The Hayek Fund: fighting back against the nanny state

Steven Kiel Contributor
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Let’s say that you feel very strongly about the environment. You were one of the first to buy a Prius. You eat veggie burgers. You like wind power. When you hear Al Gore’s name you get a little tingly inside (maybe we shouldn’t go there, in light of the recent allegations against him). You may not believe in capitalism, but you’ve got to retire too, right? So you insist on investing only in portfolios made up of “green” companies. If that’s the case, you have a lot of mutual funds and ETFs to choose from — according to cnbc.com, at least 42. You have another 130 to choose from if you’re a social conservative, or you don’t like war, or you are repulsed by tobacco companies.

Alternatively, what if you think the government should leave you alone? You don’t like red light cameras, or how rude the employees are at the Post Office and the DMV and, damn it, you’re tired of the government “protecting” you. You believe that capitalism is the best economic system because it rewards those who work hard and are creative. You’re a fan of Friedman and Von Mises. You know Keynes and, frankly, you don’t like him one bit. Is there a fund designated just for you — a portfolio of stocks of corporations that believe in free markets? Before September 15th, the answer was no.

I’m the president of an investment management firm and, on September 15th, we launched the first fund dedicated to free market principles. It’s called The Hayek Fund, and it’s made up of corporations who have made financial contributions to free market organizations. In all honesty, I stumbled upon this idea. I used to be a fundraiser for a certain free market think tank and I’m pretty familiar with the corporations friendly to our side. I was doing research earlier this year and kept coming across some of those stocks, and their returns were better than the market by quite a bit, and over a long period of time. So, I decided to have some fun and make a complete portfolio just of these stocks. I chose a few free market organizations, combed their annual reports, and did a performance backtest going back to 2000. I can’t tell you the exact results here because the disclaimer would be longer than this editorial, but I can say they were very good. If you’re interested, you can find the results at hayekfund.com. And, please, read the disclaimer.

I wondered how these results would compare to a similar portfolio made up of corporations who gave to liberal organizations? I mean, George Soros is a heck of an investor, and he’s pretty far left. I ran into a problem there. While most conservative organizations are transparent about who their donors are, liberal organizations are not. I wasn’t able to find any reliable information, so I had to give up on making the comparison.

I’m confident, though, that the free market fund would have done better than the liberal fund. A corporation whose culture is entrepreneurial in nature should do better than one that’s not. Think profitable FedEx versus the extremely unprofitable Post Office. A CEO and a management team that believes in creative destruction is going to reinvest in the company and its products. On the other hand, a corporation that exists for the benefit of its union is going to lose its competitive advantage. Thanks for making this point for me, General Motors.

The Hayek Fund was born for two purposes. First, and most important by far, is to make a good return for its clients. The fund owes this duty to its investors, much as a corporation owes a duty to its shareholders (not its unions or employees). Second, I hope this is another way to educate people on who Friedrich Hayek was and why his ideas are so important. The media likes to think that we’re all Keynesians. Well, you know what, I’m not, and I don’t think you are either. If this recession has taught us anything it’s that there is no multiplier effect. The government has wasted our hard-earned money and put a lien on the hard-earned money of our kids (well, your kids, since I don’t have any) on an economic theory that didn’t work in the ‘30s or the ‘70s or today.

If this Congress and this President have done anything, they’ve showed the destructive consequences of this bankrupt theory. For investors, the score is 172 funds to one. It’s performance that matters, though, and I like our chances.

Steven Kiel is the president and chief investment officer for Arquitos Capital Management, a Virginia-based investment management firm.