Value Investing

Hussman Funds 2015 Semi-Annual Letter: Bearish!

Hussman Funds semi annual letter for the year ended December 31, 2015.

Dear Shareholder,

The Hussman Funds continue to pursue a disciplined, value-conscious, risk-managed and historically-informed investment approach focused on the complete market cycle. Within this full-cycle perspective, my view is that the sideways volatility in the U.S. financial markets since 2014, particularly in equities and low-grade debt, most likely reflects the top-formation of the third speculative bubble in 15 years. On the basis of the valuation measures we find most strongly correlated with actual subsequent market returns (and that have fully retained that correlation even across recent market cycles), recent valuation extremes imply a 40-55% market loss over the completion of the current market cycle, with zero nominal and negative real total returns for the Standard & Poor’s 500 Index on a 10-12 year horizon.

These are not worst-case scenarios, but run-of-the-mill expectations. They reflect the outcomes that would be expected given only a return to valuation levels that have been approached or breached in every other market cycle across history, including periods prior to the 1960’s when U.S. interest rates were not much different from present levels.

The past year was largely a transition period in the financial markets. After significant volatility, the S&P 500 Index achieved a total return of 1.38% for the year ended December 31, 2015. The MSCI EAFE Index had a total return of -0.81% for the year, and the Barclays U.S. Aggregate Bond Index achieved a total return of 0.55%. During this time, our investment strategy was generally positioned in anticipation of market weakness that did not emerge until early 2016. As of this writing (February 18, 2016), the S&P 500 Index remains within 10% of its 2015 record high, but even the modest market turbulence of recent months has been sufficient to place all four of the Hussman Funds ahead of their respective benchmarks for the period from December 31, 2014 to the present. While this may change, it is instructive how quickly the relative performance of risk-managed investment strategies versus passive strategies can shift during a general market decline.

Recall that, on a total return basis, the S&P 500 Index lost -47.41% from its bull market peak on September 1, 2000 to its bear market low on October 9, 2002, while Strategic Growth Fund gained 47.83%. Assuming equal initial investments in the S&P 500 Index and Strategic Growth Fund at that bull market peak, an investment in Strategic Growth Fund, by the end of the bear market, would have been worth 2.81 times the value of the investment in the S&P 500. Similarly, between the bull market peak of the S&P 500 Index on October 9, 2007 to the bear market low on March 9, 2009, an investment in Strategic Growth Fund would have grown to 2.09 times the value of the same investment in the S&P 500. Past performance is not an assurance of future results, and Strategic Growth Fund may perform differently in future bear market periods, but these outcomes illustrate how the tables can turn in the relative performance of risk-managed investment strategies over the completion of a full market cycle.

I’ve regularly observed that, while long-term investment returns are tightly correlated with reliable measures of valuation, investment returns over shorter portions of the market cycle are primarily driven by the willingness or aversion of investors to accept risk. Historically, we’ve found that the most reliable measure of investor risk-preferences is the behavior of market internals across a broad range of individual stocks, industries, sectors, and security types, including debt securities of varying creditworthiness. The reason is straightforward: when investors are inclined to speculate, they tend to be indiscriminate about it. A uniform advance across a broad range of securities is an indication of risk-seeking, while divergent market behavior is an indication of growing risk aversion.

More than a year ago, I detailed the central adaptation to our investment discipline that was necessary as a result of extraordinary monetary policy during the advancing half-cycle since 2009. In prior market cycles across history, the emergence of extreme “overvalued, overbought, overbullish” features of market action was regularly accompanied or closely followed by deterioration in broad market internals, and steep market losses would typically follow. In recent years, the Federal Reserve’s policies of quantitative easing (QE) and near-zero interest rates encouraged persistent speculation despite these extremes. In the face of QE, one needed to wait for explicit deterioration in market internals (indicating that investors had shifted toward riskaversion) before adopting a clearly negative market outlook.

Importantly, monetary easing in itself is not what supports speculation. Rather, monetary easing generally only amplifies speculation in markets where investors are already inclined to embrace risk. The central function of quantitative easing and a zero interest rate policy is to flood the financial system with base money that someone has to hold at every moment in time, until it is retired by the Fed. That base money never comes “off the sidelines” – it merely changes hands. Provided that investors are risk-seeking, each successive holder tries to pass that base money off to someone else, typically by buying a riskier security that might provide a higher yield (as long as the risk of capital losses can be ignored). The investor who sold that security gets the cash, and the cycle continues. Put simply, when a central bank executes QE in a market where investors are already inclined to seek risk, the excess base money acts as a hot-potato that passes from one investor to another.

