Two Foul-Weather Choices Faring Well

With each new record closing of the stock market, fears of a downturn only seem to intensify. If you have a jaundiced view of the market or want to hedge your portfolio, a foul-weather mutual fund can help.

The intent of these funds is to increase in value as the overall market drops. Ironically, two prominent foul-weather mutual funds managed to make a strong showing in the 1996 bull market.

One of the funds, Lindner Bulwark, tacked on 29% during the year, outpacing the Standard & Poor’s 500 index. The other, Robertson Stephens Contrarian, spurted 22% and was up 59% in 1995 and ’96 combined, barely lagging the S&P; 500 over that stretch.

Those are impressive results considering that both products are designed in part to make money during bear markets, when traditional stock funds are getting kicked in the shins.

The reason these unusual funds have bear-market appeal reflects the investments they make. Both place bets, at least part of the time, against the S&P; 500 using put options, which rise in value when stocks in the index drop. They also wager against selected individual stocks by selling them short.

“‘I don’t view our fund as a bear-market or market-timing fund, but with stock prices at all-time highs, you need to be hedged,” says Paul Stephens, who runs Robertson Stephens Contrarian in San Francisco.

Robertson Stephens Contrarian and Lindner Bulwark also have significant holdings in gold, energy and other natural-resource shares--a big factor behind their good results last year.

“‘The next bull market will be in commodities,” Stephens predicts.

Of note, both of these funds fluctuate almost totally out of sync with the broad U.S. stock market, says Morningstar Inc. of Chicago. This means they can be a good way to diversify an equity-dominated portfolio.

But investors should realize that neither offers a low-risk ride.

For example, in addition to the holdings described above, St. Louis-based Lindner Bulwark buys foreign stocks and invests in very small U.S. companies whose shares might not be easily traded in a panic.

“‘It assumes more liquidity risk than any fund I’ve seen,” says William Whitt, a Morningstar analyst. “It’s a fund designed for people who think the sky is falling tomorrow.”

Robertson Stephens Contrarian has sizable stakes in foreign stocks and gold shares, in addition to using short sales and put options. Stephens pursues some of the same strategies that his firm employs in running hedge funds, a type of aggressive investment partnership designed for the wealthy. He believes the Contrarian fund, which already counts more than $1 billion in assets, is suitable as a core holding for many investors.

But Russel Kinnel, another Morningstar analyst, cautions that if the fund can rise strongly in a bull market, it can also fall in a bear market. Both the Lindner Bulwark and Robertson Stephens Contrarian funds are untested in a severe decline, because there has not been a prolonged market drop since 1990.

In the meantime, Kinnel notes, Contrarian carries high expenses of 2.54% a year, which exert a performance drag no matter which way stock prices are heading.

“It’s not a low-risk diversifier--it’s a pretty bold fund,” Kinnel says. “I’d recommend placing no more than 5% of your assets in a fund like this.”

Lindner Bulwark’s expenses run 1.24% annually. Both funds are sold without a sales charge.

Among the small number of additional foul-weather choices, Rydex Ursa is perhaps the most unequivocally bearish fund around. It uses short sales, put options and the like to bet against the S&P; 500. Ursa’s managers seek to perform inversely to the index, meaning that if the S&P; 500 drops 10%, the fund would rise by 10%.

Yet in 1996, when the popular index advanced 23%, Rydex Ursa tumbled just 12%. This oddity can be explained by a couple of factors, says Rob Steele, a Rydex spokesman in Bethesda, Md. One is that the fund holds Treasury bonds as collateral for its put positions, and these bonds pay interest.

Yet another foul-weather offering, the Prudent Bear Fund, finished the year down 14%. Dallas-based manager David Tice is pessimistic about stocks and has roughly 85% of the portfolio staked on short sales, cash and put options. Tice bases his forecast largely on dividend yields. With companies in the S&P; 500 barely paying 2% on average, stocks are overpriced, he believes.

Then there’s the New York-based Comstock Partners Capital Value Fund, which concentrates on bonds, gold stocks and bearish futures positions on leading market indexes to protect against downward stock prices.

It has been a laggard during the lengthy bull market, rising only 71% over the last decade and falling 11% in the last five years. It carries a maximum 4.5% load and is sold through brokerages and banks.

The key point to remember about foul-weather funds is that many of their investment techniques and holdings don’t fare well most of the time--that is, when the stock market is rising.

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Foul-Weather Funds

The following mutual funds own defensive investments such as bonds and gold shares, or use defensive tactics such as short sales and put options. The goal is to profit from falling stock prices.

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Fund name 1996 2-year return Maximum return (1995-96) sales charge Comstock Partners --6% --9% 4.5% Capital Value Lindner Bulwark +29 +15 None Prudent Bear --14 NA None Robertson Stephens Contrarian +22 +59 None Rydex Ursa --12 --30 None

Fund name Telephone number Comstock Partners Contac local brokers Capital Value Lindner Bulwark (800) 995-7777 Prudent Bear (888) 778-2327 Robertson Stephens Contrarian (800) 766-3863 Rydex Ursa (800) 820-0888

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NA: Not applicable

Source: Lipper Analytical Services.