The Problem With Forecasts
While perhaps counterintuitive, one of the biggest problems with forecasts such as Hussman’s is that many of them present a well-thought-out case and provide insightful analysis, often accompanied by interesting charts; however, as Peter Bernstein noted in “The Portable MBA in Investment”: “The essence of investment theory is that being smart is not a sufficient condition for being rich.”
There is a whole body of literature from academic research demonstrating that there are no good forecasters—not of the stock market, of interest rates, the economy or a whole range of other areas. That’s why I don’t make investment decisions based on market forecasts and neither should you.
As further evidence of why you should ignore market forecasts like Hussman’s, consider the following performance data on his flagship fund, Hussman Strategic Growth (HSGFX). As of Aug. 4, 2014, the fund had $1.1 billion in assets—less than 40 percent of what it had just 19 months earlier—as investors fled, unhappy with the poor performance.
HSGFX is a long/short stock fund. The following is a summary of the fund’s strategy: “The investment seeks to achieve long-term capital appreciation, with added emphasis on the protection of capital during unfavorable market conditions. The fund’s portfolio will typically be fully invested in common stocks favored by the fund’s investment manager, except for modest cash balances that arise due to the day-to-day management of the portfolio. When market conditions are unfavorable in the view of the investment manager, the fund may use options and index futures to reduce its exposure to general market fluctuations. When market conditions are viewed as favorable, the fund may use options to increase its investment exposure to the market.”
Almost sounds like a hedge fund, doesn’t it? And it’s produced returns just like the typical hedge fund.
According to Morningstar, for the 10-year period ending Aug. 1, 2014, the fund managed to lose 1.3 percent a year, trailing the S&P 500 Index—which returned 8.0 percent—by more than 9 percentage points a year. That’s actually even worse than the 10-year calendar returns (2004-2013) of the HFRX Global Hedge Fund Index, which returned 1.1 percent a year. And it’s far worse than the performance of every single major equity asset class over that period.
It even managed to underperform the almost riskless Vanguard Short Term Treasury Fund (VFISX) by more than 4 percent a year for the 10-year period ending Aug. 1, 2014. The fund’s performance placed it in the very last percentile (100) of Morningstar’s rankings for the one-, three-, five- and 10-year periods. And for the privilege of investing with Hussman, investors pay 1.08 percent per year in fund expenses.
The only good news is that it seems the fund’s performance actually forced its managers to lower the fee. When I last looked at it—in January 2013—the fund’s expense ratio was 1.42 percent.
As a side note, Morningstar gives the fund a one-star rating. Why’s that important? A Morningstar study found that just 61 percent of the funds rated at one star in 2004 even survived the next 10 years.