But a central requirement for easy money to have a speculative effect is that investors can’t be too concerned about capital losses. When investors reach for yield, the quiet assumption is that the extra yield will not be wiped out by a decline in price. That belief may be widely held in a risk-seeking environment, but it fails to hold in a risk-averse one. Once market internals deteriorate in an extremely overvalued market, conveying that risk-aversion is increasing in the presence of thin risk premiums, the jig is up. This is why persistent Fed easing was wholly ineffective during the 2000-2002 and 2007-2009 collapses. This is why we find in the historical data that central bank easing only supports risk-assets when investors are already inclined to embrace risk. This is the correct lesson to learn from the sequential bubbles and crashes since 2000, and it is one that effectively distinguishes those crashes from the intervening speculative episodes. In the absence of a fresh improvement in market action, the stock market remains vulnerable to significant market losses, and Fed easing is likely to prove ineffective in preventing these losses, as it was during the collapse of the two previous bubbles since 2000.

Hussman Funds Performance

Hussman Funds

Strategic Growth Fund

or the year ended December 31, 2015, the total return of Strategic Growth Fund was -8.40%, attributable both to a modest lag in the performance in the Fund’s holdings relative to the capitalization-weighted indices it uses to hedge, and to decay in the time-value of index put options held by the Fund. The persistent deterioration in market internals during 2015 exerted a significantly greater negative effect on the broad market and equal-weighted indices than on capitalization-weighted indices such as the S&P 500, which gained 1.38% for the year. While we view that deterioration as the likely precursor for broad market losses, as it was in 2000 and 2007, the shorter-term impact on Fund returns during 2015 was negative.

From the inception of Strategic Growth Fund on July 24, 2000 through December 31, 2015, the Fund achieved an average annual total return of 2.25%, compared with an average annual total return of 4.19% for the S&P 500 Index. Over that period, an initial $10,000 investment in the Fund would have grown to $14,090, compared with $18,850 for the same investment in the S&P 500 Index. The deepest loss experienced by the Fund since inception was -41.02%, compared with a maximum loss of -55.25% for the S&P 500 Index. Meanwhile, the stock selection approach of the Fund has outperformed the S&P 500 by 4.10% (410 basis points) annually from the inception of the Fund on July 24, 2000 through December 31, 2015.

Even at its lowest interim points, the Fund has experienced much smaller declines than those that the S&P 500 has repeatedly experienced since 2000. Note that in order to lose -55.25% (as the S&P 500 Index did following steep overvaluation in 2007 much like the present), one must first lose -41.02%, and then lose an additional -24.13%.

Hussman Funds

Strategic Total Return Fund

For the year ended December 31, 2015, the total return of Strategic Total Return Fund was -1.01%, compared with a total return of 0.55% for the Barclays U.S. Aggregate Bond Index. The Fund held a relatively conservative position in bonds during this time, with a duration typically ranging between 2-6 years (meaning that a 100 basis point move in interest rates would be expected to affect Fund value by about 2%-6% on the basis of bond price fluctuations). During 2015, the yield on 10-year U.S. Treasury bonds increased from 2.17% to 2.27%, resulting in a relatively flat total return in bonds. An additional driver of fluctuations in the Fund’s investment returns during this period was its exposure to precious metals shares. While this exposure was generally modest, gold stocks as measured by the Philadelphia Gold and Silver Sector Index (XAU) had a total return of -33.42% for the year, and the Fund’s holdings in this area contributed to a slight reduction in returns.

From the inception of Strategic Total Return Fund on September 12, 2002 through December 31, 2015, the Fund achieved an average annual total return of 4.52%, compared with an average annual total return of 4.41% for the Barclays U.S. Aggregate Bond Index. Over that period, an initial $10,000 investment in the Fund would have grown to $17,996, compared with $17,745 for the same investment in the Barclays U.S. Aggregate Bond Index. The deepest loss experienced by the Fund since inception was -11.52%, compared with a maximum loss of -5.09% for the Barclays U.S. Aggregate Bond Index.

