The tranquility of Hilo Bay and Mauna Kea in the background might lead you to think maybe you should go 100% into absolute strategy funds like the ones that have been mentioned in the comments for the last few days.By the way the comments about these funds in the last couple of days have been very informative, thank you.
On the surface the idea is very compelling and something I wrote about and explored several times a little over a year ago.
Conceptually the idea of making 6-8% year in and year out regardless of what is going on in the world is appealing. If you are a good saver you can get away with averaging 7% just fine.
There are several caveats, both practical and emotional, that need to be considered. As a matter of philosophy I think too much of anything, no matter how "good" or "low risk," actually becomes a risky proposition.
From a practical standpoint any fund managed to achieve a particular type of result can stumble every now and then. During the summer dip the Schwab Hedged Equity Fund (SWHEX) fell about 13% and there were several others too (feel free to leave any other ticker symbols from this category that puked down in the comments). Whatever went wrong at SWHEX can go wrong elsewhere in the future.
Anyone going heavy on the theme would be wise to spread the exposure out over quite a few different products. Owning one that blows up wouldn't be such a big deal if it was one of many. There is no way 20% of a portfolio should be in one single fund. Its ok to get the desired effect from many different places.
An emotional road block to going heavy in absolute is that the next time the market goes up 30% these funds will get dusted and will not participate that means you won't participate either--if you are very heavy.
If you really only need 7% per year and the fund can deliver that over time (which is not guaranteed) then missing out on a huge up year should not matter but to some people it will. This calls for some introspection or else the chance of chasing heat when it's too late becomes very likely and so the chance for a bad result increases.
Going all absolute is not likely something I would want to do. Like many strategies it has merit and increasing or decreasing exposure at different points in the stock is what makes more sense to me. Not that you should follow what I say but I am talking about a more moderate approach which is how I view all themes, segments and strategies.
I couldn't figure a way to work it in smoothly above but a while back one client gave us a mandate to own SWHEX.
31 comments:
sun"There is no way 20% of a portfolio should be in one single fund. Its ok to get the desired effect from many different places.
I think reasonable people can disagree on this point. I think saying "no way" is a bit too emphatic, and I see this as being more of a philosophical/personal preference issue versus having 20% in a single fund automatically equating to imprudent risk.
I presently have 20% each (40% together) in two mutual funds, one is a broadly diversifed commodity fund, and the other is the Fairhome Fund (FAIRX) which is a Buffett style concentrated value approach which has beaten the market handily since inception and held up well during the 2000-2002 bear market. If I thought the probability that we are entering a bear market was 80%+ I wouldn't hesistate to go 20%+ into Hussman Strategic Growth.
My own view is that in order to outperform the market, you have to be substantially different from the market in material ways. The line between a well researched, well thought out overweight of a particular fund versus taking an unreasonable big bet is a gray one but I think 20% isn't there. In fact, I think one could construct a LTBH portfolio with less volatility then the market with 5 well chosen mutual funds that you simply let ride, although I do not believe that is optimal
Am I the only one to base my portfolio on how much I can tolerate to loss in a bad year but not how much I can gain in a good year? Say I can tolerate a max of about 10% in a bad year then my porfolio should stay less less 50% market risk. Then I choose funds or efts or stocks to conform that criteria.
Even HSGFX got caught in that downdraft which appears to have been one of those situations where market leaders really got taken out with the broader indexes taking less of a hit. Since NARFX avoided that it suggests their approach is pretty balanced and probably not dependent on derivatives.
Curious why your client mandated SWHEX (& SWHIX which is the 'investors shares' version) when, by its own prospectus, it isn't really an absolute return fund: It is a long-short with a skewed but relatively fixed allocation scheme -- (roughly) two thirds long equities highly rated by Scwhab and one third short equities low-rated by Schwab -- the logic apparently being the market is up more than twice as often as down but the short positions will smooth the ride; which probably works okay until there's a broad market downdraft that, as noted above, takes the market leaders down more sharply than the dogs (and broad indexes) or a major bull move that takes everything up, particularly the lowly dogs (that were being shorted).
