Want a mutual fund that will go up and down solely based on its stock-picking savvy?
Newly launched Barr Rosenberg Market Neutral fund (800-447-3332) is designed to be immune to fluctuations in the overall direction of the market.It invests in stocks its manager believes are most likely to go up. But an equal amount of money goes toward selling short stocks deemed most likely to go down. (To short a stock, you borrow shares from one investor and sell them to another, profiting if you can buy back the shares at a lower price.)
By selling and buying equal amounts, the fund becomes isolated from ups and downs of the market. Such funds weren't permitted before Congress repealed a rule that forbade funds from earning more than 30 percent of their profits from short-term gains. (All profits from short sales are deemed short term.)
The brainchild of money manager and former finance professor Barr Rosenberg, the fund selects its holdings by programming computers to pick out stocks most likely to rise and to fall.
Since 1989 the firm has managed a pool of money invested using the same strategy that Market Neutral fund uses. For the five years through 1997, that pool returned an annualized 13.4 percent - a bit more than the average balanced fund owning both stocks and bonds, and with slightly less volatility.
In fact, Market Neutral has been only half as volatile as the average stock fund. Its biggest loss in any rolling 12-month period since 1989 was 3 percent, or less than one-third the biggest loss by Standard & Poor's 500-stock index.
Of course, the S&P 500 returned an annualized 20.2 percent those same five years. But Market Neutral will likely go up and down at different times than your other investments, so it should lower the overall volatility of your portfolio.
Market Neutral should weather a down market better than most stock funds. But this fund may work best in tax-sheltered accounts because almost all gains will be taxed as ordinary income.