Defensive Measure : Ryback's Bulwark Fund Aims to Be Hedge Against a Bear

Eric Ryback, 44, heads St. Louis-based Ryback Management, which manages the $4-billion-asset Lindner group of mutual funds. Ryback bought the company from founder Kurt J. Lindner in 1993, after studying under Lindner since 1982.

The frugal Lindner was a legendary "value" investor who sought stocks paying big dividends or selling cheaply relative to the worth of their underlying assets, or both. Ryback, too, is entirely value-oriented. And in 1994, he created the Lindner Bulwark fund, designed to be a hedge against a bear market.

Ryback was interviewed by Times staff writer Tom Petruno.

Times: How do you feel about the U.S. stock market?

Ryback: We're very bearish. I thought that if [President Clinton] got reelected the market could possibly rally until May of next year, and then it would correct. But with the strong bull rally that we've had over past few months, it may happen earlier than May.

Times: A brief correction or a full-fledged bear market?

Ryback: A bear market lasting anywhere from six months to 18 months, with a 20% to 30% drop [in major stock indexes]. Quite painful.

Times: What's the basic problem--simple overvaluation?

Ryback: Yes. Definitely. But there's another thing that has been touched on--the fact that foreigners are subsidizing our market by buying our government bonds. They keep liquefying our government, but ultimately that has to come to an end. Now we've heard similar thoughts from [Federal Reserve Board Chairman Alan] Greenspan.

Times: You mean his recent musing about "irrational exuberance" in financial markets?

Ryback: Yes. The Fed meets this week [today]. With some of the rhetoric that was going around, I wouldn't have been at all surprised if they had raised interest rates . . . if the market hadn't [heeded] some of the cautious statements Greenspan was making.

Times: Well, stocks haven't pulled back all that much, but it does seem like Greenspan made some people nervous. What do you think will trigger a bear market? A drop in corporate profits?

Ryback: I do see a drop in profits. But I think the real issue will be interest rates. I think you're going to see foreign capital begin to leave the United States because [foreign governments] are going to want to start boosting their own economies. I think the Fed will be in a Catch-22 situation. It won't necessarily be that our economy is overheating, but I think they're going to be in a position where they're going to have to raise rates [to lure back foreign capital]. I think that's going to be the final straw to break this market.

Times: OK, so you created the Bulwark fund specifically for a bear market environment?

Ryback: Yes. It's the brainchild of Larry Callahan, who has worked here since 1984. The fund is supposed to be part of your investment holdings at all times. That's how we designed it--as a hedge against the rest of your portfolio. . . . Because when you get into a bear market, it would be comforting to have something that will be making you money.

Times: And the major hedging element is that the fund goes "short"--meaning you bet on declines in specific stocks, or in the market overall--in addition to owning some stocks and bonds?

Ryback: Right. Being value investors, we always came across a lot of stocks that were way overvalued. We would always say, "Gee this is so overvalued, it would be great if we could short it."

Times: How are Bulwark's assets divided now?

Ryback: The fund is now about 54% in common stocks, about 10% in bonds, 6% in cash, then 27% short individual stocks and about 15% short the Standard & Poor's 500 index, using put options.

Times: We should note for readers that the total adds to more than 100% because of the leverage involved in going short--borrowing the stock to sell it. Anyway, with the fund up about 28% this year, some of your short-sale decisions must have worked, even in a generally strong market?

Ryback: They've helped overall. On down [market] days they've helped the fund be up. And that's what they were supposed to do.

Times: But shorting also is a dangerous game. The fund lost 11% in 1995--and, of course, the stock market overall was way up.

Ryback: Last year we were pretty adamant about being short the S&P; index. We hung on to the S&P; options all year and should not have. That was a real lesson.

Times: You underestimated the market?

Ryback: Obviously. This year we decided to hedge the fund by shorting actual stocks [rather than the S&P; index]. The S&P; index puts we only started building as the market was aggressively taking off in November. We said, "Now's the time. . . ."

Times: Earlier in the year you were short such stocks as technology high-flier Iomega. What are you short now?

Ryback: We don't talk about that too much. You can get in an awful lot of trouble. People start focusing on names. So I'm not going to divulge names.

Times: OK, then what makes a good short candidate?

Ryback: We're looking at balance sheets, taking apart income statements, deciding where there's a lot of fluff [in a company's numbers].

Times: Let's talk about the other side of the portfolio--the stocks you like. What is your largest holding?

Ryback: Uranium Resources. They're the lowest-cost producer of uranium in North America. It's not an earnings story so much as reserves in the ground. . . . Uranium is simply a supply-and-demand [play]: Demand exceeds supply, and it won't really correct until about the year 2005. There has been a 20-year [down] cycle and we're at the start of another up cycle in prices.

Times: What's happened with that stock this year?

Ryback: It was as low as $5, then went to $17, and now is around $8 [$8.375 on Monday on Nasdaq]. But we haven't sold a share. We like it very much.

Times: How much of the portfolio is in mining stocks?

Ryback: Mining, include uranium, is about 20% of the fund. Gold mining stocks are the bigger part of that.

Times: You have a pretty eclectic mix of stocks you like: Spaghetti Warehouse ($5.25, NYSE), wireless communications firm Metricom ($12.19, Nasdaq), Maynard Oil ($15.50, Nasdaq). They're all "value" plays?

Ryback: Yes. For us, value can mean a stock selling at a discount to asset value, meaning the value of its hard assets, plus cash, minus debt. Or it can be a low P/E [price-to-earnings ratio] stock. Or if it's a mining company, we look for those selling at a discount to the value of their reserves.

Times: So with Bulwark, you're never going to be completely out of the market?

Ryback: Even with our scenario of a bear market we would still always own [some] securities, if we can quantify the value in them. The idea behind Bulwark is to maintain your investment in a bull market and to make money in a down market.


Lindner Bulwark

Strategy: The fund is designed to be a hedge against a bear market; it owns mainly small value stocks and gold issues, and it also "shorts" stocks and market indexes, profiting if they decline.


Performance since inception:

1994: +7.2%

1995: -11%

1996: +28.1%

Five biggest holdings:

1. Uranium Resources

2. Norex Industries

3. Metricom

4. Comprehensive Care

5. Spaghetti Warehouse

Assets: $75 million

Max. Sales Charge: none

Min. Investment: $3,000

Phone: (314) 727-5305

Special risks: The fund owns many thinly traded, volatile small stocks; it is by charter required to invest heavily in gold and natural resources stocks if the stock market declines sharply; the fund could incur large losses if the securities it shorts rise instead of all; the fund is subject to heavy inflows and outflows by market timers.

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