Not knocking Schwab -- the fund is a reasonable way to make some extra money off of research they do anyway and there's a need for alternative strategies accessible to retail investors -- but, assuming my brief browse of the prospectus didn't miss anything too significant, SWHEX & SWHIX appear, well, rather automated; it looks like the fund investor is really buying Schwab's research rather than management acumen.
To Anon 9:07, I wouldn't say I base my portfolio entirely on that principle but it is certainly one of the strongest factors in my risk/reward calculation. Anyone who has done the math knows how serious a blow a catastrophic loss can be and will make every effort to avoid it; 10% does not reach that level for me but I can see where it might for some, particularly for those with a short investment horizon and/or critical income requirement.
rw, you're totally off on HSGFX. From July 19th to August 16th, the S&P500 dropped about 8%. HSGFX rose 1.6%. NARFX was basically even.
During the February downturn, HSGFX also rose while NARFX dropped a little. HSGFX often fares better during down markets, considering Hussman is almost always hedged.
Mike C, fair point. Anything can be debated cogently but IMO 20% is way too much assuming a certain portfolio size. I think history shows that any strategy or approach can have a problem especially one that relies on a particular set of qualifications for assembling a portfolio.
This probably boils down to different ideas about what risk is. Neither one is always right or always wrong.
RW, I have no idea why the client chose that fund. I manage the account but am not the primary point of contact with the client.
anon 9:07 what you describe obviously is a good fit for you or you wouldn't do it. I would expect really underweighting would cause a lack of participation in up a lot.
The thing that worries you doesn't come along very often remember and while you have a 10% threshold does a fast decline down followed by a fast snapback really worry you?
I just glanced at a few yahoo chart s before my comment and it showed HSGFX dropping from approx $16.27 to $15.88 between August 3 and August 9. Since I assume there was no distribution in August (Yahoo! doesn't account for mutual fund distributions AFAIK) that is a loss which is what I was referring to. NARFX went up during the same period; SWHEX's decline during the same period was much steeper than HSGFX and it's recovery considerably slower.
The drop in the Wilshire 5000 was rather shallow over that same period but was steeper later in the month when NARFX showed a slight decline and HSGFX showed a gain (Hussman has been nearly or completely 100% hedged this year AFAIK and it showed in that move but not in the earlier move).
No knock to HSGFX, I've owned it for some time, but that's what the picture said and that's what my comment was directed at: HSGFX got caught in a leadership downdraft w/ low overall index involvement (Hussman hedges indexes, not individual stocks) and NARFX did not (suggesting NARFX management focuses on individual issues rather than indices).
the NARFX guys do think of themselves as bottom up first and foremost.
Over the months, I've noticed that there are repeated references to "Hussman" on this blog that you don't find on other sites/blogs to such a degree. I've seen the performance of the Hussman funds. They're mediocre at best.
So why is there so much blathering on this blog about "Hussman this" and "Hussman that"? You'd think Hussman was the John Holmes of the financial world. There are other (and better performing) funds out there, but why Hussman is idolized here is beyond me.
not sure he is idolized here but look at the return over the entire stock market cycle, and read what the fund is trying to do.
While I don;t own it, don't suggest it it is a benchmark for risk adjusted returns over an ENTIRE stock market cycle.
Roger: you don't think leaving 20% in a broad based index fund, like the Vanguard Total Stock Market (tracking Wilshire 5000) or Total Bond Market (tracking Lehman Aggregate) makes any sense either? While I don't index all of my investments, I do use a couple of blocks of 10-30% for the really large, broad-based global and US indices. This lets me capture the market average return at very low cost, and leaves me with a good 30-40% to spend on finding high quality active fund managers or specific themes.
