Last month we purchased Fidelity Limited Term Bond (FJRLX) in our model portfolio. Part of our strat...
Three Bear Market Beating Funds
07/22/2008 12:00 am EST
Tim Middleton, contributor to MSN Money, finds three funds that have thrived in the current bear market and are likely to do well when the market bounces back, too.
The Standard & Poor's 500 index [has] officially entered bear market territory, and those of you who own bear market mutual funds and exchange traded funds have been preparing for this moment.
Current events remind us how difficult it can be to reconcile our long-term plans with the punishment a bear market can inflict. Are there funds defensive enough to stand up to today's market yet with qualities that will endure for tomorrow?
"Everybody is scrambling for answers" to that question, says Axel Merk, the manager of the Merk Hard Currency Fund (MERKX). Investing almost entirely in the highest-quality government bonds in the world, this fund has spurted 7.4% this year, as of July 9th, and an average of 12.6% in each of the past three years.
Born in Germany, which experienced some of the worst inflation the world has ever known after World War I, Axel Merk detests inflation and knows how to combat it. "What you're doing is buying a basket of hard currencies," he explains. "You're buying cash in Euros, in the Canadian dollar, the Swiss franc and the Australian dollar."
The Merk fund also has about 8% of its assets in gold, mostly gold bullion owned in the form of SPDR Gold Shares (NYSEArca: GLD), an exchange traded fund, or ETF.
Van Eck Global Hard Assets A (GHAAX) tracks the S&P North American Natural Resources Index, [but] the Van Eck fund vastly outperforms its benchmark. In the 12 months ending June 30, this fund soared 43.7%, compared with the benchmark's 29.3% return. The outperformance has been nearly as great for five years running: The mutual fund is up 39.7%, annualized; the benchmark is up 30.1%.
The fund has 63% of assets in energy names, 14% in industrial metals and 11% in precious metals. These are called hard assets because they're impervious to inflation; indeed, the high prices they command are evidence that US inflation is roaring.
Hodges Fund (HDPMX), a remarkable midcap growth fund, is also down steeply in the past year-15.8%-and its managers are reveling in the market's distress, just as they did so successfully at the end of the last bear market, in 2002. In 2003, the fund's return ballooned more than 80%, as investors bought back the very stuff they had been dumping one year earlier. If they do so again, Hodges will be in the driver's seat.
"We've bought one million shares of General Motors (NYSE: GM) lately and nearly two million AMR (NYSE: AMR)," co-manager Don Hodges says. The parent of American Airlines and the industrial giant that used to be synonymous with the nation itself will survive, he predicts.
History doesn't repeat itself, Mark Twain said, but it does rhyme. When ailments similar to those we're experiencing now have afflicted past markets, these funds have blossomed.
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