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Our first hotline recording was on 12/31/90, and we began publishing a printed version of our recommendations in early 1991. During the first four years of operations, the newsletter was published under the name The Sector Ace. In 1995, the newsletter was renamed All Star Funds to reflect our expanded coverage of Fidelity and no-load mutual funds. Then, in 1999, it was again renamed, becoming All Star Fund Trader. We migrated to the web in 2007.
The original concept and foundation of the All Star Fund Trader system was developed in 1986. During 1986 and early 1987, extensive computer simulations were performed on all of the historical data for the Fidelity Select funds. Many algorithms were researched, developed, tested, revised and re-tested until the desired results were achieved. The method that was settled on at that time was a system based on Relative Strength Momentum (RSM). This original research evolved into what is now known as the Fidelity Single Sector portfolio. When we began publication, we also introduced a four-fund version called the Fidelity Multi-Sector portfolio. The system variables have been slightly revised since 1987 to make improvements and to adapt to Fidelity’s evolving method of charging customers for switching the Select funds. The basic concept remains the same: We go with the proven winner until a fund with an even stronger RSM value emerges for us to switch into.
In the initial stages, the newsletter only provided coverage of sector funds: the Invesco Strategic funds, the Vanguard Specialized funds, and the Fidelity Select Portfolio funds. Early in 1994, the Fidelity fund coverage was expanded to include all Fidelity funds. The no-load coverage was also expanded to include a wider range of no-load funds. It was shortly after this that the publication was renamed All Star Funds. At the beginning of 1995, the No-Load Diversified Growth and the Fidelity Diversified Growth portfolios were added. These two conservative portfolios were dropped at the end of 1997, leaving us with four aggressive portfolios. Again, the options available in the market changed, and the newsletter changed along with them. We migrated the No-Load All Star portfolio to a Rydex portfolio in 2001, which takes advantage of the philosophy at Rydex that its investors should be allowed to trade mutual funds as often as they wish. A ProFunds portfolio was added at the same time, but it was removed in 2003 to provide room for an ETF portfolio. As Exchange Traded Funds became much more popular and the number of options grew to a level that most sectors and styles were available, we added ETFs to our fund rankings. In 2003, an ETF portfolio was started, and in 2004, a stock portfolio was created. As we close out 2007 and head into 2008, additional portfolios and many other useful tools will be provided here for your use.
RSM is our proprietary indicator that is designed to determine the absolute strength of any security. Typically, values of +25 or greater indicate a strong fund, while negative values indicate weakness. The measurement is a momentum indicator, however it is not calculated in a traditional manner. Traditional momentum measurements employ a straight look back. For instance, 10-day momentum simply calculates the percentage gain in a given security over the past 10 days. This type of calculation only employs two data points. It compares the end-point to the starting point and ignores all events in-between.
The momentum calculation used in our RSM calculation is tailored to take all data points into account. Instead of measuring just two points, we perform an analysis of all data points over the past few months. Our method helps us to distinguish a small correction in an ongoing trend from a new trend.
Relative Strength Momentum analysis heavily weights intermediate-trend data. We have found that this intermediate-term system works best over the broadest range of market conditions. Short-term trading systems have the disadvantage of numerous false starts and whipsaws. Similarly, long-term trading systems often get you in too late, and – more importantly – get you out too late. Instead, by using the intermediate-term Relative Strength Momentum system, we are able to reduce the risk associated with owning volatile funds by striking a happy medium between these two extreme systems.
RSM values are designed to project the annual return of the measured security if the current intermediate term were to remain in place for the next 12 months. Since intermediate trends almost never continue for such an extended period, the value should NOT be taken as a prediction of the fund’s gain for the next year. It is merely a measure of its current trend. For instance, if the RSM value of a money market fund were +3, that would indicate it is on a trend to return about 3% over the next 12 months.
The investment philosophy for our model portfolios can largely be summarized as sector rotation. We seek to own those securities performing best amongst the many industry groups that exist in the marketplace. For example, the largest sectors are: Financial, Technology, Healthcare, Industrial, and Energy. Most of the Fidelity equity funds are eligible to be included in our Fidelity Single Sector and Fidelity Multi-Sector model portfolios. However, most of the time, sector funds from the Fidelity Select group (there are currently 42 to choose from), are chosen because they typically have the strongest intermediate-term trends. Additionally, many of the funds available from both Rydex, Profunds, and the many ETF providers can be considered sector funds.
Most investors consider sector funds to be funds that concentrate their investments in a specific industry. At All Star Fund Trader, we like to think that all funds are sector funds: some are industry sectors, some are geographic sectors, and others are style sectors. A given investment style can alternatively be thought of as a sector of the market (i.e. the small-cap sector).
