A Fund That Bets Against Congress
If you think Congress is more of a hindrance than a help, you have plenty of company. Throughout U.S. history, comedians and commentators have been taking potshots at our national legislators. Will Rogers, for instance, said he couldn’t think up half the number of funny things in his lifetime as Congress could pass in one session. Mark Twain contended that members of Congress were America’s only “native criminal class.”
Eric Singer has taken Congressional ridicule a step further. He runs an obscure mutual fund that aims to profit from the notion that Congressional bungling is so bad that the stock market will sink when legislators report to work and rally the moment they take off on vacation. “There’s all this market folklore about the January effect; the Christmas rally; the Easter rally,” he says. “I realized that there was one unifying factor with all of those rallies: Congress was not in session.”
So to put theory into action, Singer launched the Congressional Effect Fund (CEFFX) in May 2008. The fund, which holds only $16 million in assets, moves to cash when legislators clock in and buys the moment they go away. When legislators are in session, he’s 100% invested in safe, short-term securities, such as Treasury bills and money market funds. On legislative breaks -- and even long weekends -- he uses futures contracts and exchange-traded funds to replicate the performance of Standard & Poor’s 500-stock index. “We have tried to build a portfolio that filters out the short-term noise to concentrate on legislative risk,” says Singer, who was an investment banker for 25 years, raising money for small companies, before he launched the fund.
Singer says he has tested his theory going back 46 years -- roughly 12,000 trading days. In that time, the market advanced at an average annualized rate of just 0.9% when Congress was in session and 16.6% when it was on hiatus. His explanation: Buyers hate uncertainty, and legislators create that in spades, whether they’re proposing new taxes or new regulations.
But the “sell in session and buy on breaks” strategy forces a lot of buying and selling, which triggers plenty of trading costs. The fund’s operating expenses are also high -- 3.49% in 2010, although the adviser has agreed to limit annual costs to shareholders to 1.5% for the time being. Even with those relatively high costs, the fund has beaten both the S&P 500 and fund tracker Lipper’s flexible-fund category since its launch. From then through July 8, the fund returned an annualized 3.1%, compared with 1.5% annualized for the S&P index and 3.0% for the flexible group.
But Lipper analyst Jeff Tjornehoj isn’t impressed. He says it doesn’t make sense to compare Congressional’s performance to a stock-market index because the fund is in cash more often than it is in stocks. In fact, Congressional’s own literature notes that Congress is out of session just 35% of the time, which means the fund’s investments would be in cash two-thirds of the year.
If you compare Congressional to other funds that have flexible portfolios -- in other words, funds that can invest wherever they find the best opportunities -- Singer’s fund doesn’t look as attractive. Over the past year in particular, Congressional has underperformed dramatically, earning just 5.5%, compared with 21.9% for flexible funds overall. “Because Congress is in session most of the time, you have very little equity exposure for most of the year,” says Tjornehoj. That might serve you well when the market is tanking, but it guarantees that the Congressional fund will lag when the market rallies.
Besides, Tjornehoj doesn’t buy into Congressional’s basic concept. He considers buying and selling based on legislative sessions an investment fad -- much like basing stock prognostications on women’s hem lengths or who won the Super Bowl. “There’s a correlation, but I’m not sure that you’ve got a cause and effect.”
At a time when many Americans are understandably disgruntled with legislators, who seem more bent on underscoring the divide between Republican and Democrat than passing legislation to tackle the nation’s most-pressing economic problems, Congressional Effect has a visceral appeal. But the fund does look like a gimmick, and knock-your-socks-off back-tested results often have a way of backfiring once someone tries to put them into practice in the real world.
If you’re annoyed with Congress, it may make more sense to write a letter to your legislators -- or take your frustrations out at the voting booth -- than to express your discontent through your investment portfolio.