We are all very proud of Van.
Treasury Lover Bets on Disinflation
By Mark Gongloff (Wall Street Journal)
Forget China. For the past 20 years, the U.S. government has had no more loyal buyer of its Treasury debt than Van Hoisington.
The 69-year-old Mr. Hoisington is the founder, president and chief investment officer of Hoisington Investment Management, a boutique investment firm in Austin, Texas, with about $5 billion under management.
Julia Robinson for The Wall Street Journal LOYAL TO TREASURYS: Van Hoisington, right, and Lacy Hunt, shown in July, base purchases on the way they see inflationary winds blowing.
Though small and far removed from money centers like New York and Hong Kong, this firm's investment thesis cuts to the heart of what might be the most important question facing the global economy today: Is inflation about to rise or will a chilling deflation take hold?
For nearly 20 years straight, Mr. Hoisington has had an all-in bet against inflation by investing in only one asset class: long-dated Treasury bonds. So far, whether by luck or forecasting prowess, he has been right, and his returns have trumped bond benchmarks and the stock market, despite the epic stock-market rally of the 1990s.
The news continued to break his way Friday, as a disappointing jobs report reinforced market concerns about a sluggish economy and the potential for deflation. Bond yields tumbled in response, with the two-year Treasury note's yield setting a record low of 0.51%. The 30-year bond yield dipped to 4.00%.
Mr. Hoisington has no plan to change his bet any time soon. If he is still right, then stocks and many other investments—excluding Treasurys—may also be in for more hard times.
Mr. Hoisington, originally of Paradise, Kan., population 64, is as unshowy as his investment style. His clients have but one investment on the menu, Treasury debt. And that comes in only two flavors: either very short-term Treasury debt—cash, essentially—or 30-year Treasury bonds.
Mr. Hoisington and his chief economist, Texas native Lacy Hunt, formerly chief economist at HSBC Securities Inc., decide which flavor to buy based on which way they see the inflationary winds blowing.
In October 1990, 10 years after he started the firm, Mr. Hoisington saw inflation was in retreat and started buying long-term Treasurys. He has been buying them ever since, through expansions and recessions, bubbles and busts.
"We've ridden this train a long way," says Mr. Hoisington with his characteristic understatement.
The train has gotten crowded of late, driving bond prices higher and yields, which move in the opposite direction, near historic lows. That reduces the potential upside and raises the risks associated with a sudden reversal.
Mr. Hoisington's approach has certainly led to some unpleasant years. He was fully invested in long-term Treasurys in 1994, when the Federal Reserve raised interest rates unexpectedly and bonds took a beating. That year was one of the four down years that the firm has had in the past 25.
Last year was another down year, as riskier assets bounced from near-depressionary lows and investors shed fallout-shelter investments like Treasurys.
"We have to have a client set that has a pretty strong stomach because 30-year Treasurys bounce around a lot on a quarterly basis," says Mr. Hoisington, who warns clients they should have investment horizons of no less than three years.
Then there were long stretches like the tech-stock bubble in the 1990s and the housing bubble in the 2000s, when the firm was making money but everybody else was making a lot more.
Still, Mr. Hoisington's method has paid off in the long run. Over the past 20 years, Mr. Hoisington's annual returns have averaged 9.3% compounded, net of fees, outperforming the 8% annualized returns in the Standard & Poor's 500-stock index, according to Chicago research firm Bianco Research.
Mr. Hoisington's average returns are also two percentage points, or 200 "basis points" in bond-market lingo, more than the 7.1% annualized return of the Barclays Capital Aggregate Bond Index, a standard benchmark against which bond funds are measured.
Those "200 basis points in fixed-income land is off the charts," says Jim Martin, chief investment officer of M.J. Murdock Charitable Trust in Vancouver, Wash., a Hoisington client since 1980. "What's not to like about that?"
Though the Hoisington investment style seems simplistic, Mr. Martin trusts the firm's ability to switch from long Treasurys to short Treasurys at the right time. "It's pretty easy to understand but may be difficult or impossible for a lot of people to execute," says Mr. Martin.
Clients in a sense are paying the firm less for its trading acumen than for its monk-like devotion to the study of economics. Mr. Hoisington defers questions about his off-hours activities, calling them "not very interesting."
"Everybody has their own little hobbies," says Mr. Hoisington, "but it's pretty much a full-time job keeping up with the economic literature."
Certainly, the firm's long-term view on inflation and rates has been spot-on. Since October 1990, the 30-year Treasury yield has dropped from nearly 9% to about 4%. Inflation, as measured by the consumer-price index, has fallen from 6.3% to 2%.
Messrs. Hoisington and Hunt expect inflation to fall further, toward 0%, with a risk of deflation, or a stubborn decline in prices. Based on this inflation view, they think the yield on the 30-year Treasury bond could fall to 2%, or half of what it is today, which would represent a big jump in price.
"If circumstances change, then we will change our minds and get rid of long Treasurys," Mr. Hoisington says.
He doesn't see that happening for several years. In fact, he and Mr. Hunt believe the U.S. economy is stillgripped in a long-term disinflationary—potentially deflationary—trend due to record U.S. debt levels. History suggests the effort to whittle away such debt will slow the economy and push down inflation.
In a vacuum, low inflation and low interest rates should benefit stocks and other risky assets. But such conditions are usually accompanied by uncertainty and trauma in the economy and financial markets, which tends to benefit safer assets such as Treasurys.
The Hoisington view is outside the mainstream. While most economists, including those at the Fed, worry about the risk of deflation, almost nobody thinks it is really going to happen.But with signs of slowing economic growth, the mainstream may be moving a little closer to Mr. Hoisington.
Copied from the Wall Street Journal - Aug. 7,2010.
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