Contrarians Offering a Way to Hedge Your Bet

There are ways to protect yourself against a possible stock market plunge without having to stash your cash under a mattress.

One strategy might be to invest in a mutual fund that’s positioned to profit the next time stock prices tumble.

The idea of taking a defensive posture with mutual funds is nothing new. Several well-known portfolios enjoy leeway to flee to the safety of cash when their managers think the market is ready to sink.

But a few aggressively contrarian funds are more than just defensive--they’re actually looking to reap big profits from falling stock prices.

How do they hope to accomplish this? By stocking up on gold shares, using futures and options to exploit a broad market decline and selling individual stocks short.

A short sale, the most radical of the three approaches, is the opposite of a regular or “long” transaction. The idea is to sell borrowed shares now at what you think is a high price. Then you pray the stock tumbles, allowing you to buy the shares at a lower price, repay the loan and close out the position at a profit.

The most notable new entrant in the small field of funds that do much shorting is Robertson-Stephens Contrarian of San Francisco.

This fund has raised $200 million since its debut in late June. It returned 11.9% during the second half of 1993, about four points better than the average stock fund.

In designing the portfolio, manager Paul Stephens said he wanted to maintain maximum flexibility to move among different asset categories. Although the fund can make major bets either in favor of or against the stock market, the current position is downright bearish.

At the moment, the fund’s holdings include:

* A 25% stake in growth gold mining companies, reflecting gold’s reputation as a hedge against inflation and social uncertainty.

* Another 25% in stocks sold short--notably niche beverage companies, restaurant chains and high-flying technology stocks.

* 16% in the common shares of nickel, aluminum and copper stocks, which also would be expected to fare well if higher inflation returned.

* 15% in cash (Treasury bills), a low-risk investment.

* 6% in real estate stocks, another potential beneficiary of higher inflation.

* 4% in put options on the Standard & Poor’s 500 index, which would surge in value if the stock market dived.

* 2% in call options on gold stocks, which would hit pay dirt if the underlying shares rallied.

With this mix, Stephens is making a major bet that the decade-long trend toward low interest rates, low inflation and higher stock prices will soon reverse.

Even if you don’t agree with this forecast--and it’s worth emphasizing that the stock market has been very kind to loyal investors over longer periods--Stephens feels his portfolio is a good way to hedge your other mutual fund holdings without having to sell them.

He views Robertson-Stephens Contrarian ((800) 288-7726) as a lower-cost, lower-minimum alternative to private hedge funds, which are limited partnerships designed for high-end investors--typically those with $250,000 or more to spare.

One of the salient features of private hedge funds is that their managers typically take a 20% cut of any profits, says Stephens, who runs some hedge partnerships himself.

By contrast, Robertson-Stephens Contrarian is open to investors with $5,000 or more ($1,000 and up for individual retirement accounts), and there’s no 20% cut on profits. Stephens said the Securities and Exchange Commission wouldn’t allow that on mutual funds.

It’s important to note, however, that Robertson-Stephens Contrarian isn’t cheap.

Management expects that annual operating expenses will run about 2.75%, about double the norm for stock funds. Although there’s no front-end sales charge, the expense ratio does include a 0.75% annual marketing fee.

Perhaps the mutual fund most similar to Robertson-Stephens Contrarian is Dreyfus Capital Value (Premier), a New York-based portfolio that also does short selling, has been heavily into gold stocks and maintains a modest option weighting.

Founded in 1985, Dreyfus Capital Value (Premier) won some acclaim in 1987, when it returned 34.5%, compared to an average rise of just 0.5% for general equity funds. However, it trailed the S&P; 500 in four of the next six years and badly lagged in 1991 and 1992.

The $445-million portfolio carries a maximum sales charge of 4.5%.

Maybe the most intriguing thing about hedge or contrarian mutual funds is that there are so few of them. Stephens believes that most fund families see a potential conflict with their existing product lines. “Most groups don’t want to introduce a fund that implies the other funds they’re promoting aren’t attractive,” he says. “But a year from now, I think there will be many more like it.”

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Chicago-based Acorn International ((800) 9-ACORN-9) says it will close its doors to new investors effective Feb. 11, less than two years after it premiered. Existing shareholders will be able to continue adding to their accounts.

Manager Ralph Wanger said the fund’s management wants to control growth so that its investment focus of buying small foreign stocks isn’t impaired. The no-load portfolio, which bested most rival international funds in 1993, has attracted more than $650 million in assets.

The sibling Acorn Fund, which invests primarily in small U.S. stocks, has been closed since 1990.

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Liberty Financial Funds of New York has unveiled a quarterly newsletter designed for its shareholders under 18.

“Our research has shown that kids have a strong desire to learn more about investing,” said Kenneth R. Leibler, the company’s president.

The Liberty Financial Advisor for Young Investors will feature articles and word games and will include a question-and-answer section. It will also profile companies of interest to younger shareholders, such as PepsiCo.

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The Vanguard Group has unveiled three new index funds covering the short, intermediate and long ends of the bond market. The no-load portfolios will hold government and corporate bonds in three maturity ranges: one to five years, five to 10 years and 10 years or more.

Vanguard ((800) 662-7447) says the funds will feature some of the lowest costs around, with anticipated expense ratios of about 0.18%, or $1.80 for each $1,000 investment. A $10 account maintenance fee will be waived for 1994.

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Dalbar Research of Boston says it found that the shareholder statements put out by mutual fund groups vary widely, with some being easy to use while others “require an interpreter.”

In a study, Dalbar evaluated actual account statements at 40 fund groups. The company cited four firms for the best presentations--Putnam Investments of Boston, Invesco Funds of Denver, New York-based Dreyfus Corp. and G.T. Global in San Francisco.

Traits associated with user-friendly statements included large type size, explanations of how to read the statements and summaries that prominently show the total value of an investor’s holdings.