The 4th quarter, and all of 2008 for that matter, was an extremely difficult investing environment. There truely was no place to hide if you were not 100% in short term U.S. Treasurys.
Performance:
Positives:
For the full year only three investments in the Model Portfolio’s had postive returns and of those were fixed income investments. Clearly the best performing area of the market was shorter duration U.S. Treasurys as there was a flight to quality among investors. The model portfolio’s holding in iShares Barlcays 7-10 year Treasury (IEF) and iShares 1-3 year Treasury Bond (SHY) were the top two performing investments. IEF returned 17.91% while SHY returned 6.61% for the year. The iShares Invest Grade Corp Bond (LQD) was the only other investment with a positive return for the year, ending up 2.46%.
Some of the equity funds held up fairly well during the year given the challenging environment. The Nakoma fund (NARFX) returned -4.34% and the Hussman Growth fund returned -9.02% for the year.   While it is never a good thing to loose money with an investment (Warren’s 1st and 2nd rules), these strategies provided excellent downside protection in an extremely difficult investing environment.
This weeks market commentary from John Hussman leaves the fund mostly hedged:
For now, the Strategic Growth Fund remains largely hedged against deep, significant market losses, but remains reasonably exposed to “local� fluctuations. Our current hedge places our line of defense between the 800 and 900 area on the S&P 500 for now, meaning that our sensitivity to market fluctuations begins to mute on market weakness below about 900, and would strongly mute if the S&P 500 approaches 800 or lower. As always, the extent and structure of our hedging will shift as market conditions change.
Nakoma has come out with their year end commentary on the fund and they too remain defensively positioned.
Negatives:
The list here is long, led by the iShares Emerging Markets (EEM) and the iShares Mid Cap Growth (IWM) etf’s. The Emerging Markets investment was down -48.98% while the Mid Cap Growth holding lost -44.56% for the year.
Another area of pain was the PIMCO Commodity Real Return fund (PCRDX) which suffered considerably in the second half of 2008 as many commodity prices fell. PCRDX was up approximately 14% in both Q1 and Q2 but gave back all the gains and then some, finishing down -43.61% for the entire year of 2008.
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Changes: None during 2008