This could be called "The Endless Winter" of investment returns. It's like a travel adventure film going from one fantastic ski area to another, but there is either no snow to be found or just bunny slopes for beginners. Where is the high deep powder?
It's embarassing and frustrating to report that my liquid asset accounts, including all cash deposits, are up only 2.8% for the first quarter. Cash itself is paying at a 4.6% per annum rate at Vanguard's Prime Money Market, so it was doing over 1% on the quarter.
Even Bill Gross, the bond king of PIMCO, is bemoaning lackluster returns: http://tinyurl.com/f28xr
Gross's report is long and repetitive, but it's a very important discussion of what's going on, and why substandard returns often lead to even worse risk-adjusted returns. If you want to read even more about this depressing subject, go over and read John Hussman's excellent but boring weekly essays on the same subject: http://www.hussman.net/index.html
On the other hand, gold funds (I own some) and small caps here and everywhere did superbly again as they have for six or seven years. It's a matter of the historic risk you are willing to take to get outsized rewards. If you are 25 years old, "no problem." You should be taking some risks and going for the "gold". But small caps will not outperform forever.
I am still long as I have been since early 2003, but I have been in variable hedging mode since the last quarter of 2005. Plungers with $5000 accounts are entitled to laugh. Over the past year I have gradually moved to funds with good records in both bear and bull phases and especially funds whose active management includes a policy and practice of accumulating cash when times are likely to be tough, not holding 100% long always through booms and especially through busts. If you look at funds via MSN Money or FastTrack (mentioned in the portfolio archives) you can learn who they are. I want to add that I am up 13.2% year over year.
My core positions are 42% of all liquid assets as of yesterday: HSGFX, DODBX, SGENX/FESGX/VHGEX and FAIRX. Let me mention SGENX first. It is the old SoGen Global Fund run by Frenchmen out of New York. Jean-Marie Eveillard ran it for decades and now Charles de Vaulx. It is the perfect balanced global fund that has everything including physical gold (a minor holding). The only problem is that it is a load fund, and it is closed to new investors. FESGX is the D class no-load version which I own, also closed to new investors. Check out their total return chart at FastTrack compared to almost anything over the past 20 years.
Vanguard's VHGEX is almost as good as SGENX. The only real problem with Vanguard's Global Fund is that like most Vanguard Funds they do not believe in timing, and so they never run their cash reserves above 1-3%. So they lag in bear markets. So if you buy VHGEX, as I am doing for add-ons, only buy 75% of what you would buy of SGENX/FESGX. You must carry some cash **for** them. If you grasp this simple concept, you are already on the road toward building your own hedge fund using mutual funds! Building cash and spending it are key elements in long term returns. Find people who know that and do it.
HSGFX from John Hussman takes a different tack. Again look at its total return chart at FastTrack or MSN Money. (Download and install the MSN Money advanced chart software---it's free and non-invasive.) Hussman buys stocks he thinks are undervalued and buys short index options or futures against them. The concept is to buy what's good and sell the average. It is not a bear fund, and Hussman can be fully exposed long when value conditions warrant. He varies his hedge according to values (P/E's etc.), but also according to market breadth. If the market is showing strength despite being over-valued Hussman is going to be exposed to the long side, but only if the strength is shown on declines. He uses all the classic techniques from securities analysis to technical market analysis, and "Buy low and sell high". And he's still only in his early 40's, so he'll be around. It took me several years to warm up to his approach, but look at what he did from 2000-2003. Obviously hedging pays off best in bear markets and detracts somewhat from bull moves in overvalued times.
Except for the fact that he has no foreign stocks, I would say Hussman's could be the only fund you would ever need plus a money market and/or an intermediate term bond fund. But I think SGENX and VHGEX add another dimension that we need. And my favorites below.
Then there is dear old DODBX which I have owned a long time. They are a stock and bond fund, but an extremely intelligently done one. They are heavily in cash now, perhaps 25%, and some very short term bonds with the rest in stocks. Dodge & Cox have been legendary stock pickers since 1931. Typically they are 60% stocks and 40% bonds of variable duration. And they are between 10% and 15% in foreign stocks. Again, as with Hussman and the Frenchmen in New York, and Vanguard, it is the management you are paying for. Mind you, the management costs on all these funds are relatively low. You really need to see long term total return charts with dividends reinvested, like the ones I have mentiond, to convince youself what these three funds do.
The fourth fund is Fairholme FAIRX. It is the youngest of the four (1999) and developed out of a group who invested for themselves and private clients. Like the others they believe in cash to prevent losses, and they believe in value. Right now nearly 20% of their holdings are in Berkshire Hathaway (Warren Buffet) and the second largest holding is Leucadia, another holding company. White Mountain is in there too. Fairholme are deep value and "coming attractions" people, but they know when to lay low. Look them up and study the charts compared to index and popular dopey funds over the period from 2000 to now. This quartet are 42% of assets, and Hussman is the largest piece.
Another 21% is in sector hedges: gold, REITs, energy, health/biotech, and microcaps, all of which I'll talk about another time. This latter group also includes a small 3% position in a RYDEX fund which is equivalent to a net 6% short position in the S&P500 for my own hedge. This last can be and is varied in size according to my technical and timing studies. It has ranged from a -20% to zero short. This is NOT essential to this kind of portfolio. These funds in the sector hedge are all a combination of demographic and inflationary hedges in addition the US and foreign stock funds in the core. Then 37% of assets are in cash money market funds at Vanguard.
These are four cheap core assets to own and very well and actively managed "hedge funds" in their own right. Look at the charts from 2000 to 2003 and since, not just who is hot this month.
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