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 November 2008 The Mattress Fund Sometimes You Just Have to Sleep on It
This isn't an attempt to rub it in, as most investors are in the same boat. Even those with the most carefully structured investment strategies were hit with the triple punch of converging correlations, rising expenses, and extremely volatile markets. Under these conditions, it's difficult if not impossible to make logical and well reasoned investment decisions. But what if there was an investment that didn't suffer nearly as much as more traditional alternatives? What if it was virtually unchanged for 2008, outperformed the S&P 500 for the decade of the 2000s, and over the period saw its already minimal expenses remain unchanged? Wouldn't that sound good about now? Wouldn't you sleep better with something like this?
A Firm Foundation You won't find her returns at the top of any style or category list, but they have been remarkably consistent even through the most volatile markets. Over the past ten years, average annual Standard Deviation and beta have both been a remarkable 0.0. One of the biggest problems in last fall's market upheaval was converging correlations, a problem that often arises when markets are stressed. Investors are always urged to diversify their portfolios by holding different types and classes of assets. Under typical market conditions, some classes tend to move in one direction while others move in the opposite. By holding a range of assets, the investor will be able to offset some of the poorer performers with others that are moving up. The problem is, when shocks occur as they did last October, correlations tend to converge and all asset classes suffer losses. That, however, has never been a problem for our clever money manager. Her strategy has almost no correlation to any specific asset class whether it be stock, bond, or commodity. Returns over the past decade have been astonishingly consistent, with the biggest annual loss being no more than 1% on a $10,000 investment. From January 1, 2000 through October 24, 2008, it's cumulatively 29.8% over the S&P 500. Not only that, it was virtually unchanged throughout the October selloff.
It's easy on your pocketbook, too. Knowing that expenses could have an oversized impact on conservative investors' portfolios, she created a unique flat-fee structure for her offering. Unlike traditional fee arrangements that shave off a percentage of assets under management whether or not those assets grow, she charges each investor a flat $100/year regardless of how much is invested. The more you put in, the more economical it becomes on a percentage basis. If you dollar-cost-average (a strategy of investing equal dollar amounts on a regular basis) it doesn't matter. You pay your $100 for the year just once and can make as many deposits as you please. Just think of how nice it would be if all money managers or mutual funds used this pricing structure.
Safely Tucked In The fund -- available as both a mutual fund or a separately managed account -- is appropriately called "The Mattress Fund". For your $100 a year, the fund manager will take your investments -- either lump sum or periodic -- and place them in her mattress. They'll be safely maintained there until you're ready to withdraw them (less the annual expense). Like other investment funds, it's not necessary that The Mattress Fund be insured, yet the manager does have a really good HO-3 homeowners insurance policy which does cover the mattress. Word has it, it's a blanket policy. You'll get quarterly statements comparing the value of your investment with the S&P 500. In up markets, it won't look too good, but in down markets, you'll certainly sleep better. Not only that, this is about the only investment where it's possible to precisely predict the future value at any given time. This can come in handy when you're planning for a future purchase or other savings goal. Taxes aren't an issue as the fund has never had a capital gains distribution. Given its unique structure, it never will, either. No surprises at tax time. There aren't any hidden fees, either. No 12b-1s, no loads, and no "administrative expenses". Even though the mattress is turned once a quarter, no expense is passed through to shareholders. (It should be noted however, the prospectus does allow this to be charged should the amount of assets under management make the investment vehicle too unwieldy for an early middle-aged woman to turn alone.) If you're interested -- and we know you are or you wouldn't still be reading -- you shouldn't delay. The fund can and will be closed when the investment vehicle is filled to capacity. It's difficult to specify the precise level of assets under management when this will occur, primarily because some people invest with fives, others tens, and a few hundreds. To be on the safe side, you're probably better off to send in larger denominations since there'll be fewer of them to have to keep up with anyway. So there you have it: Safety, stability, complete liquidity, and market-beating performance, all priced with an economical and easily understood formula. There's not even a need to sleep on it, your money manager will. Under the Covers Yet oddly enough, when couched in terms of safety and consistency, it has an allure, particularly now when so many investors have been badly hurt by overly aggressive investments. Safety and security sound pretty good in times like these. While not even the most cynical huckster would sell The Mattress Fund, be on the lookout for variations. The most likely formats are variable annuities, exchange traded funds, mutual funds, and, if the genre survives, structured notes. Environments like these often spawn products guaranteeing minimum returns or even the complete return of invested capital after a specified holding period. They can be appealing to investors tired of losses and market volatility.
Following the tech blow-up that ended the last decade, variable annuities guaranteeing the value of initial investment as well as "market" return were popular. The trick was that "market return" was only a percentage of a broad-based index return such as that of the S&P 500 and the guarantee of principal was effective only after a specified holding period. Fees were high and included an insurance element to help meet the guarantees. Their promises looked good at the time, but when investors found they only received a portion or the market appreciation, they were met with another rude surprise to find surrender penalties that lasted for up to ten years. No matter how sophisticated products or their marketing becomes, there is still no safe and liquid way to beat the market. It's understandable that after being burned, investors would seek out additional levels of safety, but that's no reason not to apply the same due diligence that would be used to evaluate a more aggressive alternative. If something as goofy as The Mattress Fund can be presented in such as way that it starts to sound appealing, just imagine what clever marketers can do with variable annuities, ETFs, and mutual funds. Truth be told, The Mattress Fund is probably the better alternative. Search this site! Just enter you key word or words:
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O HOW'D YOUR PORTFOLIO fare this fall? Did all those careful attempts at diversification work wonders for you? Were you able to stay the course during the periods of extreme volatility?
