Coming up with an investment theory is easy. Making it work in practice is hard. The problem comes in the execution. And when a fund manager's...
Coming up with an investment theory is easy.
Making it work in practice is hard.
The problem comes in the execution.
And when a fund manager’s investment theory is based on theoretical hogwash, and performance fails to meets its promises, the execution shareholders should be concerned about is removing the head of the money manager.
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That’s precisely why Direxion PSI Calendar Effects (PCALX) is Stupid Investment of the Week, although the theory behind the fund would make it the perfect pick for any day, month, year, Santa Claus Rally, of the first and last few days of any calendar quarter.
Direxion PSI Calendar Effects spends most of its time keeping its powder dry in money-market instruments, waiting for the right time to invest “based on long-established patterns of institutional investor behavior as driven by and related to accounting periods, tax events and other calendar-related phenomenon.”
The idea is to deliver returns that meet or beat the Standard & Poor’s 500 index with much less risk, by exposing the money to the market for roughly one-third of the days of the year, and being on the sidelines during time frames that have “demonstrable and well-recognized effects on market liquidity and volatility.”
That tastes great, but it has proved less filling for an investor’s portfolio.
Stupid Investment of the Week showcases the conditions and characteristics that make a security less than ideal for the average investor, in the hope that spotlighting flawed thinking in one case will make it easier to spot elsewhere.
For Direxion PSI Calendar Effects, the flaws start in the basic thinking and extend into how the strategy is carried out.
According to the fund’s prospectus — which has to stand as the voice of the fund since management did not return my calls — the fund spends about 70 percent of the time invested in money-market funds. Even for a fund taking a conservative asset-allocation path, that makes it hard to show much return.
The remaining 30 percent of the time, the fund uses various index instruments, trying to get the best of the following situations: the first and last few days of accounting cycles, “such as month-ends and quarter-ends;” “tax-related dates, such as the personal-income-tax due date of April 15 and the mutual-fund capital-gains tax reconciliation period in October”; days immediately adjacent to market holidays like Thanksgiving or Christmas; the period when vacations for securities executives peaks.
“It’s not quite measuring skirts or checking out who wins the Super Bowl, but it’s also not the best use of this information,” says Gregg Brewer, executive director of research for Value Line. “Trying to make investment decisions off this is not the way to go; if it was, you’d have 20 funds doing this, not one small one. … When you look at a fund and think that it could make decisions based on sounder principles — like actual financial analysis — that tells you it’s an interesting sales pitch, but not necessarily a good fund.”
Indeed, in its history, which now extends for almost three years, the Direxion calendar fund has failed to meet the expectations set in its prospectus.
Since its inception in April of 2005, the fund’s annualized average return is less than 2.5 percent. Over the last three years, the average fund in the Crane 100 — the average kept by Crane Data for the performance of the 100 largest money funds — is 4.31 percent.
The explanation for that is clear. With an expense ratio of 1.87 percent, the Direxion fund’s performance is roughly equal to the average money fund minus the expenses layered on by management.
Of course, that’s not supposed to happen, because the timing part of the formula is supposed to get the fund to where it can equal or beat the broad market. Over the last three years, the S&P 500 has an annualized return just north of 6 percent.
In fact, the fund that is designed to give shareholders some shelter can’t seem to get that right either. Its shares were down nearly 10 percent for the year in mid-February.
Slice performance any way you like, and it’s clear the fund — which has $18 million in assets — has thus far failed at its mission, and seems destined to continue lagging the expectations it has set.
Stephen Savage, editor of the No-Load Fund Analyst newsletter, says the real problem comes down to one of understanding, where things sound good and people think they know what they are getting until they actually see it in action.
“The basic premise of the fund is easy to understand, but what you don’t understand is some reason for the trend of calendar effects to persist in the future,” Savage says.
“You don’t know why this worked in the past, only that people believe calendar effects are real, at least some of the time. Just because something has happened in the past does not give me sufficient investment confidence to base an investment strategy on it.”
The Direxion fund is not the first or last fund that has failed to turn an investment theory into fund success, but with no reason to believe the fund’s early years will be different from the future, cutting it out of a portfolio would seem to be the right move.
Says Mark Salzinger, editor of the No-Load Fund Investor newsletter: “From a marketing point of view, I could see this fund appealing to old-timers, folks who have talked about theories like this since they first became popular 10 or 20 years ago. It appeals to people who are looking for an angle, rather than people who want to do the real work of investing … and it proves there’s no real substitute for real work, analysis and thought.”
Chuck Jaffe is senior columnist for MarketWatch. He does not own or hold short positions in any securities covered by Stupid Investment of the Week. If you have a suggestion for Chuck Jaffe’s Stupid Investment of the Week or a comment about this week’s column, you can reach him at firstname.lastname@example.org or Box 70, Cohasset, MA 02025-0070.