Loaded for Bear, Two Funds Hope Market Drops

It's Oct. 27 and the stock market is bucking down more than 500 points in a headlong, teeth-clattering rout. Computerized trading and investor panic are shredding billions of dollars in paper profits.

But amid the din of Wall Street's mini-cataclysm, a handful of mutual funds are going up.

These "bear market" funds are peculiar portfolios geared to rise in value when the markets fall. They're the pessimists' pick, ideal either as a hedge against stock holdings, reducing portfolio volatility, or as a way to profit broad market losses.

During the seven-year bull market, the best return bear-market funds have mustered is a minus 12 percent.

But during the week encompassing the recent swoon (Oct. 23-30), the two leading bear-market funds gained handsomely. While the average equity fund lost 4.82 percent, the Prudent Bear Fund jumped 8.52 percent and the Rydex Ursa Fund rose 4.75 percent, according to Lipper Analytical Services in New York.

The gains are a badly needed bounce. Ursa ("bear" in Latin) in the past three years has logged an average annual loss of more than 16 percent.

During 1996, Prudent Bear's first full year in operation, the fund lost 13.69 percent.

Not surprisingly, fund managers believe some of Wall Street's gloomiest - or "best" - days are to come.

"We believe the bear market has started," says David Tice, president and founder of Dallas-based Prudent Bear. "We believe it will require a substantial decline of more than 50 percent in order to wash out the excesses" and cleanse the Dow Jones Industrial Average to about 3500, he says.

The funds pursue two very different ways to profit from ruin. Ursa (800-820-0888), based in Bethesda, Md., buys futures tied to the Standard & Poor's 500 index.

Prudent Bear (888-778-2327) follows a more complex formula. When the S&P dividend yield is less than 3 percent, it shorts the majority of equities in its portfolio.

When the dividend yield exceeds 6 percent, it will heavily weigh the fund toward traditional "long" shares. The dividend yield is the most reliable signal of an overvalued security or market, Mr. Tice believes, because executives cut dividends when they anticipate a slowdown in cyclical earnings.

"During the past 38 years, a dividend yield below 3 percent has almost always signaled an overvalued market," Tice says.

Now, with the dividend yield below 3 percent, 70 percent of the stocks in the Prudent Bear portfolio are sold "short." (Tice shorts what he calls "outrageously valued or troubled common stocks.") The remainder of the fund is invested in "long" investments or cash.

Both Ursa and Prudent Bear managers must heavily churn the portfolios, in part to meet heavy redemptions from quick-in-quick-out investors timing the market.

Total assets in both funds have fluctuated wildly this year.

Since the spring, Prudent Bear has ballooned, shrunk, and ballooned again from $10 million to a current $60 million in assets.

Ursa began October with assets of $260 million and now holds $514 million, says portfolio manager Mike Bryum.

"It's always nice to see investors doing well in down markets," says Mr. Bryum.

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