You’ve probably heard of the “Catch-22” problem: investing in a company that has a terrible track record is going to cost you money in the long run.
The CCCF, a mutual fund that invests in stocks based on their earnings, recently introduced a new strategy that could solve this problem: a zero correlation.
In a nutshell, the CCCFs strategy is to invest at the extremes of their investment strategy, and then wait for the stocks to reach a certain price.
If they hit it, the fund makes a profit and invests the excess cash back into the stock market, which in turn leads to a more stable price.
This approach is different than most mutual funds because it doesn’t directly influence the stock prices, instead it’s an indirect way to help the stock price rise or fall.
The CCCFF, which started in 2014, has a track record of earning a 1.5% return, and is currently valued at $2.9 billion.
While it might sound complicated, it’s actually not.
The fund’s performance over the last five years is just as impressive as its investors say.
In fact, the investment strategy is a good example of how a market-based mutual fund can have a negative correlation to the stock markets, says Robert Siegel, CEO of Siegel & Houghton Advisors.
For example, the SCCF currently has a zero percent correlation to Apple, a company the fund bought at a $9 billion valuation in the early 2000s.
The strategy’s current valuation is just below $1.6 billion, and investors who are actively involved in the CVC fund would have been better off by buying shares of Apple instead of buying stocks that had a negative value.
“If you look at a company like Apple, you want to buy them at a very low valuation,” says Siegel.
“If they go to $18 or $19, that’s not going to be the best thing for the stock.”
The most recent CCCFA data shows that the fund has seen its market value rise more than 100 percent since its inception in 2008.
And in the first quarter of 2018, the firm’s total market value increased by $1 billion.
And while the fund is still relatively small compared to the $2 billion that the SVCF has made over the past decade, it is an excellent investment for the long-term.
If you’re looking to buy a CCCFE fund, the strategy can provide you with a more diversified approach to investing.
With a zero-to-zero correlation, the funds investment portfolio has a high chance of being diversified, which is great if you want a more diverse portfolio.
“It’s very easy to invest your money in stocks with a positive correlation,” says Mark Zandi, Chief Investment Officer at Zandi Investments.
“There’s always a chance that the stock will go up and you’ll have to put money into the index, but you can always get out and buy something.”
“If a stock goes up, you can put in your money and then sell it when it goes down, and you can get out,” says Zandi.
“The stock market goes up and the bond market goes down and you get your money back.”
As a bonus, the index fund can be quite liquid.
While you can only buy the funds most expensive stocks, you also have the option to buy smaller stocks or index funds with less expensive names.
“You can buy a little more stock at a time, but the downside is it takes longer to get your investment back,” says Jim Johnson, President and CEO of Zandi Investment.
“I’d recommend diversifying with a large portion of your portfolio in stocks,” says Johnson.
“That way, you’re able to get a good return on your money.”
When investing in stocks, it helps to think about their price volatility and how that affects your portfolio.
For instance, if the SLCF index funds stocks that have a higher market value, they may provide a better return than the CECF.
“It’s a bit of a risk for the SCEE because if you have a bad correlation, then it will make it harder to get the same performance,” says Elliott Management’s Scott Waring.
“Investing in stocks is more of a skill than it is a skill to be mastered, so it’s important to be aware of how you’re doing and what you’re investing in,” says Gary Cohn, Managing Director at Elliott Management.
For more on investing, check out:Investing: How to choose the right fund for you.