Our most aggressive core strategy, Fund Upgrading is a “momentum” strategy premised on the idea that recent past performance tends to persist. The strategy has you diversify your portfolio across five stock fund “risk categories” and up to four bond fund categories. You then buy the funds SMI objectively determines to have the highest momentum, occasionally replacing lagging funds with those showing stronger momentum. With only monthly maintenance, Fund Upgrading has generated considerably better long-term returns than the overall market. This article explains the changes to put in place for the coming month.

In the Small/Growth group, Brown Capital Mgmt Small Company (BCSIX, 10/2013) is being replaced. Six months ago, we debated whether to recommend the more-aggressive Oberweis Micro-Cap fund (which replaces Brown this month), or the less-aggressive Brown fund. At the time, their momentum scores were similar, and we wrote about the comfort of Brown’s significantly lower risk profile given how far the bull market had already progressed. In hindsight, we would have been better off with the higher-risk Oberweis fund, as the bull market continued virtually unabated. One helpful—if a bit uncomfortable—feature of our Upgrading strategy is that it will eventually force us to adjust our holdings to conform with what the market is doing!

In this case, the lower-risk Brown fund hasn’t been able to keep up with its more aggressive peers as the market has continued to rise, and it fell out of the top quartile after six months. And Oberweis, which has continued to excel, is still sitting at the top of the rankings for us to purchase it. It’s not as if Brown did a bad job—it gained 8.2% in the first five months we owned it. But in a rapidly rising market, Upgrading will gradually push for more aggressive recommendations. Buying Brown to take the place of the very conservative Nicholas fund last October was an early step in this evolution, and now moving from Brown to the even more aggressive Oberweis fund completes it.

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