Pessimists lead charge of bear funds

Mutual funds

September 20, 1998|By CHICAGO TRIBUNE

Stock market bears, ending years of hibernation in the loss column during the bulls' long run, have awakened with a growl -- and some newly minted pessimists are listening.

So-called bear funds, designed to rise when the market falls, have charged to the top of the charts with the summer sell-off.

What's grabbing investors' attention are the stunning results of the funds during the market's nerve-racking descent since July 17, when the Dow Jones industrial average peaked at 9,337.97.

Funds with names such as Prudent Bear, ProFunds UltraBear and Rydex Ursa have been top performers in this eight-week period, chalking up eye-popping gains of 20 percent to 40 percent while the benchmark Standard & Poor's 500 index surrendered 19 percent of its value.

Managers of such funds report increased phone volume from interested investors, increased cash flows into their long-neglected funds and increased respect for their long-derided approaches.

"There is an intellectual satisfaction in not being made fun of for being bearish," said David W. Tice, portfolio manager of the Dallas-based Prudent Bear fund.

But the small category of bear funds -- numbering about 12 in a universe of 8,000 funds -- is still a long, long way from mainstream acceptance as a protective tool for most individual vTC investors.

To achieve results that inversely correlate with broad market indexes, fund managers generally sell equities short.

The tactic amounts to selling borrowed shares to make bets against the market, attempting to sell the borrowed shares high and buy them back low.

They also use options and futures to bet on a downturn.

"Some might argue they are good short-term plays, but we favor long-term investing," said Susan Dziubinski, editor of the monthly Morningstar Fund Investor. "If you assume that over the long term, stocks will rise rather than fall, they are not the best investment."

Stock market veteran A. Michael Lipper, chairman of Lipper Analytical Services Inc., noted that "many of these funds use futures and so they will tend to be volatile. That's OK for investors who understand that and can tolerate that. Most can't."

The whole idea of betting on a bad turn of events is a difficult concept for most investors to handle, said Timothy Schlindwein, a fee-only investment counselor.

"Why do we invest in common stocks?" he asked. "For the promise of a better tomorrow via growth. That's the main game.

"Once you start moving psychologically into the area of negativism, there is almost a knee-jerk reaction among investors of 'Thank you very much but I'll keep my money in the bank or a money market or something safe.' "

In a bull market, the funds tend to bleed profusely, so they have lacked appeal to individual investors in recent years. More often they have been used by asset managers to hedge a large portfolio.

Now, however, bear-fund managers say their funds should have more appeal to individual investors, as a way to hedge a traditional portfolio against a market fall or as a bold move by investors who feel strongly that steep decline is coming.

"I really believe this market is going to wipe out the average mutual fund shareholder who came in late -- the ones that came into the market in '96, '97 and '98," said Charles Minter, manager of the Lawrenceville, N.J.-based Comstock Partners Capital Value Fund, which he has positioned to benefit from a severe, deflation-driven bear market.

Among the individual investors who agree that a rout is coming and who have put their money on it is Steve Pollack, 33, owner of Missing Link Jewelers in Glencoe, Ill.

Several weeks ago, when Russia announced it would default on some of its debt, he saw it as a signal that a worldwide credit crunch would ensue, triggering worldwide recession. He sold his equity holdings, Gene Logic and Netscape, at a loss and bought $5,000 worth of shares in the Prudent Bear fund.

The $5,000 investment represents a "big portion" of his investment portfolio, he said, but he claims to have no fears about his move and notes that gains in the fund already have offset his equity losses.

Whether conditions are right for an upturn or a further downturn is the subject of vigorous debate.

If the hard-line bears are wrong, said Morningstar's Dziubinski, "bear-market funds will stink up the joint."

Pub Date: 9/20/98

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