April 2011 IssueLong scroll reading

Hussman Strategic International Equity (HSIEX)

By Editor

Objective

The fund seeks long term capital growth, but with special emphasis on defensive actions during unfavorable market conditions. The portfolio is a mix of individual securities, ETFs (up to 30% of the portfolio) and hedges. In the near term, the hedging strategy will focus on shorting particular markets; the fund can short individual ETFs but “the fund does not intend to use these hedging techniques during the coming year.” The portfolio balance is determined by the manager’s macro-level assessments of world markets. The fund may be fully hedged (that is, the amount long exactly matches the amount short), but it will not be net short.

Adviser

Hussman Econometrics Advisors of beautiful Ellicott City, Maryland. The advisor was founded in 1989 by John Hussman, who is the firm’s President and sole shareholder. Hussman also advises the Hussman Strategic Growth and Hussman Strategic Total Return funds but does not advise any private accounts. Together, those funds hold about $9 billion in assets.

Manager

John Hussman and William Hester. Hussman has a Ph.D. in economics from Stanford, a Masters degree in education and social policy and a B.A. in economics from Northwestern University. Prior to managing the Hussman Funds, he was a adjunct assistant professor of economics and international finance at the University of Michigan and its business school, an options mathematician at the Chicago Board of Trade, and publisher (since ’88) of the Hussman Econometrics newsletter. Mr. Hester has been Hussman’s Senior Research Analyst since 2003, and this will be his first stint at co-managing a fund.

Management’s Stake in the Fund

“Except for a tiny percentage in money market funds, all of Dr. Hussman’s liquid assets are invested in the Hussman Funds,” which translates to over a million in each of his two funds, plus sole ownership of the advisor. Likewise, “The compensation of every member of our Board of Trustees is generally invested directly into the Funds. All of these investments are regular and automatic.”

Opening date

December 31, 2009, sort of. The fund ran for nine months of road-testing, with only the manager’s own money in the fund. It opened to purchases by the public on September 1, 2010.

Minimum investment

$1,000 for regular, $500 for IRA/UGMA accounts and $100 for automatic investing plans.

Expense ratio

Capped at 2.0% through the end of 2012. The fund’s actual operating expenses are around 5.0%, measured against an in-house asset base of $7.5 million. The Strategic Growth Fund, of which this is an offshoot, has expenses around 1%. There’s a 1.5% redemption fee on shares held fewer than sixty days.

Comments

Dr. Hussman’s funds have drawn huge inflows in the past several years. Strategic Total Return (HSTRX) grew from under $200 million in June 2007 to $2.3 billion by June 2010. Strategic Growth (HSGFX) grew from $2.7 billion to $6.7 billion in the same period. The reason’s simple: over the past five years, they’ve made money. Total Return posted a healthy profit in 2008 (7%) and over the entire period of the market crash (an 8% rise from 10/07 – 03/09). In a crash where the Total Stock Market index dropped nearly 50%, Strategic Growth’s 5% decline became phenomenally attractive. And so the money poured in.

Presumably that track record will quickly draw attention, and assets, here.

Mr. Hussman’s success has been driven by his ability to make macro-level assessments of markets and economies, and then to position his funds with varying degrees of defensiveness based on those assessments. He has frequently been right, though that merely means he’s mostly been bearish.

Before investing in the fund, one might consider several reservations:

  1. Mr. Hussman has relatively little experience, at least as measured by portfolio composition, in international investing. Non-U.S. stocks comprise only 5-6% of his other portfolios.
  2. The other Hussman funds could, if Mr. H. found the case compelling, provide substantially more international exposure. At the very least, Strategic Growth’s portfolio contains no explicit limitation on the extent of international exposure in the portfolio.
  3. Mr. Hussman himself is skeptical of the value of international investing. His argument in January 2009 was striking:

    . . . the correlation of returns across various markets increases during recessionary periods. As I noted in November 2007 . . . global diversification is least useful when it’s needed most. And this data shows that not only does the correlation between US and international markets rise during recessions, but that global returns trail US returns during these periods. Lower returns with higher correlation. This data implies that the benefits of international investing and diversification come predominantly during periods of global expansion, and not during bear markets induced by recessions.

  4. Assets under management are ballooning. $2 billion in new – read: “hot” – money in a single year is a lot for a small operation to handle (c.f. Van Wagoner funds), and there’s no immediate sign of a decrease. Encouraging still-more inflows comes at a cost.

Mr. Hussman has done good work. I’ve written, favorably and repeatedly, about his Strategic Total Return fund. I’ve invested in that fund. And I’ve been impressed with his concern about shareholder-friendly policies, including his own financial commitment to the funds. That said, Mr. Hussman has not – so far as I can find – made any public statements explaining the launch of, or reasons behind this new fund.

Bottom Line

I don’t know why you’d want to invest in this fund. The expenses are high, the existing funds can provide international exposure and the manager himself seems skeptical of the rationale for international investing. That’s not an argument that you should run away. It’s a simple observation that the particular advantages of this fund are still undefined.

Fund website

The Hussman Funds. Hussman’s 2009 critique of international investing is also available on his website.

© Mutual Fund Observer, 2011.  All rights reserved.  The information here reflects publicly available information current at the time of publication.  For reprint/e-rights contact [email protected].