Arnott's star in the finp0rn pundocracy faded several years ago, in my view. But Josh Brown is still a rock star worth listening to.

April 20, 2020 Oil (WTI) hit a 138 year low price of (-$39).

At the start of 2020 the big industrial economies were healthy, investors were optimistic, and West Texas Intermediate was trading at about $60 a barrel. Prices began to fall in February after the first reports of the coronavirus. That accelerated as the outbreak turned into a pandemic. By the end of March, WTI futures were at $20, the lowest they’d been since after Sept. 11. Then, after tense negotiations, the big oil producers—led by Russia, Saudi Arabia, and the U.S.—agreed to reduce production by 10% to try to stabilize prices.
Then on April 20th, 2020 oil prices sank.
Here’s how it works: Imagine a trader sees that WTI is at $10 and predicts it’s going to end the day at $5. To capitalize, he buys 50,000 barrels in the TAS market, agreeing to purchase oil at wherever the price ends up by 2:30 p.m. At the same time, he starts selling regular WTI futures: 10,000 barrels for $10 and then, if the market is falling as predicted, 10,000 more at $9, and again at $8. As the settlement window approaches, the trader accelerates his selling, offloading a further 10,000 contracts at $7, then another chunk at $6, helping push the price lower until, sure enough, it settles at $5. By now he is “flat,” meaning he’s sold as many barrels as he’s bought and isn’t obliged to take delivery of any actual oil.
The trader’s bet has come off. His profit is $150,000, the difference between what he sold oil for (50,000 barrels at prices ranging from $10 to $6, for a total of $400,000) and what he bought it for in TAS contracts (50,000 barrels at $5 a barrel, or $250,000). All of this is perfectly legal, providing the trader doesn’t deliberately try to push the closing price down to an artificial level to maximize his profits, which constitutes market manipulation under U.S. law. Manipulation can result in civil penalties such as fines or bans, or even criminal charges carrying a potential prison sentence of up to 10 years. It’s also illegal in the U.S. to place trades during or before the settlement with “intentional or reckless disregard” for the impact.

Story Here:
stock-market-when-oil-went-negative-these-essex-traders-pounced

"Clean" WHERE? This usually means solar power, and while a laudable idea, you have to have large tracts of surface available, good weather most of the time, and you need to manufacture the stuff (polluting THERE) in order to build the panels. This stuff doesn't magically produce and transport itself; nor transport its output magically either (wiring, etc). Geothermal would be great, but a major implementation problem. Tidal power, sure, but you have to produce the materials, transport them, install them, run wiring, etc. Off-loading all this construction and manufacture into space and transmitting microwaves back? Yeah, THAT might be a 'solution' EVENTUALLY, but 15 years (or 25)? Fusion power could do it, but not in that time period. Not bloody likely we're getting THERE from HERE!
And while we're making that viable, what is everyone ELSE doing? We become even MORE economically handicapped, lose MORE jobs to cheap labor elsewhere, and THEIR pollution simply blows HERE? And is it moral to simply export our environmental problems? We don't have the technology, international consensus, or financial wherewithal to actually FIX this problem, and we shouldn't delude ourselves that we DO.

Quick read that looks at some of the challenges surrounding Biden's 15 year plan...

Joe Biden put a 100% clean grid at the core of his climate agenda. Even more remarkable was his proposed timeline: 15 years.
Can anyone build a clean grid that fast? And for that matter, where did an idea this big come from in the first place?

https://financialpost.com/pmn/business-pmn/the-making-of-bidens-superfast-push-for-clean-electricity

I have been using great risk reward funds since 2000 but in the last several years and especially since retirement I just sell to cash when I see extreme market conditions. It's the only sure way to protect my portfolio. When a black swan shows up is years such as 2008,2009,2020 there is no way to know what will work and what used to work before may not work in the future.

Thank you, FD1000,
I agree that each bear market is different and they are less predictable with massive quantities of stimulus. I reduce my exposure to stocks to 25% following Benjamin Graham’s guidelines late in the business cycle. MFO has been great to identify lower risk funds. I am pleased with the low downturns in my portfolio which is rising slow and steady.

