Tale of two bear market funds: different approaches with different results

March 05, 1995|By New York Times News Service

Seeking refuge in a mutual fund designed for bear markets would have made good sense last year -- if you picked the right one.

Your two choices use antipodal approaches to a financial markets meltdown. The Robertson Stephens Contrarian Fund aims to profit, while the Lindner Bulwark Fund seeks to preserve capital.

Congratulations if you owned Lindner, which rose 7.2 percent in 1994, when United States diversified domestic funds lost 1.7 percent.

Too bad if you picked Contrarian, which lost 5.5 percent, according to the fund researchers at Morningstar Inc.

Now that the Dow Jones industrial average has crossed the 4,000 mark, some investors may be worried about a fall and looking for a fund that will protect them. So let's see what happened with these two bear market funds last year and how they've fared so far in 1995.

Once it got off the ground a year ago, the $87 million Lindner Bulwark Fund tucked 45 percent of its portfolio into common stock, largely small-capitalization value shares.

Most of its run-up last year came from those stocks, all of which the fund still owns and all of which its lead manager, Larry Callahan, still considers undervalued, even given the rise in share prices.

Among the hottest: Gradco Systems, Las Vegas, Nev., an office equipment manufacturer; Tripos, St. Louis, a maker of molecular modeling software, and the National Insurance Group, San Francisco, which offers flood insurance services.

Cash levels averaging 25 percent have helped, and so has a 20 percent short position. The short positions are mostly in leveraged car-leasing companies, medical technology companies and HMOs.

The biggest single industry group is now gold mining (17 percent), including Placer Dome, Barrick Gold and Freeport McMoran. Computers and electronics hold another 10 percent, and energy, 6 percent, with the rest among various industries.

The allocations are roughly the same in 1995 as the market rose, which accounts for the fund's 6.1 percent drop through Thursday. A 5 percent position in Standard & Poor's 500-stock index put options (which gain value as the S&P falls) played a part in the drop; so did the short positions.

That doesn't bother Mr. Callahan, who said his portfolio allocation still makes sense.

"The perceived slowing in the economy and stabilization of interest rates helped push the market up," he said, but the rebound "is destined to be short."

Paul Stephens, who manages the $400 million Contrarian fund, said of his fund's poor performance, "We're unhappy but not discouraged."

"After the upside blow-off to 4,000, reality will sink in," said Mr. Stephens, adding that he tripled his personal stake in Contrarian the last two months as its share price fell from $11, to below $8. In 1995, through Thursday, the fund was off 2.3 percent.

He said companies that produce gold and other hard assets might become growth stocks through the end of the decade but timing that moment would be rough -- sometime in the next three years.

Why gold? "All the currency problems in Mexico will cause worry about the stability of currencies, and there will be an explosion in gold," Mr. Stephens said.

Among his holdings are Ashanti Gold, which has mining operations in Ghana, and its parent, Lonrho, two London companies.

But his gold bet -- nearly 20 percent of his portfolio -- hurt in 1994. Gold was the worst performer among the 19 equity sectors tracked by Morningstar last year, down 11.7 percent.

Mr. Stephens said that while he made money on his 25 percent short position, he lost more on gold and a 4 percent position in S&P puts.

But Contrarian's allocation remains roughly similar to last year's, with one exception: Mr. Stephens has built up his holdings in oil-and-gas to 12 percent of the portfolio because "we like the long-term supply-demand situation in the late 1990s." Companies include Anadasko Petroleum, Conwest Exploration and Louisiana Land and Exploration.

He has 17 percent of the portfolio invested in producers of base metals like aluminum, copper and nickel because "we see global economic growth in the next five years as countries that were behind the Iron Curtain embrace capitalism." His picks include Diamon Fields Resources, Maxxam, Alumax and Freeport McMoran.

Another 6 percent is in real estate stocks, mostly in Florida and California. The biggest: Avatar, Catellus Development, Atlantic Gulf Communities.

Mr. Stephens also sees bad news coming on the inflation front. "We think one surprise is that inflation will rise gradually to 5 percent in the next 18 months," he said. "The seeds have been sown for a gradual inflation rise and global economic growth."

So he remains undaunted.

"We are not positioned for a bull market," he said. "We probably have the most defensive mutual fund portfolio that anyone can buy, and that doesn't do well when the market goes up."

Or sometimes when it goes down.

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