Our portfolio of mutual funds with “hedge fund” strategies is still delivering the steady, solid returns we set as its goal. This last quarter also shows why I put together this collection of funds. You can see how they work together as a portfolio to achieve steady returns.
The portfolio had a modest gain for the first quarter of 0.32%. But that puts it over 2.5 percentage points ahead of the S&P 500.
Dragging down the performance is the portfolio’s largest holding, Clipper Fund. The fund buys less than 30 stocks. It was hurt recently by its large holdings in Fannie Mae and Freddie Mac, two quasi-government financing companies that have been in trouble with regulators. There has been management turnover, accounting restatements, and threats of other actions.
Clipper’s managers say they have studied the companies carefully and concluded that investor fears are overblown. They will hold the stocks. Cash levels in the fund have gotten fairly high, as Clipper’s managers say that few stocks meet its strict value criteria.
The high yield bonds held by Berwyn Income and Price High Yield have declined as investors seek to reduce risk. American Century International Bond took a dive as the dollar rose against other currencies.
Offsetting these losses were some nice gains.
Laudus Rosenberg Global Long/Short Equity showed its strong counterweight to the stock indexes by registering a 4.17% gain for the quarter. An even better counterweight was Third Avenue Value. These funds have low correlations with the stock indexes while registering higher long-term returns. Also registering positive returns for the portfolio were Hussman Strategic Growth and FPA Crescent, a balanced fund with a unique strategy.
There are several key factors that make this portfolio work so well.
Together the collection of funds has about half the volatility as the S&P 500, yet it has a higher long-term return by about 6% annually. The portfolio also has a very low correlation with the S&P 500 stock index, calculated at about 30% to 40%. Most portfolios, despite their claims to diversification, bounce up and down with the indexes. That isn’t good during an extended bear market or flat market. This portfolio, because of its true diversification, can generate strong gains even when stocks are declining. Its direction isn’t a prisoner of the indexes.
The alternatives portfolio is a long-term holding. I plan to recommend changes only when there is a major change at one of the funds or discover a great addition.
|RW “Hedge Fund” Portfolio|
|Annualized Returns as of 3/31/2005|
|Laudus Ros Gl L/S Eq||10%||4.17||2.5||4.29||N/A|
|Hussman Str. Gr.||10%||1.69||2.78||10.8||N/A|
|Oakmark Eq & Inc.||10%||-0.64||5.26||8.26||12.4|
|Third Ave. Value||10%||5.13||22.2||13.4||10.3||15.3|
|Am Cent. Intl. Bond||5%||-2.93||8.23||18.5||10||6.21|