Hi Lynn, great article.
I have been using great risk reward funds since 2000 but in the last several years and especially since retirement I just sell to cash when I see extreme market conditions. It's the only sure way to protect my portfolio. When a black swan shows up is years such as 2008,2009,2020 there is no way to know what will work and what used to work before may not work in the future.
I have several criteria but the easiest one is the VIX, when...VIX>30 get ready...VIX>35 start selling...VIX>40 rapid selling. The catch of course is not to stay out for longer term. I have been out of the market about 3% of the times in the last 10 years.
As you said correctly: "All Weather" Permanent Portfolio created by Harry Brown in 1980's. It was made of four equal weighted assets of gold, cash, stocks, and long term treasuries. It's performance has worked well in some environments and not others. This portfolio performance was poor since 2010 (PRPFX isn't exactly it but close enough) compared to VBINX(60/40) and VWINX(40/60) see (link).

I appreciate all the comments and observations about how OAKBX has altered its portfolio (both in allocation and in types of bonds) over the past several years. This seems to be in response to the changing fixed income market (interest rates low and presumably bottoming out though not rising).
Interestingly, OAKBX is the only Oakmark fund that M* does not like (rated neutral). So while M* does not see significant changes happening on the equity side, somethings must have changed to cause the equity funds to degrade so much.
(M* still loves long time managers Nygren at 2*, gold-rated, OAKMX; Herro at 2% gold-rated OAKIX and 1* bronze-rated OAKEX; McGregor at 2*, silver-rated OAKGX.)

I too want to thank you for all your hard work and interesting ideas. As a recent retiree I am concerned about the potential for significant losses early in retirement that will never be made up, having lived through 1974 and later bear markets. Many other portfolio recommendations ( ie AAII) claim that there has never been a five year period of negative returns on various indices so if you just can leave your equity position alone and have a 5 year supply of resources, don't worry.
My math show the negative period is in fact longer but it really depends on "hanging on" as you see your net worth drop by 30 or 50%. This works far better at age 25 or 35 than 65, believe me, and almost all of the previous periods did not start from such insane valuations.
The only concern I have with your suggestions is Hussman. Many of us were quite convinced Hussman knew what he was doing with HSGFX in the run up the 2008 but his fund did especially poorly since, and I can't say I feel comfortable believing him now. There is very little recent data ( since June) on HSTRX even on his web page. The data on M* is equally unhelpful.
As for Gold, I have owned a small % for years as inflation hedge. Seems to work OK although some mining stocks would pay a dividend

It looks like HFCSX has a history of not being tax efficient. Its tax cost ratio, not counting the current distribution (figures are through Nov. 30th) is 2.29% for one year and 2.18% for three years. Though funds in its category, MCG, are typically not tax efficient. On average they lost 1.85% to taxes annually over the past three years.
Last year HFCSX distributed about 10% of its NAV (click on 2019 box here). 2020 was a great year for growth funds, so one would not be surprised to see cap gains distributions double or triple that of last year's.
For example, one of the handful of other mid cap growth funds with mid cap blend portfolios, HMDYX, had a cap gains distribution in 2019 of 2.28%, while its estimate for 2020 is 10.62%.
"They don't deserve to have my funds."
Is it because of their cap gains distribution this year, though last year's 10% was tolerable? Or is it at least in part because of the fund's recent anemic performance of 4.45% YTD? None of the MCG funds with MC blend portfolios did better than average for the category; still HFCSX's performance was way under that of its peers.
"I'll be liquidating in 30 days."
If you're worried about wash sales, your net gain (or loss) will come out the same regardless since you're liquidating. Or are you thinking about postponing any remaining gain in your shares until 2021? (That would be 23-24 days.)

I owned OAKBX for about 10 years in my IRA, and it generally performed better than average. I sold it several years ago because it was changing in ways that didn’t suit my purposes. It started holding higher percentages in stacks, its volatility increased, and its bond sleeve seemed to underperform. It no longer had the excellent downside performance that attracted me in the first place. I replaced it by increasing stakes in funds I already owned — FBALX, PRBLX, TWEIX— that had good downside performances. I also added money to good performing bond funds to achieve a comparable stock/bond allocation.