In all of our portfolios, we may also employ style rotation when the best performing funds at a given time often have a similar investment strategy. For example, when large cap growth investing is performing well, we rotate into large cap growth funds. When the small cap value style of investing is providing the best results, we rotate into small cap value funds.
Growth and value are only two of the many investment styles available with mutual funds and ETFs. Some of the many other investment styles include contrarian, large-cap, small-cap, earnings momentum, asset allocation, special situations, international, global, hedging, index, sector selection, bottoms-up, top-down, thematic, defensive, conservative, aggressive, moderate, all-weather, high yield, hybrids, and new styles yet to be invented.
We do include money market and cash in our universe. We believe that it is sometimes more profitable to be in a money market fund than in a defensive investment during an overall market decline. We treat money market funds much like any other security: we calculate the RSM value and rank them each week. If a money market fund rises to the top of our rankings, we will sometimes switch into it. A switch into money market funds can also be prompted when most (or all) of the other securities are experiencing a decline.
Remember, the ability to sell a stock or fund is critical to your long-term success as an investor. You can like something, but don’t fall in love with it. The hardest thing for anybody to do is to part with something that they love. Stocks, ETFs, and mutual funds are just investment vehicles, they are not your children. Get rid of them if they are not performing like you want them to.
Modern portfolio theory dictates that the market will compensate you with higher returns for taking on a greater level of risk. If your primary goal is to preserve your assets, then money market funds, bank certificates of deposit (CDs), and securities backed by the U.S. Government are safe investments. The tradeoff is that the return on these investments is normally low. On the other hand, equities historically provide a much higher return on your investment. But, as you might expect, this is accompanied by the risk that the investment might decrease in value. Generally, the market rewards you for taking on the risk that your investment’s value might decrease with the chance of realizing higher returns over the long term.
The All Star model portfolios do not represent a comprehensive investment plan. Fidelity Single Sector, Fidelity Multi-Sector, and the Rydex portfolios are well suited for a portion of the aggressive growth allocation of your overall investment plan and should be based upon your desired return and tolerance for risk. The Exchange Traded Fund (ETF) portfolio is best suited for a growth objective. The aggressive growth, growth, and sector funds we choose are typically more volatile than broadly diversified and balanced funds but less volatile than individual stocks. This feature allows you to achieve above-average returns while avoiding the higher risk associated with holding individual stocks.
Once your brokerage account has been activated, review the website and determine which funds are being held in the portfolios that you have chosen to follow. For newcomers to the All Star system, the first trades are typically the hardest since you need to get your portfolio aligned with ours. The biggest considerations when starting are usually Fidelity Select’s 0.75% short-term redemption fee on funds held less than 30 days and short-term trading policies on all Fidelity funds held less than 31 days. Some options for getting started are listed below:
Option 1: Jump In
Immediately switch into or buy the currently recommended funds. The downside risk to this option is that a recommendation to sell may be signaled before your position’s short-term holding period expires, which could cost you additional fees and cause you to receive a warning letter from your custodian. This is generally not a problem for Rydex, ProFunds, and ETFs.
Option 2: Wait for Next Switch
This entails waiting to begin your portfolio until we signal a switch from one of our portfolios. This allows you to purchase your new fund at the same time that our model portfolio does. The downside involved with waiting for the next switch is that it may be many weeks or months before the next switch is recommended and, if the current portfolio is rising, you could miss out on the gains.
Option 3: Combination/Compromise
Put half of your money into each fund for the recommended positions in the portfolio immediately, and invest the remainder as the next switches are signaled.
The RSM value and rankings are used as an indicator for our fund selection. It is not a 100% mechanical switching system. For Fidelity Select funds, there is a 0.75% trading fee if a fund is sold within 30 days of its purchase. Too much switching can have an adverse impact on your performance. Ideally, we would calculate the RSM value for all stocks and funds each day and switch into the top-ranked security. However, blindly switching into the top-ranked investment is costly, and steps must be taken to minimize the number of switches. We utilize several factors to reduce the amount of switching. When evaluating a potential switch, we look at the relative ranking of each security, the absolute RSM values, the investment strategies of the fund, the risk level of the funds, the support and resistance levels of the funds, and the length of time we have held a fund or equity security. After this analysis, if the two securities are somewhat similar in one or more of these areas, then it is usually not worthwhile to switch.
For the multi-fund portfolios, like the Fidelity Multi-Sector, Rydex, and ETF portfolios, there are additional considerations. The four top-ranked funds are often all similar. If we were to invest in four similar funds, we would not have much diversification and the risk level of the portfolio would be higher than its target range. That is why we typically limit the concentration in any single style or sector to 50% for our multi-fund portfolios.