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It's brutal out there. We're in the second bear market of the decade. The banking system is a colossal mess. The economy is now almost certainly in recession.
The world doesn't end too often, so this too shall eventually pass. But 2009 will not be a strong year for the economy, and the uncharted waters of a shattered financial system only compound the uncertainty. So we are extra cautious in this unfriendly environment in recommending any mutual fund. Only those that do a good job of preserving shareholders' wealth were even considered. These five look especially compelling for the stressful year ahead.
Farsighted. For this year to October 13, Hussman Strategic Growth (symbol HSGFX) lost 4%, a whopping 33 percentage points less than Standard & Poor's 500-stock index. Clearly, this is no ordinary fund. John Hussman runs it kind of like a poor manUs hedge fund, owning stocks the traditional way but also short selling stocks and indexes to reduce exposure to risk.
Hussman, who holds a doctorate in economics from Stanford University, says that since he launched Strategic Growth in July 2000, he's found the market too richly valued. So heUs consistently hedged his long positions in individual stocks by putting on short positions that range from 30% to 100% of his longs. From its inception to October 13, the fund returned an annualized 10%, compared with the S&P 500's decline of 4% a year. So far, the fund hasn't had a down year. Annual expenses run 1.11%.
The fund's performance has been aided by Hussman's remarkably clear-eyed and early view of the growing risks to the nation's financial system. In a July 2003 essay titled "Freight Trains and Steep Curves," he warned of the dangers to homeowners and corporations of snowballing adjustable-rate debt and dependence on low short-term interest rates. He predicted that the "unwinding of extreme leverage" would leave the U.S. economy vulnerable to an Racceleration of defaultsS and a debt crisis.
So it's no surprise that Hussman has avoided financial stocks completely. Instead, his fund has large positions in consumer-goods companies with predictable cash flows, such as Coca-Cola, Colgate-Palmolive and Johnson & Johnson. Hussman anticipates three to four more rocky quarters for the economy, but he says that the stock market is approaching fair value for the first time this decade.
If the market shoots up, this fund will likely trail. But over a full cycle of bull and bear markets, it has shown its worth as a portfolio diversifier.
Through think and thin. None of the dynamic thinking and economic analysis that Hussman brings to bear on his fund is to be found in Permanent Portfolio (PRPFX). Instead, this well-diversified fund is rather static in its allocations. It's almost on autopilot.
The fund's simple formula works. Since its inception 26 years ago, Permanent Portfolio has had only three down years (although it is down 11% to October 13, so this year could be the fourth). In the ten years through September 30, Permanent Portfolio returned 9% annualized.
Michael Cuggino, manager of the fund since 1991, divides the money into six asset classes: precious metals, Swiss francs, global real estate stocks, natural-resources stocks, domestic growth stocks and U.S. bonds. The idea is to preserve capital and provide low-risk growth through diversification into assets that tend not to move in sync with one another. For example, when inflation rears its head, gold and Swiss francs perform well; in deflation, U.S. Treasury securities kick in.
Permanent Portfolio places investors in a position to profit from a variety of economic scenarios and outcomes. "The premise is that the future is unpredictable," says Cuggino. Interestingly, the fund was launched in 1982 in response to turmoil because of inflation, high oil prices, decline of the dollar and miserable stock markets. Sound familiar? "No investments were performing," recalls Cuggino. "Investors felt as if they were losing even if they did nothing but sit on cash."
Like Hussman Strategic, Permanent Portfolio requires a low minimum investment of $1,000. The annual fee is 0.95%.
POSTED BY: francis (November 11, 2008 08:31 PM)
This is a great fund, FPACX, but I think it is only available to existing shareholders, so why not at least make that clear in your article. Also why does Kiplinger regularly talk to individual investors about funds only available to institutional investors? Thanks
POSTED BY: j (December 07, 2008 09:36 PM)
FPACX is available to individuals. An application can be obtained from FPA funds by writing,email,or calling
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