I own Oakmark funds, both in taxable and Roth accounts. Have long been a fan of the firm and their process, and more concentrated portfolios.
OAKBX appears to have really lagged a surprising number of "usual suspect" actively managed funds over a moderate time period. At one time I thought OAKBX would be one of the folds I'd hold until well into retirement; maybe I still will, but I have reduced my position there substantially.
I have posted here how OAKEX (which I also used to hold both in Roth and taxable) has really been lackluster vis-a-vis any other number of actively-managed competitors. I haven't held it for ages and doubt I will return.
I still hold OAKIX. I have held OAKGX in taxable and non-taxable, and may do so again.
There's not a lot of active managers who wow me at the moment; I try to be reasonable on timelines, because a value mindset has kept me in markets when others I know have panicked. I look harder now at indexing than I did years ago, but I haven't fully drank that Kool-Aid yet.

Good article. I've traveled a lot. I used school and then work as the means to do it. Living in places for a few years at a time, like a serial-location monogamist. When, after a few years into retirement, the time to leave that safe and secure address came, I knew it. Because it wasn't safe and secure, anymore. CRIME! So, I could not let inertia hold me there any longer. Family connections provided a new opportunity. And the marriage part? I still don't have to like it, but by now, I'm accustomed to the way my wife "communicates." Her ability to plan ahead seems to have a three week limit into the future. Even about major stuff. There are things I can easily agree to. But I have to say "no" to the long-term items on her wish-list which she seems to think are short-term items. Because "long-term" is not a thing she comprehends. ;) Changes? I can enjoy the beach again, since I discovered what water shoes are. The rest is easy: I need to get up to DO stuff only rarely. I LIKE that! I'll be so glad for LIVE music again, and the LIVE opera-on-screen, when covid is behind us. I use the local library a lot. I learn on YouTube. For FREE. And I give myself permission not to respond when my wife reminds me that she doesn't like the fact that she still has to work--- at age 47. :) LOL.

There are many wise and thoughtful contributions from several of the varsity team here on MFO. When I held one of the Fidelity Asset Manager funds way back when, then OAKBX, and then BRUFX, I believed (probably naïvely) that what I had were "all-weather" funds. The past few years have demonstrated that allocation funds work great when markets are "behaving" as they usually have. Interest rates and rates of inflation rose and fell with a certain regularity. Value stocks and growth stocks alternated with being the flavor of the year or two, but there was an alternation. Nowadays, interest rates remain far below historical levels and value securities can't find even hold-the-nose buyers. My thought is that the weather has changed so drastically that it's pointless to expect a balanced fund to thrive in this climate.
While I hold PTIAX and TMSRX in my taxable portfolio, what I expect from them is not that their managers hedge their stock holdings as a balanced fund manager might do, but that they will provide a steady stream of income or capital appreciation that does not depend on the performance of my stocks and equity funds. I have a small slice of RPGAX, but no other allocation fund in my taxable portfolio. As for my TIAA retirement account, I let Vanguard's retirement target fund managers decide what bonds to buy. The only decision I make is on the year (2025, 2030, etc.). Those mixed asset funds-of-funds represent approximately 40% of the portfolio, which is tilted farther towards equities than most 78-year-olds can tolerate. Not advice, just observations.

“The difficulty in finding value in bonds helps explain poor absolute performance of balanced funds, but it doesn't help explain relatively poor performance. All of OAKBX's peers face this same problem.”
Yes and No. Not all bonds are equal. I’m aware of no other balanced fund that relied(ies) so heavily on upper tier and longer dated bonds as OAKBX during its hey-day.. It doesn’t take a big commitment to AAA bonds with 15 or 20 year durations to pack a lot of hedging power - if you get it right. I’d argue that that’s a riskier proposition than hedging with short-term junk bonds - just by way of example. During the time I was with OAKBX management sounded distrustful of the junk and lower rated bond sector. They did begin to exit the AAA stuff - but in so doing weakened or discarded the method of hedging against equity losses they knew best.
DODBX, from what I can tell, utilizes the same components as their relatively tame DODIX (income fund) for its “bond” portion. That’s a much more docile approach to bonds. Yeah - I’m disappointed in my DODBX holding. But, unlike Oakmark I think, D & C has stuck to its stated and time-proven philosophy. Unfortunately, they were early (by years) in predicting the uptick in long-term rates which now appears to have begun. Their big stake in financials has now started to pay off (and the fund’s recent performance shows some improvement.) So, I’m comfortable continuing to hold DODBX.
Final thought - As a group balanced funds are a very unbalanced lot. :)

https://www.marketwatch.com/story/so-much-of-retirement-planning-is-wishful-thinking-what-ive-learned-after-3-years-of-actually-being-retired-11607448083?siteid=yhoof2
Stay Safe, Derf

