Fund Frustration, Huffman-Style

This week's update from John Hussman struck me as unusual. He seemed to be expressing a fair bit of frustration over how much the market has gone up in the last few months and that their various disciplines and concepts have prevented them from having more net long exposure. So as the S&P 500 as gone up about 50% in the last five months the Hussman Strategic Growth Fund (HSGFX) appears to have only gone up 5%.

Now, let me just say that I'm not sure if he really is frustrated or if he is merely being empathetic to shareholders, but either way it is reasonable to be a little frustrated being up 5% in an up 50% world. That does not make the fund a bad fund, and does not mean holders should sell. Hussman's post was a catalyst for an article for theStreet.com by me that should run later in the week which is more about the nuts and bolts of this type of fund, but for this post I'd like to focus on the emotional response of frustration.

During the worst of the bear market there were comments from readers expressing interest in putting huge allocations to funds like Hussman's or one that I own and have written about, the Rydex Managed Futures Fund (RYMFX). My replies were along the lines of I love these funds in small does but they will get left way behind if the market goes up a lot.

That is just how the funds work and anyone buying in who is shocked that a low-octane absolute return fund lagged a huge rally probably did not understand the product.

If you bought an absolute return fund with proper expectations and the fund you chose has turned out to be much less volatile than the broad market, then it would seem to me that it is doing exactly what you would have hoped for when you bought it. One or two funds like this, combined with a couple of emerging market stocks or funds that are up close to the 80% that the iShares Emerging Markets ETF (EEM) is up, would help create a pretty good risk adjusted return for your portfolio.

Here is a crazy example that assumes that the Hussman fund charted will continue to have very low volatility. Since the March low, the S&P 500 is up 50%. The Hussman fund is up 5% and the iShares Brazil ETF (EWZ) is up a little over 80%. Half the portfolio put into each would have resulted in the portfolio going up 42.5% in an up 50% world with only half the portfolio exposed to historically volatile assets.

The purpose of that example is to (hopefully) show that the result from the fund is too simplistic to say the fund did well or did poorly, or that it should or should not be kept. The fund is behaving as I would expect it to, and integrated properly into a portfolio, it can deliver a useful result. If, in the example above, Brazil had dropped 30%, then the portfolio would have been down 12.5%.

In the type of portfolio construction I write about, and implement, every holding serves a purpose along these lines. The other day I talked about swapping a lower vol name for a higher vol name as a way to increase exposure. When I added the Rydex fund a long ways back, it was to reduce volatility. I imagine that had it been the Hussman fund instead, it would have had a similar effect and I would have been just as happy with that fund as I am with the Rydex fund.

Comments

[AMV613:]

I was a holder of this fund for many years prior to last September when everything started to fall off the cliff before jumping back in during the Spring.

I treat the fund as an investment that gives a better return than a bank account. I am not thinking of it as having performance like the Magellan Fund. It is a conservative fund that looks to protect principal and give a decent return. I think it fits that mold.

I appreciate Mr. Hussman's commentary and can understand his frustration. But to his credit, he is not abandoning his philosophy which I think over the long term leads to better sleep and less anxiety.

Aug 06 12:41 PM

[mla99:]

I love the fund (and HSTRX too). I'm not greedy. The fund didn't lose 40% so a 5% gain from an almost fully hedged position seems great to me.

Aug 07 04:48 AM

[mals:]

As a former Hussman fund owner, I find that this article hits it right on the button. I made the mistake of expecting large return during a bull run and ending up with a measly 3% return over three years. I think there are less risky alternatives than buying into Hussman.

Aug 07 08:13 AM

[jim invests:]

As an alternative I bought Forester Value Fund. It's a conservative fund as well but seems to have more upside.

Aug 22 01:12 PM