In my wanderings this weekend, I stumbled onto two funds which, on face, have similar strategies: the Yacktman Fund (YACKX) and the Hussman Strategic Growth Fund (HSGFX). The goal of both is long-term appreciation through investing in common stocks. There are some differences: the former allows up to 20% in foreign equity as well as some debt and the latter adds a focus on capital protection. Nonetheless, both focus on common stocks to grow capital.
How then did one outperform the other by nearly 120% since 2009?
We are not talking a few percentage points or even double-digit differentiation through stock selection, and it is not like one fund bet everything on one stock Yacktman's largest position is 9%, Hussman's is 3%. Essentially, Yacktman doubled his fund while Hussman lost money.
Where is the difference then? It seems that Hussman sold calls on equity indices which more than offset his long equity positions. The nearly 30% short/macro hedge is now the single largest position that, now way in the money, is an outright short position in us equities. This contributed to his fund losing more than 11% in 2012. An expensive hedge indeed. The ironic thing is that Hussman is the fund which adds the capital protection component and describes a strategy that combines valuation with market action.
On the other hand, Yactkman focuses far more on company-specific factors such as high market share and and cheap purchase price. Indeed, there is little mention of the overall economy and more elaboration on what he defines as a "good business." He keeps things simple, buying good companies at good prices.
My view: Hussman doesn't believe he is trying to time the market, but he is. The fact that he sends out weekly commentary is a pretty short term viewpoint, and far more importantly, his market positioning is short term - using options (especially selling calls) is by definition a time-dependent vehicle. It doesn't matter if they are long dated options - there is an inherent path/time dependency risk he is taking and he could be "right" and still lose too much capital before. His arguments, on the other hand, don't have have a time-dependent path to resolution - i.e. risk assets are overbought, but when will then come down then?
Then again, he has been around longer than most of us have been active (fund at least since 2000) in the markets. Perhaps Hussman will have his day?
(icon source: http://mathinsight.org/divergence_idea)
Great post. Thanks for this.
Although I love macro investment strategies, this is one example of why macro calls are so dangerous. Seth Klarman discusses this in "Margin of Safety." He basically argues that the problem with macro bets is that you not only have to be right on the overall economic direction of the global economy (which is influenced by numerous political and economic factors), you also have to be perfect on timing. Accomplishing both is very difficult, and if you are wrong on either one, the mistake could cost you everything. Klarman thus believes that the safest approach to investing is research-driven bottoms-up approach rather than top-down. I see a lot of merit in his points although I personally find fundamental equity research quite boring.
If you've read some of Hussman's latest letters, you'll know it's been ugly for a while. He needs to invest given the current situation, not the situation he wishes existed.
Great post
Donny and Stevie Yacktman... killing it...
It should be noted that the Yacktmans typically hold less than 35 positions in their funds (their other fund, Yacktman Focused YAFFX, is extremely similar but even more concentrated). Most traditional large cap stock funds hold hundreds. Hussman (as of a few months ago) holds 117.
While I don't think the Yacktmans ever short equities or hedge their long positions, they have been known to hold cash (if memory serves me correctly I think they probably held 20% cash in 2008), which is also relatively unique among traditional large cap stock funds.
As Morgan Stanley, KKR, and others roll out "retail" alternative investment/HF-like strategies in '40 act mutual funds, I'm interested to see how much value they add. There seems to be huge opportunity there, but many who have made forays into this space thus far (Hussman being one) have yet to capitalize on it partly due to bets like this.
Yacktman is heavily concentrated and just better, which is probably the best explanation I could give you. The market's done extremely well since '09 and on average he's a better investor than the market so he's outperformed heavily. Hussman is more of a pussy and hedged so he lost most of that long exposure trying to be smart/fancy.
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