Laziness is not a virtue. :) - I’ve now taken the effort to Google the referenced column (November 2020 Mutual Fund Observer). I think in fairness to Ed I should post his exact words:
“ When I left Harris Associates in January of 2012, the Oakmark Equity and Income Fund had, on 12/31/2011, $18.9B in assets. Performance over the long-term had been above the relevant benchmarks. As of 10/31/2020, per Morningstar, the fund’s assets are at $7.2B, and performance has been lagging benchmarks for the last 1, 3, and 5 years.
What is the problem? Has my former colleague Clyde McGregor lost his touch? No, certainly not that I can see. The equity portion of the portfolio is a classic Harris Associates’ value portfolio, and it looks very interesting to me looking forward over a three to five-year time horizon.
There are two areas of issue. Please recognize that I am speaking about balanced funds, which is the class of investment I am most familiar with, having managed the same for more than twenty-five years at a national bank trust department as well as at Harris Associates. The first competitive issue is fees. When Fidelity’s Balanced Fund shows a 53-basis point expense ratio and Vanguard’s Wellington Fund shows a 25-basis point expense ratio (and the Vanguard Admiral share class drops that fee to 17 basis points). A 25 to 35 basis point fee disadvantage is a lot of baggage to overcome consistently in terms of its detrimental impact upon performance. If the fee disparity is larger, making up the differential becomes nigh on impossible. I will leave it to others to address the issue of the fee disadvantages relative to exchange traded funds.
The other area of disadvantage currently is fixed income as an asset class for a balanced portfolio. With rates where they are and where they are likely to be for the foreseeable future, it is almost impossible to add any value in the fixed income area without taking on extreme amounts of risk. Money market rates, when not negative, are running from zero to perhaps eight basis points. Maturities beyond two years are not compensating you for the risk you are taking on (if you are lucky, you can find 1% on a credit union’s three-year insured certificate of deposit).
I will leave aside the issue of value being out of favor as opposed to growth. Those of us who are value investors are prepared to wait through those periods of underperformance. That said, the goalposts for various asset classes have shifted. Small cap was equities with a market capitalization of $500M to $1B. Now, the range is extended up to $2.5B. And one must consider the extent to which other asset classes impinge on your allocation decisions. An article on the “Seeking Alpha” website was making an argument not too long ago that the better way to achieve portfolio diversification going forward was to pair an S&P 500 Index Fund with one of the publicly-traded C-Corporation private equity firms. It is an interesting question to think about.”
The End of Many Eras

Thanks for the pointer to the column. You can find a list of Ed Studzinski's pieces here, including his November post:
https://www.mutualfundobserver.com/2020/11/the-end-of-many-eras/
Your memory is perfect, right month, and 3/3 on his reasons. (More on that below.) I appreciate your additional thoughts about the quality of bonds used (Ed also commented on this in his column, saying that one can't add value without adding excessive risk). Interesting observation about using the energy sector.
Value vs. growth does seem to be a major factor. I looked at all 50%-70% allocation funds at M*. Of the 40 distinct funds with value portfolios, the number in the top half over the past five or three years can be counted on two hands. Of the 38 with star ratings, just 5 manage even four stars, with more having two stars than three. The four star fund people will recognize is BRUFX.
Cost would seem to be a smaller factor, though it could be why DODBX retains three stars. The difficulty in finding value in bonds helps explain poor absolute performance of balanced funds, but it doesn't help explain relatively poor performance. All of OAKBX's peers face this same problem.
Apparently value vs. growth has more of an impact on funds in this category than I suspected.

