Five Funds That Beat the Bear

01/23/2008 12:00 am EST


Timothy Middleton, contributor to MSN Money, says there are ways to keep ahead of a plunging market and he recommends several different strategies you can use.

The only thing bouncing around in this market is a bear. We're in a recession, and in a recession, stocks go down. That includes foreign and emerging-markets stocks.

Here are four distinct strategies that range from helping you lose less in this downturn to helping you make more.

1. [Buying bonds] is the simplest and most easily implemented strategy. Swap out of some of your riskiest stocks, such as emerging markets and real-estate investment trusts, and use the proceeds to bulk up on bonds.

"We like bonds because we think the Fed has a lot more rate cuts ahead," says Mark Kiesel of bond megashop Pimco, "We think the Fed will end up at 3% or even lower, and that will be good for bonds, particularly short-maturity bonds."

In retirement accounts, the choice is an intermediate-term, high-quality fund such as Pimco Total Return (PTTRX), by far the world's largest bond fund.

2. Dividend-paying stocks are a traditional defense against downturns because their yield-the money they pay out to investors-gives them bondlike attributes. The problem is that dividends are not particularly lush anywhere in the US stock market.

But many actively managed equity funds with "income" in their name have done a better job. A good example is Thornburg Investment Income Builder A (TIBAX), [has fallen] much less than the Standard & Poor's 500. The current yield is about 4%, and it comes from a blend that is 37% US stocks, 48% foreign equities and the balance in cash and bonds.

3. Prudent Bear (BEARX) is ahead 18.6% in the past three months and a respectable 11% annually for the past three years. Manager David Tice thinks the great bull market of the 1980s and 1990s is over, replaced by a bear market that will last just as long. This fund uses derivatives to short the S&P 500, owns gold-mining stocks, and otherwise positions itself to prosper in hard times.

4. If you have access to them, both ProFunds and Rydex offer funds designed to go up two times as much as the benchmark they follow goes down. ProFunds UltraBear (URPIX) is up 33% in the past three months, more than twice as much as the decline in the S&P 500 in the same period.

Rydex Inverse OTC2X Strategy (RYVNX), which pits itself against the NASDAQ 100, is ahead 47% in three months, likewise a bit more than twice the loss of its target. Because of the way these funds are designed, they are very faithful to their objective on a daily basis, but they tend to wander over longer periods because of the compounding of returns.

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