John Hussman

Despite the challenges of the epic market downturn of 2008, the $1.1 billion Hussman Strategic Total Return Fund delivered a positive return last year.

Strategic Total Return (HSTRX) outperformed 99% of its peers in 2008, with a return of 6.3%. The fund had a 7.67% annualized return over the five years through Aug. 26, according to Morningstar Inc. By contrast, the S&P 500 returned 0.4% over the same period and the Barclays Capital U.S. Aggregate Bond Index returned 4.67%.

In addition, 2008 also marked the sixth consecutive year that the fund delivered a positive return.

Analysts credited the performance to the unique style and risk management acumen of fund manager John Hussman, president and chairman of Hussman Econometrics Advisors and president of Hussman Investment Trust. The firm offers the Strategic Total Return Fund and the $5.2 billion Hussman Strategic Growth Fund (HSGFX).

“There are not a lot of funds that invest in utility stocks, bonds and foreign currency,” said Ryan Leggio, a Morningstar mutual fund analyst who covers the fund. “He is an expert in all of those areas. Most other shops would have to hire a team of managers on the fund be-cause of the complexity involved.”

“SHINING EXAMPLE’

But Mr. Hussman manages the fund with a staff of five.

“It’s a shining example of asset management,” Mr. Leggio said. “No passive [exchange-traded fund] could ever do what he does.”

The fund has benefited from its popularity, Mr. Leggio added. Strategic Total Return grew to $1.1 billion as of Aug. 18, up from $500 million in 2009 and $200 million in 2007, Morningstar reported.

“He is also one of the most shareholder-friendly advisers,” Mr. Leggio said. “He is the only fund manager who publishes his trading costs and his commission costs on his website.”

Indeed, Mr. Hussman is well-known among analysts and advisers for his transparency and weekly commentaries, which he posts on his website.

“He is so clear with his commentaries and makes so much sense,” said Chuck Gibson, president of Financial Perspectives Inc., a registered investment advisory firm that manages $50 million. He admits he is a regular follower of the columns and the funds.

And it will only boost the funds’ popularity that Mr. Hussman last month again lowered the management fees on both, even though they were already below the industry average.

“He also invests about 90% of his own assets into his funds,” said Nadia Papagiannis, a mutual fund analyst at Morningstar who covers the Hussman Strategic Growth Fund, which invests largely in domestic stocks.

While that fund did post a loss last year for the first time in its nine-year history, the 9% decline was significantly narrower than the 37% loss posted by the S&P 500.

The fund aims to outperform the major indexes over the long term, while managing risk over a full market cycle.

Mr. Hussman’s analysis of stock valuations and market moves sets him apart from his peers, Ms. Papagiannis said.

“I think his focus on the macroeconomic outlook makes him better off than other managers that focus on fundamental company-specific events [when stock picking],” she said. “It’s the type of strategy that will help preserve wealth in those kinds of market environments.”

Only nine of the 56 funds in the long-short fund category, where Morningstar places the Strategic Growth Fund, had positive returns last year, Ms. Papagiannis said.

Last year was a difficult test, Mr. Hussman said.

“On the one hand, we expected it,” he said. “We expected a great deal of weakness. But even we underestimated the extent to which the market would experience a one-way decline. It was our first loss.”

Mr. Hussman, who holds a Ph.D. in economics from Stanford University, was a professor of economics and international finance at the University of Michigan before becoming a fund manager in 2000.

Investment decisions are made based on valuations and market action, he said.

GO WITH THE FLOW

Mr. Hussman considers cash flow forces such as sustainable growth, return on investment profit margins, organic growth, competitive pressures, dilution from options and other stock-based compensation. “Simple [price/earnings] multiples do not capture that,” he said.

Evaluating signals from the markets is another process.

“We are not forecasting short-term moves in the market,” Mr. Hussman said. “Instead we are focused on the average return-to-risk profile of the market.”

And market action is evaluated for quality, Mr. Hussman said.

“We are looking at how broad the advance is and what kind of trading volume there is,” he said. “Also, we are looking to see whether there are any divergences between what securities should be doing, given what other securities are doing.”

To manage risk in the Strategic Growth Fund, Mr. Hussman hedges the major indexes.

He “is more than willing to give up some of the upside, but he is going to really cover you in the bad times going forward,” Mr. Gibson said.

“For those investors who are retired and on a fixed income, they need some growth and need more protection against the loss in their investments,” he said.

Investors will soon have a third option from Mr. Hussman, who filed with the Securities and Exchange Commission in June to launch an international fund.

Related Topics: ING Group, Morningstar Inc.