I'm sounding like a broken record here, but 2020 was an unusual year. Take a look at its performance since inception through 2019 instead. Over the 7¾ years, it achieved an annualized return of 5.156% vs its peers' 3.936%. Still impressive, but far from the 7% advantage you're seeing to date.
Inception to Dec 31, 2019 chart. IMHO this chart really puts this fund into perspective.
Irrespective of the fact that most of the figures you gave are long term (multi-year) results, what they're really showing you is short term performance. That's because the past year has so distorted the longer term averages. So the next question is why did it do so well on a relative basis this year?
Look at its portfolio (again in the context of the 2020 market). It's nearly off the scale on the growth side. (YTD, VIGAX has returned 36.89% vs. 16.13% for VFINX.) Was this a matter of skill, that the management took the fund to the right part of the market at the right time, or was it luck? The fund has always been growth leaning (check its portfolio history). Its peers are a much tamer group (look at the "Value and Growth Measures" section of the M* portfolio page for the fund.)
I tend to look just as much at year by year performance as cumulative performance. Especially this year, one good year can skew the numbers. Likewise, while growth has tended to do better than value or blend for a long time, it hasn't had a year like this since the dot-com bubble burst.
https://www.longtermtrends.net/growth-stocks-vs-value-stocks/
Difference in annual returns of growth and value (from Vanguard)

Side note: what happened to Oakmark?

I can only speak to OAKBX which I owned for a decade or longer before bailing late in 2018. As to “EdStud” (referenced above), Ed Studzinski did address the dire situation at his old fund (OAKBX) in a recent MFO Commentary. For some reason I’m unable to bring up any except the December issue, but I think it was in the November issue - or possibly October. Ed was magnanimous in addressing the fund’s stumble since leaving as pertains current manager Clyde McGregor. Something along the lines of Miller’s “Nobody dast blame this man”.
Memory is a funny thing ... :) - But I believe Ed attributed the problems more to (1) value being long out of favor, (2) bond rates being too low and (3) competition from extremely low-fee index funds which compete against moderate-fee OAKBX. (Hopefully I got 2 out of 3 correct.)
My own perceptions:
- OAKBX (more than other balanced funds) hedged their equity risk with AAA rated (government bonds). Some had rather long duration. I never understood how they pulled it off, but for many years it worked for them. So when “the band stopped playing” (so to speak) and rates in AAA debt plunged to near 0, that hedging strategy ceased to work.
- OAKBX also hedged successfully in the energy sector, particularly with small drillers. So the depressed prices and upheaval in how oil is extracted had to hurt their strategy.
- Around the time I exited (late 2018) I noticed that OAKBX had begun mirroring (resembling) the performance of the major indexes on big “up” and “down” days. For a defensive fund, that’s not a welcome characteristic. That’s what drove me to get out. I tried unsuccessfully to prove my case that it had become a closet indexer and posted those thoughts here, but without success. The fund’s largest holdings did not correspond with those of the S&P. I remain convinced, however, that they had begun taking on more risk with OAKBX back than in an effort to compensate for the fund’s poor performance.
- Like all value funds OAKBX has suffered from value being out of favor.
- Likely, a lot of money has hit the exits (I believe Ed referenced the drawdown) and money flowing out generally hamstrings a manager. Conversely, money flowing in during strong markets generally helps a fund - though only in the near term.
Just some rambling thoughts. But, Ed’s comments were appreciated by me and definitely worth reading if you missed them.

Side note: what happened to Oakmark? Not a single fund rated higher than 2 stars. Though M* still loves the company, giving most of its funds gold or sliver prospective (forward looking) analyst ratings.

M* "likes" them because they advertise on the platform, not because they truly have conviction.

Clearly my question was not understood. Oakmark used to be a fine fund company. For example, OAKBX was a

five star fund in 2010.

Oakmark Equity & Income (OAKBX) is another popular moderate-allocation offering that looks especially good these days. This fund grew from less than $60 million in assets at the end of 1999 up to roughly $7 billion in late April 2004, as it crushed its peers during each of the first four years of this decade.

https://www.morningstar.com/articles/108318/choose-your-all-weather-fund-with-care
Recent (and not so recent) history suggests things have changed. M* does not perceive a change in most of Oakmark's funds (it still thinks highly of the people/process). Do you perceive any changes, and if so, what?

I don't think your question was misunderstood at all. Note, the star rating is simply an objective risk/return metric. Regarding the lack of change to the Gold/Silver/Bronze rankings which are indicative of M*'s perspective on the platform, I'm simply highlighting that M* has a bias to not alter those rating because they serve as a source of revenue to them (i.e. they would never admit it, but M* is bias and influenced by factors other than conviction).