Fund name
: Hussman Strategic Total Return (HSTRX)Objective: The fund works for total returns (i.e., capital appreciation plus income) by investing in a changing mix of Treasuries, foreign government bonds, investment grade corporate debt, dividend stocks, REITs, and gold and silver stocks. They invest both in the US and internationally and can hedge their various exposures, including currency exposure. The portfolio balance is determined by the manager’s macro-level assessments of world markets.
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 fund but does not advise any private accounts.
Manager: John P. Hussman. 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.
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: September 12, 2002.
Minimum investment: $1,000 for regular and $500 for IRA/UGMA accounts.
Expense ratio: 0.90% on assets of about $200 million. There’s a 1.5% redemption fee on shares held fewer than six months.
Comments: The comedian Paul Rodriquez famously observed, "War is God’s way of teaching Americans geography." We might add a corollary to that: "Volatility is the Market’s way of teaching Americans psychology." As volatility rises and portfolios swoon, even briefly, investors suddenly reassess their long-professed dedication to "riding out the storm," "sticking with the market for the long-term" and "ignoring the noise from Wall Street." Instead, they find sudden delight in the joys of low-return cash-equivalents, ranging from bank savings accounts (my local bank is offering a rich 0.54% return – guaranteed!) to money markets and CDs. The problem with all of these investments is inflation: any investment that doesn’t return more than the rate of inflation is costing you purchasing power. By way of simple example, assuming the 2005 inflation rate, $1000 in cash today will be worth $600 in 15 years. Unless you want to watch your savings evaporate like a puddle in the summer sun, you need to beat inflation.
How much is that? The more-or-less official answer from the Bureau of Labor Statistics is 2.8% in 2007. It’s indisputable that the so-called "headline number" – the one which famously excludes the volatile food and energy sectors – understates total inflation by about a percent (that’s from a Cleveland Federal Reserve study. Critics argue that the Consumer Price Index actually understates inflation by an additional percent or so.
Cash simply doesn’t, over the long run, beat inflation. The best form of cash investing is Treasury bills, which pay several times more than traditional bank savings accounts. But even T-bills, after inflation, returned only 0.7% annually between 1926 and 2001. Bond funds are an alternative to cash-equivalents but they can suffer badly if inflation rises, especially if the Fed begins a cycle of vigorous rate increases. T. Rowe Price calculates, for example, that a 1% increase in the interest rate will cut the value of a $1000 10-year bond down to $926.
Some fund families have tried to balance these two needs – stability and inflation protection – by creating vehicles sometimes called "strategic income" funds. These funds may supplement traditional bond investments, or replace them almost entirely, with uncorrelated, unconventional assets that allow the funds to counter some of the factors that might undercut traditional bond funds. The argument here is that Hussman Strategic Total Return is a pretty good example of such a fund.
Like Hussman’s very successful Strategic Growth Fund (HSGFX), Strategic Total Return starts with a top-down analysis of market conditions such as inflation and interest rates. The manager makes two adjustments to the portfolio in response to those protections:
and
The fund typically has around 20% of its portfolio in stocks and typically three-quarters of its stocks are from precious metals companies. The remainder is a changing mix of T-bills, Treasury bonds of various durations, inflation-protected securities, agency bonds (e.g., obligations issued by the Federal Farm Credit Bank), international bonds, REITs and currency options.
So far, Hussman has performed solidly. His fund has made money in every year since inception (2002). Despite a bond-heavy portfolio, the fund has returned almost 10% per year, it has returned more than 5% every year, and its trailing returns are in the top 1 – 10% of its Morningstar peer group.
It’s particularly reassuring to track the fund’s performance in the market instability of the past month and quarter. While the stock market has dropped about 11% over the past 3 months and 7-8% in January, the Total Return fund gained 7% and 5% in the same periods.
To get some idea of the distinctiveness of that accomplishment, I asked Morningstar’s fund screening software to generate a list of all retail funds which have returned at least 5% in each of the past five years and which have at least broken even so far in 2008. Of the 11,000 or so funds that have been around for at least 5 years, exactly five of them pass this screen. Those include three emerging market bond funds (Fidelity, MFS and Price), Permanent Portfolio fund (PRPFX) and Hussman.
The Permanent Portfolio fund is a sort of amped-up version of Hussman’s fund; it has produced remarkable results with a one-of-a-kind portfolio (gold and silver bullion rather than precious metal stocks, Swiss francs, real estate and natural resources stocks, aggressive growth stocks and U.S. government bonds). Morningstar analysts haven’t covered the fund since it was, under previous management, involved in a major scandal in the mid-1990s. PRPFX has lost money in only three of the past 27 years (most recently, 1994) though it does suffer through periods of low single digit returns. I’ve always been skeptical of the fund because of that checkered past and its manager’s refusal to invest a single dollar in it. That having been said, it has with some considerable consistency made a lot of money for its investors.
Bottom Line: Investors concerned about market volatility, inflation, stagflation (a sort of worst-case economic condition in which economic stagnation and high inflation combine to render the Fed impotent) and stock market bears might seriously consider the sort of safety net offered by strategic income funds. Hussman’s low expenses, low investment minimum, consistent returns and substantial management stake make it an awfully credible choice.
Fund website: http://www.hussmanfunds.com/. As befits a guy with a doctorate, Hussman writes incessantly. His website hosts more interesting articles on economics and investing than any three of his peers.