfolio. First, as we've written in the newsletter several times in recent years, we're concerned that the nearly 30-year bull market in bonds may be drawing to a conclusion. While the Vanguard bond index funds have worked well for us since 2003, it's well known that index funds are typically great performers in bull markets but don't always fare as well when those bull markets end. (Think about how great stock indexing did in the 1990s, and how poorly it has performed in the 2000s.) While we still think the extremely low costs of Vanguard's index funds will keep the bond side of our newsletter portfolios competitive in their risk categories (note that the newsletter is not making a change away from the Vanguard index funds), the possibility of a weaker bond market has made us more open to an actively-managed solution. Second, securing a bond management company of Reams' caliber to manage the bond side of this portfolio is fairly amazing. While Reams may not be a household name, their performance ranks with any bond manager over the past decade. In fact, the "Core Plus" approach they will utilize within the SMI Balanced Fund has outperformed the Vanguard bond index recommendations made in the newsletter by a consistent and significant margin.
Over that nearly eight-year period, Reams had a total return of 72.56%, while the newsletter's bond recommendations earned 43.05%. On an annualized basis, Reams beat the newsletter recommendations by 2.5% per year (7.13% vs 4.63%). The 2008/2009 returns are instructive in terms of Reams' investing approach. Reams is a value investing shop. Whereas many bond managers focus primarily on yield (often taking higher risks to get more yield), Reams approaches things differently. They are convinced that volatility in the bond market is higher than most participants believe. As such, they expect that opportunities to take advantage of volatility will present themselves regularly. So Reams is content to build conservative bond portfolios while they wait for these occasional disruptions in the bond market. When those opportunities arise, Reams swoops in and buys what they perceive to be great values. While occasionally this means being a bit early — as was the case in 2008, which was an incredible buying opportunity for a value manager like Reams — the payoff can be exceptional, as was the case in 2009. This is why SMI Advisory Services thought it made sense to hire Reams as a subadvisor for the SMI Balanced Fund. Coupling the Upgrading strategy on the stock side with Reams' approach on the bond side seems to create a formidable pairing. How can investors best use this fund? While it's true that a 60/40 stock-bond split won't perfectly meet every investor's ideal, research has shown that a 60/40 allocation is both popular and effective for many investors. Those who want more stock exposure than the SMI Balanced Fund (SMILX) provides can easily get it by also purchasing shares of the flagship SMI Fund (SMIFX). Those who want more bond exposure than the 40% provided by SMILX can obtain it by purchasing the Vanguard bond index funds recommended in the newsletter. Naturally, as with the other SMI Funds, the primary downside of utilizing the SMI Balanced Fund as opposed to managing your own portfolio is the higher expenses you will pay. While the costs of the Vanguard index funds may only be marginally lower than what Reams will charge to manage the bond side of the fund, there's no question that the extra layer of fees on the stock Upgrading side of the portfolio will increase costs beyond what you would pay if you were to upgrade on your own. Theoretically, if you could own the identical underlying stock funds when the Fund owns them without paying any additional trading costs, you would outperform the stock side of the Fund by the amount of its expenses, which according to the prospectus will be capped at 1.15%. (See Five Years In, Sound Mind Investing Fund Looks Solid for more insight on this cost issue.) For more information about the SMI Balanced Fund (SMILX), including risks, fees, and expenses, call 877-764-3863 for a free prospectus. Or, download one from the www.smifund.com website. Read it carefully before investing or sending money. SMILX will be available to investors in January through all brokerages that currently carry SMIFX. If your broker offers SMIFX but doesn't list SMILX yet, know that it will be added soon (some brokers add funds more quickly than others). Thousands of investors currently enjoy the simplicity and peace of mind of having the professionals at SMI Advisory Services manage their stock Upgrading portfolios. If you'd like to enjoy those benefits on the bond side of your portfolio, this new SMI Balanced Fund may be worth investigating.  Please note: The SMI newsletter staff is not authorized to give information regarding the Sound Mind Investing Fund on the newsletter's reader services phone line. To get information relating to the fund, please call 877-764-3863, or visit www.smifund.com.
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*Because the SMI Balanced Fund (SMILX) will invest in other stock mutual funds, it will bear its share of the fees and expenses of the underlying funds, in addition to the fees and expenses payable directly to the Fund. As a result, you'll pay higher total expenses than you would investing in these funds directly. You should carefully consider the investment objectives, potential risks, management fees, and charges and expenses of the Fund before investing. The Fund's prospectus contains this and other information about the Fund, and should be read carefully before investing.
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As the table at right shows, Reams has beaten the specific blend of Vanguard bond index funds recommended in the SMI newsletter every year since 2003, with the exception of 2008. That's seven out of eight years (including 2010's performance through Nov. 30, the most recent data available).
