Swedroe: Why Care What Hussman Forecasts?

August 20, 2014

Analyzing the performance of the other Hussman fund with a long track record is more problematic because the fund, the Hussman Strategic Total Return Fund (HSTRX), has the freedom to invest in stocks. The fund had about $2.1 billion in assets in January 2013, but now has just $610 million. You can guess why.

The following is a summary of the fund’s strategy: “The investment seeks to achieve long-term total return from income and capital appreciation. The fund invests primarily in fixed-income securities, such as U.S. Treasury bonds, notes and bills, Treasury inflation-protected securities, U.S. Treasury Strips, U.S. government agency securities (primarily mortgage-backed securities), and investment grade corporate debt rated BBB or higher. Under normal market conditions, the duration of the fund’s portfolio is expected to range between 1 year and 15 years.”

For the 10-year period ending Aug. 1, 2014, the fund returned 5.1 percent. As one comparison, Vanguard’s Intermediate-Term Bond Index Fund (VBIIX), a pure bond fund, outperformed HSTRX, returning 5.7 percent.

It’s hard to make the case that there’s any evidence here of added value based on superior analysis. Again, for the privilege of investing in HSTRX, investors were paying 0.64 percent in expenses, much higher than the cost of Vanguard’s fund (0.20 percent for VBIIX and just 0.10 for the admiral shares version, VBILX).

So, what’s the takeaway? Hussman is a very bright man. He provides compelling analysis and opinions, which I typically find quite interesting. The only problem is that the evidence, including his own track record, demonstrates that investors are best served by ignoring his opinions.

One reason to do so is that he isn’t telling me, or you, anything that other sophisticated investors (such as pension plans, hedge funds and mutual funds) are unaware of. The market has already priced the risks on which Hussman bases his analysis. He just believes he’s smarter than the collective wisdom of the market. Or, at least, he wants you to believe he is, even if he knows better.

If the evidence hasn’t yet convinced you to ignore Hussman’s forecasts, and others like his, ask yourself this question: Do you think you’re better served by following Hussman’s advice or Buffett’s?

The best advice is, instead of worrying about what some guru has to say, to focus your attention on the things you actually can control, such as the amount of risk you’re taking, diversifying those risks as much as possible, keeping costs low and keeping tax efficiency high. That’s playing the winner’s game.

Larry Swedroe is the director of research for the BAM Alliance, a community of more than 140 independent registered investment advisors throughout the country.



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