Hussman Funds

Strategic International Fund

For the year ended December 31, 2015, the total return of Strategic International Fund was -0.78%, compared with a total return of -0.81% in the MSCI EAFE Index. The Fund generally held a defensive portfolio focused on equities that we view as undervalued and having significant dividend yields. The Fund was partially exposed to currency fluctuations early in the year, which contributed to negative returns during the first and second quarters. In June 2015, following a rebound in the value of the euro and the Japanese yen, the composition of the Fund’s hedges was altered in order to reduce the impact of both local equity fluctuations and broad currency fluctuations. This shift was effective in helping the Fund achieve a positive return during the second half of the year, despite a decline in the MSCI EAFE Index during that period.

From the inception of Strategic International Fund on December 31, 2009 through December 31, 2015, the Fund had an average annual total return of -1.13%, compared with an average annual total return of 4.28% for the MSCI EAFE Index. Over that period, an initial $10,000 investment in the Fund would have declined to $9,343, compared with $12,862 for the same investment in the MSCI EAFE Index. The maximum decline of the EAFE Index was -26.48%, compared with a maximum decline of -21.77% for Strategic International Fund.

Hussman Funds

Strategic Dividend Value Fund

For the year ended December 31, 2015, the total return of Strategic Dividend Value Fund was -8.39%. This outcome largely reflected generally deteriorating internals in the broad market, which extended to value-oriented dividend-paying stocks. The capitalization-weighted S&P 500 Index had a total return of 1.38% during the same period.

From the inception of Strategic Dividend Value Fund on February 6, 2012 through December 31, 2015, the Fund had an average annual total return of -0.28%, compared with an average annual total return of 13.75% for the S&P 500 Index. Over that period, an initial $10,000 investment in the Fund would have declined to $9,890, compared with $16,533 for the same investment in the S&P 500 Index. The deepest loss experienced by the Fund since inception was -9.35%, compared with a maximum loss of -14.66% for the S&P 500 Index.

Hussman Funds – Portfolio Composition

As of December 31, 2015, Strategic Growth Fund had net assets of $602,758,396, and held 110 stocks in a wide variety of industries. The largest sector holdings as a percent of net assets were information technology (38.8%), health care (13.7%), consumer discretionary (11.5%), consumer staples (9.2%), financials (9.7%), and industrials (8.7%). The smallest sector weights were materials (5.1%), energy (3.2%), and utilities (1.0%).

Strategic Growth Fund’s holdings of individual stocks as of December 31, 2015 were valued at $607,969,030. Against these stock positions, the Fund also held 2,000 option combinations (long put option/short call option) on the S&P 500 Index, 1,300 option combinations on the Russell 2000 Index and 100 option combinations on the Nasdaq 100 Index. Each option combination behaves as a short sale on the underlying index, with a notional value of $100 times the index value. On December 30, 2015, the S&P 500 Index closed at 2,043.94, while the Russell 2000 Index and the Nasdaq 100 Index closed at 1,135.89 and 4,593.27, respectively. The Fund’s total hedge therefore represented a short position of $602,386,400, thereby hedging 99.1% of the dollar value of the Fund’s investment positions in individual stocks.

Though the performance of Strategic Growth Fund’s diversified portfolio cannot be attributed to any narrow group of stocks, the following holdings achieved gains in excess of $2 million during the six months ended December 31, 2015: Global Payments, First Solar, and NVIDIA. Holdings with losses in excess of $3 million during this same period were Barrick Gold, Newmont Mining, and Vasco Data Security.

As of December 31, 2015, Strategic Total Return Fund had net assets of $396,977,937. Treasury notes, Treasury bills, Treasury Inflation-Protected Securities (TIPS) and money market funds represented 77.9% of the Fund’s net assets. Exchange-traded funds, precious metals shares and utility shares accounted for 8.3%, 13.8% and 0.2% of net assets, respectively.

In Strategic Total Return Fund, during the six months ended December 31, 2015, a portfolio gain in excess of $1 million was achieved in United States Natural Gas Fund, LP. Holdings with losses in excess of $2 million during this same period were Goldcorp, Newmont Mining and Barrick Gold.

As of December 31, 2015, Strategic International Fund had net assets of $38,665,801 and held 67 stocks in a wide variety of industries. The largest sector holdings as a percent of net assets were consumer discretionary (21.8%), information technology (15.8%), health care (9.2%), industrials (9.1%), financials (6.5%), consumer staples (5.8%), and utilities (4.7%). The smallest sector weights were materials (3.7%) and telecommunication services (1.1%). Investment in shares of money market funds accounted for 10.5% of net assets.

