Fund Manager: Congress Is (Almost) Always Wrong

When Congress is in session, this manager pulls completely out of the stock market.

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Mutual fund manager Eric Singer predicts that healthcare reform will eventually harm the stock market. "Long term, I think that the bill is bad for the country because it raises taxes a lot and forces us to spend in a very inefficient way on healthcare," he says.

[See Healthcare Reform: What Does It Mean for Investors?]

But then again, Singer thinks that just about anything Congress does will put a damper on returns. In fact, Singer has—perhaps more than any other manager—staked his fund's fortune to that very thesis. Singer manages the Congressional Effect mutual fund, which launched in 2008. The fund's premise is this: Congress will, as far as the market is concerned, almost always get it wrong.

[See U.S. News's list of the Best Mutual Funds for 2010, and use our Mutual Fund Score to find the best investments for you.]

Given Congress's recent legislative binge, the issue of the relationship between reform and returns has become particularly salient. In Singer's mind, the connection is clear: "Whenever government interferes in an industry, it almost always—not always, but almost always—distorts the true market forces of that industry and ultimately makes the industry less competitive," he says.

In fact, Singer sees politicians' disruptive influences as so far-reaching that when Congress is in session, he pulls completely out of the stock market and moves the fund's entire portfolio into treasuries, cash, and money market funds.

He claims to have compelling research to back up that strategy. According to the fund's calculations for the period between Jan. 1, 1965, and Dec. 31, 2008, the S&P 500 registered a paltry 0.31 percent annualized gain when Congress was in session, compared with a 16.15 percent annualized increase when Congress was on vacation.

Still, the fund's recent returns tell a different story. Even during the height of the bull market, the fund couldn't find its feet, and it ended up losing 4 percent in 2009. By comparison, the S&P 500 shot up 23 percent last year.

With healthcare reform all but wrapped up, Congress is now turning its attention to financial regulation. True to form, Singer predicts that a regulatory overhaul will harm investments.

"I think that the risk with financial reform is that one way or another, in the name of making us safer, Congress will be contributing to a perceived politicization of the Fed," he says. "And I think that if you make the Fed more politicized, it adds to uncertainty and volatility. So whatever they think they're gaining by introducing yet another layer of financial regulation, as market participants we're going to pay for it."