If you ask most mutual fund managers where they think the economy is headed, many would respond that their job is to select securities and construct portfolios, not to try and forecast the direction of the economy.
Michael Aronstein, portfolio manager of the Marketfield Fund and the chief investment strategist for Oscar Gruss & Son, is a notable exception. In the past he has called pivotal economic turning points, including the 1987 stock market crash, the recent bursting of the housing bubble and last year's downturn in commodity prices.
Such calls help explain why his $44 million absolute return fund, which employs strategies such as selling short and investing in commodity futures contracts, managed to lose only 13% in 2008 while the S&P 500 index lost 37%. This year, Aronstein lightened up on those short positions and moved into stocks he thinks will benefit from an economic rebound. But still the fund is beating the index by a considerable margin.
The 55-year-old fund manager is now taking a stance many people view as contrarian. As the majority of economists look for a weak and gradual recovery, Aronstein believes we will see a sharper, more pronounced rebound that takes many by surprise.
"The collapse in economic activity late last year was driven by the shutdown in the global capital markets," he says. "The subsequent restoration of liquidity in those markets and in the banking system should allow economic activity to begin returning to more normal levels over the next several months. The recent decline was an event shock rather than a gradual process, and recoveries from such shocks tend to be quite powerful."
To Aronstein, the key to successful investing is figuring out pivotal economic inflection points, and when he recognizes them, shifting his investment strategy accordingly. Economists, he says, often do a poor job of predicting such turning points. "Traditional economic analysis looks at what has happened in the past. The problem is that each economic cycle, and the reasons behind each drop and recovery, is different."
He also takes issue with traditional allocation models. As more investors own the same securities through broad indices, assets and strategies have become much more correlated, especially when things go wrong. "The efficient frontier proved to be a long, deep precipice," he says.
In the management of his own portfolio, Aronstein's selection of individual stocks takes a back seat to broad economic themes. He says it's hard for investors to gain a durable advantage by picking stocks when Wall Street research and other information on midsize and large companies are so widely disseminated.
He does no proprietary research to fill the sector sleeves of the portfolio, preferring instead to talk to a network of analysts, money managers and even business owners to see what stocks they recommend. Besides buying individual securities, he also makes liberal use of exchange-traded funds for broad sector participation. The fund's 76 holdings are widely distributed, and the top ten holdings represent just 17.5% of assets.
Aronstein considers himself a long-term investor, but market volatility has shortened his holding periods. "Normally, we make major decisions based on macroeconomic factors every couple of years. This time around, there have been three such decisions in the last 18 months."