I suspect you're concerned with the "idiosyncratic" risk of owning a single fund. While this concern is valid with some highly specific strategies, surely the "idiosyncratic" risk of a broad index fund cannot possibly exceed, by definition, the risk of any comparable portfolio?cc
if the context is not clear i am not referring to an index fund or broad based ETF.
Hi A question about sector weighting: does the sector weighting among the ten sectors within the s and p 500 change over time or are they static. If the weightings changes with time, I would think the weightings you give to each sector would be a major factor for future gains thanks Ron
Hi A question regarding sector weightings in the s and p 500. Do the weighting of each sector change over time thanks
they do change from both market action and also index changes.
To me, this sounds like "noise." Why not just chunk it all in a couple of well run mutual funds, one domestic and one international, and let it go at that? Also, make regular contributions to dollar cost average. Thoughts?
what happens if one of your "well run mutual funds" blows up?
Or if you happen to own only a couple of "well run" managed mutual funds and they change managers in one or more of those funds?
I have a question regarding sector weighting. Does the weighting of each sector in the s and p 500 chage over time aor are they static?
tori, read the comments from 1pm -130
One of the biggest problem funds was HSKAX, which raised some huge amount of money in Europe in its first six months and closed to new investors, only to plunge in the summer months. They have made a big deal in their marketing effort that the fund's investments are driven by the famous Highbridge quant systems. You can imagine how well that's worked out.
Re:earlier questions about Hussman, I'm starting to wonder the same thing. He is a very clear thinker and writer, and quite compelling in his arguments, but as a long-term shareholder (since 2005) I'm verging on losing hope in him as an investor. He consistently argues that HSGFX is not a "bear" fund, which is borne out in performance, given that he hasn't tended to perform well in good OR poor markets. The summer downdraft mentioned earlier was (per one of his weekly letters) due largely to stock selection in four names - hardly inspiring, given that it was exactly the kind of environment he should have done relatively well in. The final insult - HSGFX just made a long-term capital gain distribution of 4% of NAV, which is about what the fund has earned YTD. Gee, thanks!
According to Dr. Hussman, this fund will earn at least the return of short-term bonds when it is under 100% hedged and if his selection of stocks are no better than broad indices(the S&P500 and Russell 2000). I would say for this year and last this is quite true(two year return 5.2% annualized). Hussman fund can earn better retruns if its stock selection performs better than the broad market. A case in point is that when value stocks outperform growth stocks again Hussman fund could and will do better but this is not the case now. I have had Hussman fund for a long time and I treat it as bond/cash equivalent in my asset allocation. Thus my 10% allocation of Hussman is not counted as equity and contributes negative risk to my portfolio(according to riskgrades.com analysis)
Anonymous, you make an important point about how to use a fund like this within a diversified portfolio. If you take Hussman at his work, his bogey is the equity market over a full market cycle, which implies that HSGFX should be part of the equity bucket. But your approach - which sounds like you're focusing the volatility - seems equally apt, and more prone to happy investing (given the lower performance hurdle). I think that's something Roger was alluding to earlier, in terms of figuring out what to do with these things in a total portfolio context. I guess for a real mean-variance portfolio the final step would be correlations, which if we have performance and risk should be easy to come by.
On a somewhat related note, the question of how to use these funds is even more complicated by the fact that Hussman's bond fund HSTRX has beaten the pants off of the stock fund with roughly 80% in 2-yr TIPS and 20% in precious metals/mining stocks. How on earth does that fit into an asset allocation? As a real return product? That would make sense short-term, but over the longer haul chances are he might move away from that kind of stance. I've noticed that the Prudent Bear Funds have a similar pattern, with the Income fund doing much, much better than the equity fund (in this case due to a short-USD bet rather than a US inflation bet).
On a more positive note, even with all these challenges I'm still really grateful to have all of these tools to work with. It's a hell of a lot more interesting than it was 10 years ago, that's for sure.
