Dancing With Bears : Some Funds Do Well When Market Doesn’t

The dreaded “bear market” brings smiles to the faces of investors such as Paul Stephens, Bob Buettner and Michael Byrum.

The three portfolio managers help run mutual funds designed to make shareholders money when the U.S. stock markets are falling--and that’s exactly what they’ve been doing.

Stephens’ Contrarian Fund was up 3.1% in value between July 3 and Monday. Buettner’s Lindner Bulwark Fund rose 2.1% and Byrum’s Rydex Ursa Fund was up 7.1%, according to Lipper Analytical Services Inc. In contrast, the average stock fund was down 7.4% for the two-week period.

The Nasdaq composite index, the barometer used to measure the strength of small-company stocks, is down about 15.7% since closing at a high of 1,249.14 on June 5. Add to that Tuesday’s activity, which saw Nasdaq drop as much as 50 points before closing down 6.70. A bear market is commonly defined as one in which stock prices fall at least 20%.

“We’re in a bear market,” Buettner said. “It’s that simple. The carnage has been swift and deep.”

The stock market may recover some of its losses over the next week or two, but the market is in the beginning stages of what could be a prolonged slide, Buettner said. Stock investors face increased concerns about rising interest rates and the release of disappointing corporate profits, Buettner said.

As long as the yield of the 30-year Treasury bond stays above 7%, many investors will be more attracted to the bond market than to the stock market, Buettner said. The yield dropped to 7.02% Tuesday.

“You have to be bearish right now,” said Byrum, who manages the $312-million Rydex Ursa Fund. “There’s been a complete loss of earnings momentum.”

Leading technology companies such as Hewlett-Packard Co., Motorola Inc. and Applied Materials Inc. are indicating business conditions are worsening. Hewlett-Packard, for instance, announced last week that orders for disk drives, printers and workstations slowed.

“At the very least, earnings announcements like Hewlett-Packard’s, Motorola’s and Applied Materials’ have to make almost any investor get more defensive,” Byrum said.

An investor couldn’t find a more defensively run fund than Byrum’s fund. Rydex Ursa Fund invests the bulk of its assets in index options that rise in value when the S&P; 500 falls, and it also “short sells” index futures.

The 2 1/2-year-old fund rose 3.7% in 1994 and then fell 20.1% last year when the S&P; 500 surged 37.6%. This year, it’s up just 0.75%, as of Monday’s closing price, according to Lipper Analytical.

Lindner Bulwark was up 32.7% this year, as of Monday. That’s almost 13 times better than the average stock fund gain, according to Lipper. The $65-million fund’s performance is in stark contrast to 1995 when the stock market had one of its best years since 1958 and Lindner Bulwark fell 11%.

Lindner Bulwark invests in everything from gold bullion options to convertible bonds to S&P; 100 put options, not to mention uranium mines. Up to 25% of the fund’s assets can be allocated to “short sell” individual stocks, and the fund tends to carry a lot of cash.

The $905-million Robertson Stephens Contrarian Fund invests in much the same way. It was up 20.2% this year, as of yesterday, Lipper Analytical reported.

“We’re not bears, but we do think the stock market is overvalued,” Stephens said.

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The stock market won’t plunge suddenly like it did in October 1987 when the Dow Jones Industrial Average lost 22.6% of its value in a day, Stephens said.

“It will be more of a saw-toothed market that will resemble the market of 1974,” Stephens said.

The Dow industrials fell 41% from a high of 987.05 in October 1973 to a low of 577.6 on December 1974. The Dow industrials are down about 7.3% since closing at a high of 5778 on May 22.