Some diversified funds do well despite markets' wreckage
— -- Whenever you survey the scene of incredible wreckage — a 50-car pileup, for example, or a 6-year-old's birthday party — your eye is always drawn to the few things that survived. Look! That car didn't have a scratch! Look! The turtles are still here!
Surveying the wreckage of the mutual fund industry this year, a few funds have survived remarkably intact. What's even more remarkable is that a few might even be worth investing in.
The bear market has toppled many of the mightiest funds: The Growth Fund of America, the largest mutual fund in the galaxy, is down 35% this year; the Vanguard 500 fund, down 34%; Fidelity Magellan, down 46%.
But a tiny handful of diversified funds have managed to fall less than 10% — and a few have even eked out gains. For the purposes of this discussion, we're not talking about bear funds, which are designed to rise when the stock market falls. A bear fund that rises in a bear market isn't noteworthy.
Bears vs. bulls
The top two funds, Comstock Capital Value and the Prudent Bear funds, aren't bear funds per se, because they can bet on a market rise, if they choose to. Nevertheless, they are run by longtime, perennially bearish managers. Comstock Capital Value, for example, was started in April 1987 by Charles Minter and Stan Salvigsen, both of whom were bearish on the market. When the Dow fell more than 20% in one heart-stopping day in October 1987, the fund held up well.
Management never really got over its bearishness, which was unfortunate, because the stock market often rose in the intervening years. Comstock Capital Value has lost an average of 0.49% a year since its inception, according to Morningstar, the Chicago mutual fund trackers. Nevertheless, the fund's 47% gain this year deserves noting. Its largest holding is a bet against the Standard & Poor's 500-stock index.
Similarly, the Prudent Bear fund has been hating on the stock market for more than a decade. The fund has huge amounts of money market securities, or cash, in its portfolio, as well as a smattering of gold-mining stocks. What the fund earns in bear markets, however, it loses in bull markets: It's virtually unchanged since its inception.
Three funds that have held up well are long/short funds, which bears some explaining. When you buy a stock, you're "going long," in Wall Street parlance. When you bet that a stock will fall, you're "going short."
Long/short funds buy the stocks they like and short the ones they don't. In theory, this can help the manager make money in good markets and bad. Unfortunately, a long/short fund gives you opportunities to lose money on stocks that rise and stocks that fall. ICON Long/Short A, for example, has plunged 37% this year.
But the three remaining funds in the chart are all long/short funds, and all three have performed decently in this market — as has the category as a whole, which is down 13.9% this year. (The past five years, the category has averaged 2.12% a year — nothing to write home about, but still better than the S&P 500.)
Two similar funds, the Merger fund and Gabelli ABC fund, have also fared well in the downturn. That's because the funds hold staggering amounts of cash — 31% in the case of Merger and 61% in the case of Gabelli.
It's also because they use a fairly safe form of investing called merger arbitrage, buying the stocks of companies being taken over and shorting the stock of the acquiring company. (It's more complicated than it sounds.)
Conservative by nature
A few diversified funds deserve special mention, however:
•Forester Value FVALX has eked out a 2.9% gain through October. The fund couldn't find many stocks cheap enough to meet its criteria — at least until recently. Forester Value has gained 28% the past five years.
•Hussman Strategic Growth HSGFX looks for stocks that are cheap relative to earnings, but also looks at overall market action when it buys stocks. It's down 1.2% this year and up 23% the past five years.
•Heartland Value Plus HRVIX, another long-tem value fund, is down 11.1% this year, but it will be a good fund to own when the market turns around. It's up 40% the past five years.
Bear in mind that all of these funds are conservative by nature, and if another wild market bubble appears, these funds will probably miss it. On the other hand, when the next bubble pops, it's likely that these will be spared in the wreckage.
John Waggoner is a personal finance columnist for USA TODAY. His Investing column appears Fridays. new book, Bailout: What the Rescue of Bear Stearns and the Credit Crisis Mean for Your Investments, is available through John Wiley & Sons. Click here for an index of Investing columns. His e-mail is jwaggoner@usatoday.com.