HSTRX for Cash?

[TBV]

Craigr has suggested SHY as a cash substitute over SHV because of the potential for higher returns.  In comparing HSTRX with SHY and SGV, I found that it outperforms both by a substantial margin, more than enough to cover its higher expense ratio. Since HSTRX holds mostly short-term treasuries (with a smattering of gold and stock as needed) and has a very conservative track record, what do you think of it as a stand-in for the PP cash allocation?

http://performance.morningstar.com/fund ... ture=en-US

[KevD]

Hi TBV,

HSTRX has held as much as 22% equities.  See the Morningstar portfolio page and go down to Investment Style History:

http://portfolios.morningstar.com/fund/ ... ture=en-US

[TBV]

Hi TBV,

HSTRX has held as much as 22% equities.  See the Morningstar portfolio page and go down to Investment Style History:

http://portfolios.morningstar.com/fund/ ... ture=en-US

Granted, but given Hussman's notoriously defensive investment strategy, this fund has provided the security of a money-market fund, but with much better returns.  No?

[craigr]

I only recommend using SHY/US Treasury short term bonds if you have a large cash buffer already built. Such as at least a year's worth of living expenses. But this is an optional change.

Overall though your cash should only be in 100% US Treasury Money Market. Anything else other than these two options has higher risk and I don't recommend them.

[TBV]

OK, you've clarified what your recommendation actually is and I'm not contesting the logic of that view.  Just the possibility that an alternately safe option might be available.

From time to time posters here have suggested this or that tweak to the HB 4x25 PP.  I've never been that  interested in changing the formula. It seems that the reason to hold cash is to avoid risk and have a ready stash to tide you over during deflation.  Trying to use the cash allocation to chase returns is therefore not prudent.  Got that.  However...as this chart shows, since its inception HSTRX has had little correlation to gold, LT Bonds or stocks.  It resembles cash more than anything else, just with better returns.  In addition, its beta and sharpe ratio numbers suggest very low risk.  So, if its performance over the last 8 years persisted, wouldn't this be an attractive and safe alternative to plain-vanilla cash?

http://quote.morningstar.com/fund/chart ... %2C0%22%7D

[TBV]

Well, his job is to "meddle."  It's his fund after all.  But as you say, HSTRX has done well.

The performance of his other funds does not interest me, since the criticism about them has been that he should be getting higher returns.  My point about HSTRX is precisely the opposite: his inherent defensiveness makes this fund more attractive (not less) as a cash alternative.

The point about manager risk is well taken.  But I think we have to balance that against the risk of artificially low returns imposed on MM investors by QE2, QE3, etc.

[craigr]

You really don't want a money manager making decisions in the portfolio for the various assets. As a cash substitute, you especially don't want it.

This HSTRX fund has a very high 0.73% expense ratio vs. the 0.15% of the SHY/SHV funds. Also this fund had very volatile performance in 2008 when the markets were going crazy. If you want your cash to serve as a buffer in bad markets you don't want to see this kind of moving around vs. the much more stable SHY fund for instance:

HSTRX vs. SHY in 2008:

The point about manager risk is well taken.  But I think we have to balance that against the risk of artificially low returns imposed on MM investors by QE2, QE3, etc.

Chasing yield has burned many more investors than it has ever helped. I talked about this in this blog post:

https://web.archive.org/web/20160324133 ... your-cash/

Please read the comments from one poster that lost money in the Reserve Fund when it unexpectedly froze all redemptions as it broke the buck.

I would not try to complicate things. If you want to gamble for extra performance in the portfolio I would just setup a variable portfolio and play your hunches there. But I wouldn't take risks with the core asset classes.

[Drewskers]

Right now HSTRX yield is .99%, expenses are .67%, Sharpe Ratio .63%.

SHY is yielding .99%, expenses are .15%, Sharpe Ratio 1.07%.

'Nuff said.

[AdamA]

Right now HSTRX yield is .99%, expenses are .67%, Sharpe Ratio .63%.

SHY is yielding .99%, expenses are .15%, Sharpe Ratio 1.07%.

'Nuff said.

I think that's kind of beside the point.  

HSTRX is subject to all kinds of risks (credit, market, inflation) that a short term treasury fund is not.  It's also redundant in the context of the PP because it holds treasury bonds and stocks.  

If it's all you have access to, then make it work as best as possible, but don't fool yourself into think it's the same as cash.  It's not even close, IMO.

 

[Drewskers]

Right now HSTRX yield is .99%, expenses are .67%, Sharpe Ratio .63%.

SHY is yielding .99%, expenses are .15%, Sharpe Ratio 1.07%.

'Nuff said.

I think that's kind of beside the point. 

That information is directly to the point. The original poster made the statement that HSTRX outperforms SHY despite higher expenses. The numbers I posted show that is not the case.

[TBV]

Right now HSTRX yield is .99%, expenses are .67%, Sharpe Ratio .63%.

SHY is yielding .99%, expenses are .15%, Sharpe Ratio 1.07%.

'Nuff said.

I think that's kind of beside the point.  

That information is directly to the point. The original poster made the statement that HSTRX outperforms SHY despite higher expenses. The numbers I posted show that is not the case.

As a long-term investor, the most recent three months performance is less important to me than the last 8 years, in which HSTRX outperformed SHY by an average of 4.4% per year.  The only "winning" year for SHY was 2008, but even then the difference was only 0.28%.  The next closest year was 2006, in which HSTRX was better by 1.77%.  HSTRX has not had a losing year yet, and much of the volatility it has seen seems confined to 2008-09, both of which were up years for the fund.

However, it's probably unfair to compare HSTRX's performance to a pure money market/ST bond fund, whose returns are modest almost by design. And although HSTRX has been the superior investment so far, I can see where it may not quite fit the role that the PP expects cash to play.

Thanks for everyone's opinion.

[AdamA]

Right now HSTRX yield is .99%, expenses are .67%, Sharpe Ratio .63%.

SHY is yielding .99%, expenses are .15%, Sharpe Ratio 1.07%.

'Nuff said.

I think that's kind of beside the point.  

That information is directly to the point. The original poster made the statement that HSTRX outperforms SHY despite higher expenses. The numbers I posted show that is not the case.

Yes, you're right.  I just think it's not really an apples to apples comparison.