DaveB you are wildly insulting which is not what blogging is about either.
While Hussman has had mediocre results the last few years, nonetheless, HSGFX has never had a down year. He rarely has down quarters for that matter. And his bond fund, HSTRX has beaten the Lehman Aggregate bond index in every single year as well. If you're expecting a homerun, then Hussman isn't for you. But if you want someone to protect your money, then Hussman does the job just fine.
Calvin Coolidge was known for being a most reluctant speaker. "Silent Cal" was once challenged by an attractive socialite at a White House dinner. She told President Coolidge that she was sure she could get him to say more than three words over the course of the evening to her. His response? "You loose."
Today's posts can be summarized by only one word: Diversify.
I've heard that story before, always get a kick out of that.
I believe he also gave us "I choose not to run."
Here is how HSTRX and HSGFX compare over the last 5 years with the staid Dow Jones:
http://tinyurl.com/ypejcu
I would prefer to just put the money in a MM account, take a box of Sominex and sleep, sleep, sleep.
If you're that afraid to invest I might suggest CDs. The return would be about the same too.
xIn my opinion, we are in a bear market in 80% of the
sectors, and trying to determine which sectors will remain bullish. We already see a major shift to defensive stocks like Coke, Pepsi, PG, etc. and are in the midst of a potentially catastrophic rise in inflation in commodities, which have a ripple effect throughout the economy. Regardless of the vehicle (MF's, bonds,
ETF's or Stocks) the important thing is picking the
right mix. I appreciate the way you choose to skin the cat, Roger, but there are many ways to make kittie holler.
I really appreciate the link that I got either from you or one of your blog links to this guy Don Coxe.
In my opinion, he is one of the most astute analysts
that I have heard or read. If you have a contrary opionion, Roger, I would love to hear it. Anyway,
he is a commodity bull, and this is his modelportfolio from this link: www.victoradair.com/pdf/BasicPoints20071109.pdf
US Equities 30%
European 7
Jap/Korean 5
Canuck/Aus 8
Emerging 11
US Bonds 7
INT Bonds 11
Can. Bonds 4
Cash 17
His equity weighting, foreign and domestic, is
Energy 33
Ag 25
Base Metals/Steel 22
Precious Metals 20
Any feedback appreciated.
Scoot
"This probably boils down to different ideas about what risk is. Neither one is always right or always wrong."
I think of risk in a dual fashion. I try to be cognizant of risk in the academic sense which is short-term volatility if for no other reason then normal human beings will be affected psychologically by 20 to 30% drawdowns even if the chance of permanent capital impairment is zero. At the same time, I lean slighly more towards the "value investor" definition of risk which is permanent loss of capital, not short-term volatility.
Charlie Munger, Buffett's sidekick who arguably is a brilliant man thinks you can have a diversified portfolio owning 5 STOCKS at 20% each. I disagree with that because a single stock going to ZERO blows up your portfolio, but when you juxtapose that against 5 funds at 20% each, having 20% in a single fund looks pretty tame.
A single fund (even a concentrated one) might own 30-100 individual securities so a 5 fund-20% each portfolio could own 150-500 individual securities. Much of the academic work supports that owning 15-20 individual stocks across different sectors and industries gives full diversification.
I think it is tough to make the case that owning 20% in a single fund that may already be well-diversified is taking undue concentration risk, but again reasonable people can disagree and I can respect your preference to not do this. I think I would just have an issue if someone were reviewing one of my client portfolios and made the statement there is "NO WAY" any prudent person would do that.
Whoa! There are about 10-15 posts of sheer nonsense from I guess the heckler. I don't want to feed the troll or add to the noise, but the signal to noise ratio is getting skewed.
Not sure if there is a more effective way to basically keep the riff-raff from posting.
DaveB-
Shutup you handicapped retard. Quit obsessing over Roger. There's nothing your lawyer can do, so go away.
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