Talk about tapping into the powers that be inside the Beltway.
A new mutual fund recently registered with the Securities and Exchange Commission actually hopes to do the opposite by proving out historical statistics that show the U.S. equity market performs far better when elected representatives are nowhere to be found on Capitol Hill.
The Congressional Effect Fund, registered earlier this month by Congressional Effect Management of New York, will shift between investing in S&P 500 Index futures contracts and related ETFs and index funds when both houses of Congress are on recess.
When the either the U.S. House of Representatives and Senate are out of session, the fund will invest in fixed-income and money market funds.
The rationale for this unusual investment strategy? It's all based on historical performance data, notes the fund's investment advisor in its fund filing.
The investment advisor analyzed empirical data from Jan. 1, 1965 through Dec. 31, 2007. The fund's backers say the data shows that, on average, one or both houses of Congress are in session approximately 65% of eligible business days and out of session the remaining 35% of business days.
Matching up the daily performance for the S&P 500, the advisor then found that on days when Congressional hallways were silent, the S&P's return was 0.06% (translated into an average annualized price gain of 17.6%) versus only a fractional 0.01% performance gain (equivalent to an average annualized gain of 1.6%) when members of Congress were seated and conducting their usual Congressional business.
Coincidence? Congressional Effect Management thinks not.
"The advisor believes that these gains are not coincidental, but rather reflect the cumulative effect of unintended adverse consequences on the U.S. stock market from anticipated and actual Congressional legislative initiatives," the fund prospectus says. The advisor has dubbed the deleterious impact of Senatorial and House debate, the "Congressional Effect".
So, what's the link between equity market performance and Congressional activities? According to the fund advisor, it all revolves around uncertainty.
Both anticipated and actual Congressional actions are two factors that tend to contribute to stock market uncertainty. Investors in the U.S. stock market tend to react negatively to market uncertainty, which typically drives stock prices lower.
Certainly, for instance, in the weeks following the 2000 Presidential election, in which Al Gore won the popular vote but a few hundred hanging chads in Florida cost him the electoral votes in Florida, thus the win to George W. Bush, the stock market fell consistently.
Markets don't like uncertainty.
Congressional hearings, fear of new corporate probes, anxiety about potential new legislation and concerns over how Congress' actions could alter the corporate competitive landscape, can all feed investors' worries.
In contrast, the general mood of the stock market tends to be less wary when Congress is out during scheduled breaks and holidays and when Senators and Representatives are on hiatus, or just collectively off to the golf course or heading home to family and friends.
Of course, that doesn't mean that the U.S. stock market will always move in lockstep with Congressional initiatives, nor will activities on Capitol Hill be the single factor that sways the market, the fund's advisor argues.
Certainly other factors affect daily market gain or losses. During a bear market, for example, Congressional actions may have little or no bearing on investor sentiment. But, argues the advisor, the so-called Congressional Effect is observable over the long term.
The no-load Congressional Effect Fund has a 1.00% management fee and a 0.25% 12b-1 fee. Total annual fund expenses are expected to top 3.8%, but offsets and fee waivers will bring the fund's annual expenses down to 2.34%, according to the prospectus.
Eric Singer, managing director of Pelion Securities Corp., will manage the fund. He is the managing member of the fund's advisory firm that began operating last year. Singer will also serve as president of the lone mutual fund. Pelion is parent company to an SEC-registered investment advisor, a retirement and pension plan administrator and a broker/dealer.
Singer had not returned a call seeking comment by press time.
Fads vs. Governmental Underpinnings
The mutual fund industry has had its share of faddish and trendy mutual funds that have long since vanished, including a fund focusing solely on public companies involved in the golf industry. How about another focused on the death and assured mortality marketplace? Investors need only recall the Tsunami of singularly-focused technology and Internet funds in the late 1990s to bristle at the suggestion of another seemingly odd mutual fund.
But the truth is, governmental-linked investment trends may not be that wacky, after all. Surely, there are a smattering of Democratic, socially responsible mutual funds in the U.S.
"There does indeed seem to be a fair amount of research that backs up this trading strategy [of investing in S&P 500 companies when Congress is not in session]," said industry commentator Eric Tyson of Hoboken, N.J., and author of the 2005 fourth edition of "Investing for Dummies" and the 2007 fifth edition of "Mutual Funds For Dummies."
"Perceptually, the markets prefer that the government does less," he added. "It's not a kooky idea. There is a fair amount of research to prove this effect."
However, from an operational standpoint, Tyson cautions that the advisor's strategy could see the fund racking up substantial trading costs, which would drag down returns and potentially impact investors not sheltered by tax deferred retirement plans.
Investing according to political or governmental underpinnings is not new, even in the mutual fund industry. For years, theorists have suggested a link between the performance of the stock market and various phases of the presidential election cycle.
In October 2006, The Blue Fund debuted under an investment mandate that leans, unashamedly, into favoring the Democratic party. The unusual mutual fund follows the advisor's "Blue" index, which invests in companies that engage in practices consistent with various "progressive values" and in which at least the firm's top three executives contribute to the political campaigns of Democratic candidates. Blue Investment Management of Washington, D.C., manages the fund.
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