Right now, sitting in an office somewhere there is a fund manager you have never heard of who is going to be famous in the coming years. This person will have absolutely spectacular performance during the next bear market. S/he’ll be heavily overweighted to a handful of stocks that avoid the downturn, or (more likely) be very conservatively positioned with a large cash allocation in the months before the market falls off a cliff. Most likely this person is a tactical manager who will guess two things right: the runup to the top, and then get very close to pulling out at the top.
The impact of trailing performance on these factors cannot be overstated. Here’s a look at my favorite whipping boy, John Hussman, and how this worked for his fund in the financial crisis. In 2007 Hussman was up 4.16%, just under the 5.49% return of the S&P 500. In 2008 the S&P 500 fell -37.00% (!) and Hussman? He lost only -9.02%. He was nearly 28% ahead of the benchmark in one of the worst bear markets in 75 years. From the fund’s inception in mid-2000 through 12/31/2009 Hussman Strategic Growth returned 8.19% annualized. Pretty amazing numbers, considering the S&P 500 return was close to 0% over that same time period.
The trouble is that most people found Hussman’s fund after he dodged the 2008 bullet. The fund’s assets went from $3 billion in 2008 to $6 billion in 2010. Not too many fund managers can double in size in two years. Even the Bogleheads were eyeballing Hussman’s trailing performance with envy.
Alas, Hussman’s golden touch was not to last. The fund has imploded since 2009. It lost money in 4 of the last 5 full calendar years while the S&P 500 has been on a historic bull run. As always, investors have fled and the fund’s assets are now about $800 million. The fund’s 10-year trailing performance is a cringeworthy -2.46% (through 3/31/15), compared to 8.01% annualized gains from the S&P 500. To put that another way, S&P 500 index fund investors have doubled their money, and Hussman investors are down about 30%.
I’m telling you right now, April 2015, that this scenario is going to repeat itself. There will be a shining star asset manager who comes out of the next bear market largely unscathed. Chances are very good you have never heard of this person. The once-in-a-lifetime bet the portfolio manager makes is going to pay off in droves, likely raising billions in assets under management. This fund will have jumped to gold or Treasuries or cash or commodities or whichever asset class does well the next time stocks drop. Financial media and commentators will crown him or her as the next Warren Buffett, give them “Fund Manager of the Year” awards, throw acclaim on the brilliant insight of the manager and his/her skill in navigating financial markets. The trailing performance of the fund measured from the bottom of the bear market will be spectacular compared to the index.
And, again, investors are going to flock to the fund in droves, convinced that they’d found the guy who has the market figured out. My guess is that it’s not going to work out quite as well as they’d hope.
Bason Asset Management 