Strategic International Fund’s holdings of individual stocks as of December 31, 2015 were valued at $30,046,988. In order to hedge the impact of general market fluctuations, as of December 31, 2015, Strategic International Fund was short 340 futures on the Mini MSCI EAFE Index. The notional value of this hedge was $28,910,200, hedging 96.2% of the value of equity investments held by the Fund. When the Fund is in a hedged investment position, the primary driver of Fund returns is the difference in performance between the stocks owned by the Fund and the indices that are used to hedge.

While Strategic International Fund’s investment portfolio is diversified and the Fund’s performance is affected by numerous investment positions, the hedging strategy of the Fund was primarily responsible for the reduced sensitivity of the Fund to market fluctuations from the Fund’s inception through December 31, 2015. Individual equity holdings having portfolio gains in excess of $500,000 during the six months ended December 31, 2015 included Lonza Group, Novartis, Smith & Nephew PLC – ADR and Reckitt Benckiser Group PLC. Holdings with portfolio losses in excess of $350,000 during this same period included Electricite De France, Statoil ASA and Canadian Oil Sands.

As of December 31, 2015, Strategic Dividend Value Fund had net assets of $7,778,017 and held 55 stocks in a wide variety of industries. The largest sector holdings as a percent of net assets were information technology (26.3%), consumer discretionary (19.1%), consumer staples (14.3%), industrials (11.9%), energy (7.9%), health care (6.3%), and materials (5.0%). The smallest sector weights were utilities (1.8%) and financials (1.6%).

Strategic Dividend Value Fund’s holdings of individual stocks as of December 31, 2015 were valued at $7,330,213. Against these stock positions, the Fund also held 35 option combinations (long put option/short call option) on the S&P 500. The notional value of this hedge was $7,153,790, hedging 97.6% of the value of equity investments held by the Fund. When the Fund is in a hedged investment position, the primary driver of Fund returns is the difference in performance between the stocks owned by the Fund and the indices that are used to hedge.

In Strategic Dividend Value Fund, during the six months ended December 31, 2015, a portfolio gain in excess of $50,000 was achieved in Kraft Heinz Company. Holdings with portfolio losses in excess of $50,000 during this same period included Staples, Stage Stores, Mosaic Company and Kinder Morgan.

Supplementary information including quarterly returns and equity-only performance is available on the Hussman Funds website.

Hussman Funds – Current Strategy and Outlook

From the standpoint of our investment discipline, the present environment couples the second most extreme market valuations in history (exceeded only by the 2000 bubble peak) with a clear deterioration in our measures of market internals. Many of our long-term concerns would persist regardless of the behavior of market action, as an improvement at these levels would not make reliable valuation measures any less extreme. However, the immediacy of our concerns would be substantially reduced in the event that our measures of market action were to improve. Ideally, such an improvement will follow a material retreat in valuations; a combination which has historically represented the best opportunity in the market cycle to shift toward an aggressive exposure to stocks.

In late-2015, we observed the combination of falling stock prices, widening credit spreads, a relatively modest spread between long-term and short-term interest rates, and a decline in the ISM Purchasing Managers Index below 50. While none of these measures is significantly correlated with economic recessions individually, the full combination – a syndrome that comprises our basic Recession Warning Composite – has generally been a useful early warning signal of oncoming economic difficulties, as I observed in real-time in 2000 and 2007. While employment weakness in 2011-2012 contributed to recession concerns that did not unfold in that instance, the foregoing set of conditions was not in place at that time, and the employment figures were later revised upward. Also, in contrast to 2011-2012, market internals in the present instance have been persistently unfavorable. As I’ve emphasized regularly since mid-2014 in my weekly commentaries on the Hussman Funds website (www.hussmanfunds.com), the behavior of market internals is an important “hinge” that distinguishes weakness in leading economic data that tends to be followed by recovery from weak leading economic data that tends to devolve into recession. We find that market internals act as a similar hinge in distinguishing the likely outcomes of overvaluation and Federal Reserve easing.

As we enter 2016, various measures of financial stress, particularly in the equity and low-grade credit markets, suggest that financial conditions have tightened. As in 2007 after a similar period of untethered speculation, the reason conditions have “tightened” is that low-grade borrowers were able to issue a mountain of questionable debt to yield-seeking speculators in recent years. Much of the proceeds were used to finance various forms of malinvestment, such as expanded oil/gas capacity and the repurchase of corporate equities at steep valuations. All of this was encouraged by the Federal Reserve’s reckless policy of quantitative easing. As default concerns increase and investors become more risk-averse, low-grade credit has weakened markedly. The correct conclusion to draw, I believe, is that the consequences of misguided policies are predictably coming home to roost.

