BOSTON (MarketWatch) — About a week from now, Eric Singer is going to move all of his mutual fund’s investment capital from the sidelines into the stock market. The money has been in Treasurys and money-market instruments for months, but Singer has one big reason why he’s sure it’s time to get in: Congress is going on vacation.
Singer runs the Congressional Effect Fund, which opened in May 2008 with a simple, straightforward strategy: Invest in the stock market only when Congress is out of session.
Following that strategy requires jumping into the market now, having missed the market’s rebound since early March, and at a point where many observers believe a downturn is in the offing. It’s also why the fund is the Stupid Investment of the Week.
Stupid Investment of the Week highlights the worrisome conditions and flawed thinking that make a security less than ideal for the average investor; it is written in the hope that spotlighting danger in one situation will make trouble easier to uncover elsewhere.
is an intriguing investment, thanks to the sobering headlines coming out of Washington. The sense that government is bad for both business and stocks isn’t even the half of it; Singer’s research — available, with links to fund information, at congressionaleffect.com — has back-tested almost 45 years worth of Congress’ impact on the market.
From January 1965 through the end of the last year, the Standard & Poor’s 500 Index had produced a 16.15% annualized gain when Congress is out of session, compared to a gain of just 0.31% when the House and/or Senate are working. The difference has been even more pronounced this decade; entering 2009, the index gained almost 9% annualized while Congress is on vacation, compared to an annualized loss of nearly 12.5% while they worked. The market’s rally — which has occurred while Congress was in session and the fund was on the sidelines — has narrowed but not closed the gap.
No matter what Congress is working on, according to Singer, it muddies the waters. Bailouts, for example, are a boon for some companies and a bane for others. When the government passes something like the “Cash-for-Clunkers” program (which Singer has called “Pimp my ride, D.C. style”), stocks move and react, making it harder for the market as a whole, Singer said.
Health-care stocks, for example, have been buffeted by every theoretical, hypothetical and realistically possible solution that has crept into public view. But when Congress is out of session and daily speculation quiets down, these stocks and the market will give a truer reflection of what’s happening, according to Singer.
“This is a fund that is designed to mechanically reduce political risk at a moment in time when there is a lot of political risk,” said Singer, who first published research on the “Congressional Effect” in the early 1990s. “Think about how much the presence of government is in the public debate these days. If you invest in insurance companies or health-care companies, you have to wonder ‘What is Congress going to do? What are they just proposing?’
“Sometimes,” he added, “you can have a proposal that moves a stock 20%, and then they say, ‘Ohmigosh, this is a bad idea’ and they move away from it, but you suffered for it. … That typically doesn’t happen when Congress is out of session.”
Voting with your wallet
Singer’s approach is unwavering; if either the House or the Senate is working, his fund’s money is not — at least not in the stock market. Last year’s decline didn’t sway Singer — who was in the market when Congress was out of session — nor has this year’s rally. If the politicians recess early, he’ll move money in when they move out; if they call an emergency late summer meeting, he’ll give his stock investments a late summer vacation.
Plenty of investors hate virtually everything happening in Washington, and Singer’s research might give them one more bipartisan reason. But the real question is whether this love-hate with Congress will deliver in the long haul, and whether a mutual fund is the right device for it.
Congressional Effect currently has about $7 million in assets. Expenses, which started north of 2% when the fund first opened, are working their way down as assets grow and are slightly above average for a stock fund. Singer expects expenses to be at a below-average total of 1.25% if and when the fund tops $25 million in assets.
Still, an investor could roughly duplicate the strategy using exchange-traded funds and money-market or short-duration Treasury funds. Moreover, if you believe the theory, you might have to apply it to the rest of your investments. Singer’s fund is an unusual social portfolio, based on an investor’s political beliefs on the wealth-destroying powers of Congress. If you truly buy into the Congressional Effect, it would be incongruous to own any other fund that puts money into the market at the very times you pay Singer to keep it out.
Ultimately, the strategy feels gimmicky, which is never a good thing. A fund based on calendar events — including the Congressional Effect — failed in 2008 after a short, inglorious life (it was also a Stupid Investment of the Week). There’s more science here than with hemline theory or Super Bowl theory, but not much more proof that this idea will work in the future. See archived story.
Finally, the fund’s all-in/all-out strategy makes it a blunt instrument. Congress may be out of session, but politics never shut off. The House and Senate may meet longer and act more in a crisis; but those machinations on Capitol Hill may not be so much the cause of the problem as a symptom of it. If Congress is the root cause of trouble, that would beg for a “Congressional Cause” fund that tries to stay out of the market when Congress is causing trouble (bailouts or major industry overhauls or regulation), but dives in when issues like capital gains tax cuts are spurring investor excitement.
“There are many, many things that affect the market and the economy, so I’m not sure why you focus on this one thing, which ignores the issues and just says that all Congressional meetings are bad for the market,” said Russel Kinnel, director of mutual fund research at investment researcher Morningstar Inc. “I am sure it has back-tested well or they wouldn’t do it, but you have to be skeptical.”
He added: “There were a lot of other investment theories that worked until 2008, and then didn’t work so hot. … We’ll see how this turns out — they missed the rally and the chance to buy things cheaply and are buying in now, when the rally may fade — but I’d need a lot more convincing before I’d take a chance on the fund.”
View more information: https://www.marketwatch.com/story/congressional-effect-fund-gets-no-confidence-vote-2009-07-31