(Bloomberg) — David Wright knows a thing or two about bear markets.
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His Sierra Tactical All Asset Fund lost almost nothing in 2008, as the global financial crisis triggered the worst market panic since the Great Depression. The loss of him during the 2020 Covid defeat was also relatively small. Wright, who lives in Santa Monica, California, says another private fund he manages didn’t lose a dime when the dot-com bubble burst two decades ago.
But neither of those periods compares to what is to come, according to Wright. Stocks and bonds have already fallen sharply in 2022. Much more is to come, the 78-year-old said in an interview.
“I think we’re in the biggest bear market of my life,” said Wright, co-founder of Sierra Investment Management, which oversees some $10 billion. “This is only the second inning. Much more to come.”
There is no shortage of bears making similar claims these days. Between the war between Russia and Ukraine, aggressive Fed tightening, skyrocketing inflation, and China’s Covid lockdowns, there are plenty of things to worry about. The S&P 500 has already lost 12% this year, while the Nasdaq Composite entered a bear market after falling more than 20% from its November peak. Key bond benchmarks are down more than 10%.
But what’s unique about Sierra is its aggressive approach to eliminating risk. The $869 million Sierra Tactical All Asset Fund, a so-called fund of funds that invests in mutual funds and exchange-traded funds, had less than 3% in US stocks at the end of April. More than half of the fund is in cash. Fixed-rated bonds accounted for just 1% of his holdings, while commodities accounted for more than 9%. The remainder of the portfolio is spread across assets including floating rate bonds, foreign stocks and master limited partnerships.
It is paying off this year. The fund has lost 2.3% in 2022, outperforming 91% of its peers tracked by Bloomberg.
What sustains Wright’s pessimism is not the Federal Reserve, inflation, or war. It is the enthusiastic behavior of investors over the past few years that has sent everything from meme stocks to cryptocurrencies skyrocketing. Stock market gains helped US household wealth soar to a record $150 trillion, or more than six times the size of the US economy, according to data compiled by the Federal Reserve.
“There is no other country on earth that has staked so much of its net worth on stocks,” said Wright, who co-founded Sierra Investment with Kenneth Sleeper in 1987. “But we are at a very big peak of complacency.”
Using computer models, the Sierra fund, which Wright manages with Sleeper and Douglas Loeffler, sets dynamic loss limits on its holdings. Once prices fall to those preset levels, the fund liquidates the holdings and moves into cash or other assets that are trending higher. It targets retirees and other investors who want to minimize risk.
Such a conservative approach helps you limit losses in a market downturn. But it also hurts performance when the market rises, which has mostly been since the 2008 crash. The fund returned 2.4% annually over the past five years, compared with an average 5% gain among its peers, according to data compiled by Bloomberg. A portfolio made up of 60% stocks and 40% bonds has returned 9% per year over the same period.
Wright didn’t specify the amount of losses he thinks are coming, but noted that the significant pullbacks in the 1970s and 1980s didn’t end until the market’s price-earnings ratio fell below 10. Currently, while the S&P 500’s 12- The P/E ratio for the month has dropped to 21, from 32 in March 2021, it is still above the average of 19 in the last two decades.
“Young people have no idea what the downside might be, what causes the drawdowns and how far it can go,” said Wright, one of the top 100 independent financial advisers, according to Barron’s.
(Adds Wright’s location in paragraph 2, updates fund size in paragraph 6, and peer performance in paragraph 11.)
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