Funds for the Cautious: Contrarian and Offbeat
The Dow Jones industrial average has risen more than 10 percent this year. Money is still pouring into mutual funds. But will the economy continue to expand? What if there is a downturn? Should investors be moving some assets into safer areas?
One possible haven: contrarian mutual funds, which go against conventional attitudes about the stock market. Another option: offbeat funds that offer some built-in protection against a market slump.
"With stocks now outperforming just about every investment around these days, some people are getting nervous and looking for alternatives," says Mark Wright, an analyst with Morningstar Inc., a Chicago financial information firm. If they want a place to put 5 to 10 percent of their assets, he says contrarian funds or offbeat funds "provide instant diversification."
Of about 6,000 mutual funds, only a few are "pure" contrarian funds. These funds either believe the market is heading in the "wrong direction" (they look for a bear market while everyone else is looking for a bull market) or they seek to avoid certain red-hot stock sectors, such as technology.
"Most contrarian funds are very young and have been around two years or less," says Sheldon Jacobs, editor of No-Load Fund Investor. "A number of contrarian funds have faded out in recent years. But people who are bearish buy [into] them."
Most investors, Mr. Jacobs says, are probably better off buying "regular" mutual funds geared to benefit from economic growth. Or, if you want a defensive stock position, he says, try funds that specialize in natural resources, including precious metals or commodities. These can be a hedge against the possibility of rising inflation - a concern of late on Wall Street.
Among the more successful contrarian funds are the Robertson Stephens Contrarian Fund (800-810-9755), which is up more than 20 percent this year, and Lindner Bulwark (314-727-5305), up more than 30 percent. Both funds have natural resources holdings. The Contrarian Fund seeks to avoid exposure to technology industries. Initial minimum investments are $5,000 for Contrarian, $3,000 at Bulwark. Both allow subsequent investments of $100 or more.
Offbeat funds include the Merger Fund (800-343-8959) and Rydex URSA Fund (800-820-0888). The Merger Fund, with a minimum investment of $2,000, looks for companies that are being taken over or are likely to merge. Through a strategy called "shorting," the fund essentially neutralizes any stake in the company doing the acquiring. That allows the fund to focus on the acquired firm. If the merger goes through, history says the fund stands to gain. The fund's total returns have averaged about 10 percent a year. So far, 1996 has been a good year for mergers.
The Rydex URSA Fund is mainly a fund for institutional investors, with a minimum payment of $25,000. But it can be acquired through some discount brokers. Essentially, the fund seeks to "short" the Standard & Poor's 500 - that is, it bets the stock index will fall. So if the market goes up, the fund will likely lose money. But if the market goes down, the fund makes money.
The T. Rowe Price New Era Fund (800-225-5132) plays things both ways. The fund will acquire commodities, as a stake against inflation and to reduce the fund's correlation with the market (dominated by the industrial firms in the S&P 500). But it also looks for selected growth companies. Minimum investment: $2,500. Subsequent investments can be $100 or more.
Several funds also look for new companies making "initial public offerings" of stock. IPOs are up substantially this year in volume. Several of the Van Wagoner family of funds (800-228-2121) - which are among this year's top performers - invest somewhat in IPOs.
Perhaps the world's most politically incorrect fund is Morgan Funshares (800-446-2987). Robert Pincus, a vice president of Maxus Investment Group in Cleveland, the fund's financial agent, says he believes the portfolio is well-positioned to offset a market downturn.
The fund invests in producers of "consumer nondurable" goods - including items many individuals use in a "habitual" way. The portfolio includes tobacco, liquor, soft drink, gambling, slot machine, and entertainment companies, as well as such "non-sin" companies as Gillette (razor blades) and Wrigley's (chewing gum).
The fund is closed-end, meaning the number of shares in the fund is limited. Its shares trade on the Nasdaq market. (Symbol: MFUN) at about $9. The fund has gained more than 12 percent this year.