Introducing the SMI Managed Volatility Fund
Regular readers of this newsletter know we are huge fans of the Upgrading investing strategy. In recent years, we've watched Upgrading add value during all types of markets—bull, bear, and flat. But we've experienced some jarring bumps along the road as well. This past year was a vivid illustration of the best and worst Upgrading has to offer: a huge gain through May, a brutal drop that gave all those gains back over the next several weeks, and finally a sustained climb over the last four months of the year. While the final result was good, 2006 was an emotional roller-coaster for many Upgraders.
That sort of volatility inspired an SMI article in October called In Pursuit of A Safer Way to Upgrade. 
The idea presented there was to combine a regular Upgrading fund strategy with a type of "insurance" that would help reduce the impact of sharp market declines on the portfolio. This approach involved hedging away downside risk by shorting index futures that corresponded to the Upgrading funds owned. During periods of market weakness, the profits from the futures position cushioned the loss in the rest of the portfolio; when the market was rising, the losses from the futures position slightly eroded the gains from the fund Upgrading portion of the portfolio.
The historical results from this arrangement were quite appealing—returns were lower overall than from regular Upgrading, but still dramatically higher than the Wilshire 5000 index. More importantly, the research indicated this "hedged Upgrading" portfolio would have experienced volatility more than 40% lower than that of regular Upgrading.
Unfortunately, that article ended acknowledging that this type of hedging was virtually impossible for the individual investor to achieve on their own. That has now changed with the launch of the SMI Managed Volatility Fund. This new fund, scheduled to open to investors on December 27, is designed to implement a "hedged Upgrading" strategy similar to the theoretical approach detailed in the October article.
According to the fund prospectus, the SMI Managed Volatility Fund will be very similar in many respects to the original Sound Mind Investing Fund that launched in late 2005. Both funds will use the same Upgrading approach to assemble a portfolio of mutual funds (although their fund portfolios may differ from each other due to the timing of cash flows). The SMI Managed Volatility Fund will take the additional step of adding a hedging component in an effort to reduce volatility. As the article last October noted, this approach would seemingly appeal a great deal to investors who are on track to reach their investing goals and want to prevent losing ground while still trying to earn competitive returns (such as those who are approaching or in retirement).
It's worth noting that the SMI Managed Volatility Fund hedging will be slightly different than the research reported last October. That research assumed the portfolio was always hedged at a static 50% rate. The new fund will use a "dynamic" hedge, meaning the managers can raise and lower it depending on a variety of factors they will watch on a regular basis. Their research indicates this flexibility enhanced the performance results.
As you might expect, this new SMI Managed Volatility Fund (SMIVX) has the same key negative when compared to Upgrading on your own—higher expenses. Upgrading through the SMI Managed Volatility Fund adds an extra layer of expenses. That means if you could own all the identical underlying funds without paying any additional trading costs, you would outperform the Fund by the amount of its expenses, which according to the prospectus will be capped at 1.5% annualized.*
For more information about the Sound Mind Investing Funds, 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.
If the idea of Upgrading with a safety net appeals to you, this new fund is worth investigating further. Not everyone will be drawn to the idea of sacrificing some upside potential in order to limit their downside risk, but that's exactly the tradeoff that may enable others to feel comfortable proceeding with Upgrading at this point in their investing journey. 
Please note: The SMI newsletter staff is not authorized to give information regarding the SMI Managed Volatility 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.
*Because the SMI Managed Volatility Fund will invest in other 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. You may obtain a current copy of the Fund's prospectus by calling 1-877-764-3863. Past performance is no guarantee of future results. Your Fund shares, when redeemed, may be worth more or less than their original cost. The Sound Mind Investing Funds are distributed by Unified Financial Securities, 431 N. Pennsylvania St., Indianapolis, Indiana 46204.
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