Prior to U.S. recessions, the earliest indications of an oncoming economic shift are usually observable in the financial markets, particularly in growing deterioration across broad market internals, and widening credit spreads between debt securities of varying creditworthiness. The next indication comes from measures of what I call “order surplus”: new orders, plus backlogs, minus inventories. When orders and backlogs are falling while inventories are rising, a slowdown in production typically follows. If an economic downturn is broad, “coincident” measures of supply and demand, such as industrial production and real retail sales, then slow at about the same time. Real income slows shortly thereafter. The last to move are employment indicators – starting with initial claims for unemployment, next payroll job growth, and finally, the duration of unemployment.

Indications of oncoming recession are already evident in financial market strains, a weakening order surplus, and deterioration in our Recession Warning Composite not seen since the 2007-2009 downturn. Of course, it remains important to look for confirmation from other indications in the economic sequence. Notably, U.S. industrial production has declined in 10 of the past 12 months, which is an outcome that has never emerged except in the context of a U.S. recession. Our concerns about recession would be further amplified and confirmed by weakness in consumer confidence, real retail sales, real income, and later, in various employment measures.

The present syndrome of historically extreme equity valuations, poor market internals, widening credit spreads, and growing evidence of oncoming recession is familiar. The same set of observable conditions prompted my strong concerns in 2000 and 2007, both before steep market retreats and economic weakness. I don’t hesitate to admit that in the face of extraordinary Federal Reserve activism during the advancing half-cycle since 2009, we could have experienced far better results had we required explicit deterioration in market internals before taking a negative market outlook in response to “overvalued, overbought, overbullish” features of market action. In mid-2014, we imposed that requirement on our methods of classifying market return/risk profiles. But that adaptation plays no role in the concerns that we have at present. If our measures of market internals were to improve materially, the immediacy of both our market and economic concerns would be significantly reduced, even if the same “overvalued, overbought, overbullish” extremes emerge. Presently, however, we observe the same evidence that allowed us to anticipate previous financial and economic distress.

Our investment outlook toward the equity market is decidedly negative at present. These concerns extend beyond the U.S. alone. Notably, the profound weakness in European bank stocks and spiking credit default swap spreads on those banks raise concerns about financial distress, while an industrial downturn in China raises similar concerns. As of mid-February 2016, Strategic Growth Fund continues to hold a broadly diversified portfolio of individual stocks, hedging against the impact of general market fluctuations using long-put / short-call index option combinations on the S&P 500, Nasdaq 100, and Russell 2000 Indices, currently setting the put option strike prices closer to current market levels than the strike prices of the corresponding short call options. While this position can experience greater time-decay as a result of higher put option premiums, it is commensurate with the severe market return/risk classification we presently identify, which easily places current conditions within the most negative 10% of all periods across history.

Conversely, in the most favorable return/risk classification we identify, Strategic Growth Fund may hold a fully unhedged investment position, augmented with “leverage” established by investing a few percent of Fund assets in call options. It is important to recognize that the Fund’s strategy fully anticipates the use of such aggressive investment positions, provided that market conditions are consistent with the expectation of strong equity market returns. Despite occasionally incorrect categorization by outside observers, Strategic Growth Fund is neither a market-neutral fund nor a bear market fund. As always, the best way to understand the Fund’s actual investment approach is to carefully read the Prospectus.

Strategic Dividend Value Fund also remains fully hedged at present, but with a “flat” hedge where the long-put and short-call index options have identical strike prices and expiration dates. While we observe less extreme and often reasonable valuations across the international equity markets, there is a marked tendency for international equity markets to decline in concert with significant declines in the U.S. equity market. For this reason, Strategic International Equity Fund also remains fullyhedged at present, using short futures contracts on the MSCI EAFE Index. A reduction in the severity of our U.S. market concerns would contribute to a more constructive outlook toward foreign markets.

