It's been more than 12 years now since stocks experienced a sharp and prolonged sell-off. What are the best options for investors who fear a bear market is about to catch up with them, but don't want to be caught flat-footed if the market keeps going higher? Jay Schabacker thinks he knows.
According to the Hulbert Financial Digest, Schabacker's Mutual Fund Investing newsletter is one of only five letters whose model portfolios have beaten the market over the past decade on a risk-adjusted basis. Schabacker's portfolios carried the least risk among the five. Below are his favorite bear-market funds:TWEEDY BROWN GLOBAL VALUE is "one of the most adept funds around," says Schabacker. "It's hard enough to find small-cap stocks trading at bargain prices, but it's even harder to find them overseas. Yet that's exactly what this fund does best. While institutional investors have focused on large foreign stocks, small overseas firms have remained cheap because nobody knew about them. Now institutions have begun catching on. I expect to see much greater demand, sending foreign small-caps soaring."
MONTGOMERY EMERGING MARKETS uses quantitative methods to find countries with the highest growth prospects and least risk. "The best sectors within those countries are then chosen - and then the best stocks," explains Schabacker. "The fund is currently invested in 27 countries; its heaviest concentration is in Malaysia and Argentina. Longer term, fund managers envision economic growth will average 7 percent to 8 percent a year in emerging countries with stock prices experiencing double that growth."
LINDNER FUND has given investors double-digit gains in all but two of the last 19 years, notes Schabacker. "Even in 1987, it gained 8.9 percent. Lindner's strict value orientation has led to solid growth with little risk; in fact, the fund has lost money only once in the last 19 years."
MUTUAL BEACON "has an ace in the hole: manager Michael Price. He's one of those guys who just knows how to make money. He focuses on stocks selling at substantial discounts to their book values, many of which are of beaten-down or nearly bankrupt companies ripe for a turnaround or takeover."
ROBERTSON STEPHENS CONTRARIAN is Schabacker's "secret weapon" against falling stocks. "The fund has given us a healthy return by betting against the market (short selling) and investing heavily in gold. Chances are good that companies will try to raise their prices to counter the negative effects of rising interest-rate costs on their earnings. And that's good news for inflation hedges like gold."
MERGER FUND buys firms solely because they're about to take over another firm or be taken over, concludes Schabacker. "The fund's holdings are in different industries, have different fundamentals, and offer different opportunities. Merger Fund has consistently produced positive returns."
(Mutual Fund Investing, 7811 Montrose Road, Potomac, Md. 20854; monthly, $187 annually)