With respect to Strategic Total Return Fund, Treasury securities are typically sought by investors as safe-havens in an environment of perceived economic and credit risk. However, 10-year Treasury yields have declined to about 1.7%, and at such low yields, Treasury bonds become vulnerable to abrupt yield spikes that can quickly wipe out years of anticipated income. As of mid-February 2016, Strategic Total Return Fund has reduced its average duration in Treasury bonds to just under 2 years (meaning that a 100 basis point change in interest rates would be expected to impact the Fund by less than 2% on the basis of bond price fluctuations). Our inclination, as is typical in this environment, is to expand the Fund’s duration in response to upward spikes in yield, and reduce that exposure on marked declines in yield.

I observed in the 1990’s that precious metals shares have usually fared particularly well in environments where nominal interest rates are declining, the year-over-year rate of inflation is advancing (even from a low level), leading economic data is relatively weak, and precious metals shares are depressed relative to the spot price of gold itself. Yet in recent years, precious metals shares have periodically been hit hard despite the presence of three or all four elements of this favorable “syndrome.” The reason, I think, has been the recurring specter of global deflation. A useful way to confine that risk has been to remain somewhat more cautious on this sector if the U.S. dollar index and credit spreads are both rising and inflation is subdued. Unlike 2008, when the dollar started at a somewhat depressed level on the basis of our valuation methods, the U.S. dollar has already been steeply bid up as a result of continuing QE in Europe and Japan. On that front, the U.S. Dollar Index has moved sideways over the past year, and as of January 2016, the rate of core inflation has increased to 2.22% on a year-over-year basis. While we continue to closely monitor market conditions for changes in these and related factors, we shifted to a clearly positive outlook on precious metals shares in early 2016. This is reflected in a larger investment position in precious metals shares within Strategic Total Return Fund, amounting to about 15% of Fund assets.

Discipline does not imply a static approach. It requires one to adapt to new evidence, but in my view, those adaptations should still be consistent with the lessons of history, without abandoning those lessons by carelessly repeating “this time is different.” In mid-2014, we addressed what I viewed as the central challenge that made our experience during the half-cycle since 2009 so different from our favorable experience in other complete market cycles. Despite the repeated emergence of “overvalued, overbought, overbullish” syndromes that had reliably been followed by steep market losses in prior cycles across history, the aggressively activist policy of the Federal Reserve since the global financial crisis required one to wait for explicit deterioration in market internals – indicating a shift toward risk-aversion among investors – before adopting a clearly negative market outlook. As I wrote a year ago:

“For those who trust and value our work, my hope is that we have clarified when and how we’ve adapted to the challenges of recent years in a way that helps to understand both the successes we’ve enjoyed over time and the difficulties that we’ve experienced in the recent half-cycle. Again, we cannot assure that future cycles will mirror the lessons of a century of historical evidence. What we do know for certain is that the framework that resulted from our recent challenges is robust to every market cycle we’ve observed across a century of history, including periods of growth, depression, peace, war, deflation, inflation, the late-1990’s bubble and crash, the housing bubble and crash, and even the most recent half-cycle since 2009.”

Put simply, I believe that we have fully adapted to the challenges and realities of policies that enabled three of the greatest speculative bubbles in history to emerge in sequence, and that our present methods have the capacity to distinguish those bubbles from the financial and economic collapses that have predictably followed. Markets move in complete cycles that include not only periods of speculation, rich valuations and uniformly advancing prices, but also periods of risk-aversion, depressed valuations, and persistent market losses. The speculative half-cycle that has emerged from the combination of risk-seeking fueled by monetary easing should not be confused for the complete cycle. Until market internals improve materially, risk-aversion – as it did in 2000-2002 and 2007-2009 – is likely to render further monetary easing wholly ineffective over the completion of the current market cycle. Our outlook will change as the evidence does.

ll of the Hussman Funds have the ability to accept constructive, and in some cases, aggressive investment exposure to various financial markets, provided that we observe market conditions that have historically been associated with significant investment returns, on average. Historically, the strongest expected market return/risk profile we identify is associated with a material retreat in valuations that is then joined by an early improvement in market action. Those opportunities will undoubtedly emerge as market conditions change over time. Meanwhile, I remain confident that our value-conscious, risk-managed, historically-informed investment discipline is well-suited to navigate investment opportunities and risks over the completion of the current market cycle and those in the future.

As always, I remain grateful for your trust.

Sincerely,

John P. Hussman, Ph.D.

Past performance is not predictive of future performance. Investment results and principal value will fluctuate so that shares of the Funds, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than the performance data quoted.

Weekly updates regarding market conditions and investment strategy, as well as special reports, analysis, and performance data current to the most recent month end, are available at the Hussman Funds website www.hussmanfunds.com.

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