4 Mutual Funds for a Bear Market

On Monday, Standard & Poor’s Ratings Services jolted the market by cutting its outlook on U.S. debt.  It indicated that there was one-in-three chance of a downgrade of the AAA-rating of the debt within the next two years.

The announcement sent shockwaves across markets across the globe.  The Dow dropped over 250 points.  Although, by the end of the trading day, the index saw improvement and the index was off “only” 140 points.

No doubt, there are legitimate concerns about the global economy.  Crude oil prices remain stubbornly high and inflation continues to be a problem in China.  There are also concerns about debt defaults in Greece, Portugal and Spain.

As for next month, there is likely to be a tussle over the raising of the U.S. national debt ceiling.  Then in June, the Federal Reserve is expected to end its $600 billion QE2 program to buy government bonds, which has been a strong stimulus for the economy.

With all these problems, investors are looking at ways to protect the downside on their portfolios.  And yes, there are ways to do this with mutual funds. Here’s a look:

Federated Prudent Bear Fund A (BEARX)

The Federated Prudent Bear Fund (MUTF: BEARX), which has $1.3 billion in assets, focuses on short selling securities.  This involves borrowing stock and selling the shares – hopefully – at a lower price in the future.  In other words, this is a way to make money when prices fall.

However, short selling can mean volatile returns.  In 2008, the Prudent Bear fund was able to post a gain of 26.85%.  Then again, the fund was off by 18.54% in 2009 and 13.21% a year later.

The three portfolio managers of the Prudent Bear fund — Doug Noland, Ryan Bend and Chad Hudson –are certainly top notch, with a combined experience of over 45 years.  As should be no surprise, they are long-term bears on the market.

PIMCO StocksPLUS TR Short Strategy (PSSAX)

Bill Gross is considered the “king of bonds.”  After all, he manages the world’s largest bond fund, PIMCO Total Return (MUTF: PTTAX), which has $237 billion in assets.

To generate competitive returns, Gross will also go short.  For example, he recently did this with US Treasuries.

Although, Gross also has another fund that focuses on the short-side of equities:  PIMCO StocksPLUS TR Short Strategy (MUTF: PSSAX).  Essentially, the fund has short exposure on the S&P 500 Index, so as to hedge against stock market falls.  Moreover, to reduce volatility, Gross also invests the portfolio in high-quality, lower duration bonds.

In 2008, the fund returned 47.42%.  But of course, it was tougher to get traction during the bull runs for 2009 to 2010, with the fund dropping 14.21% and 9.13%, respectively.

Hussman Strategic Growth (HSGFX)

As the name implies, a long-short fund will have a portfolio that will involves stock purchases and short sales.  In fact, this is a common approach for hedge funds.

There are also a variety of mutual funds that pursue the strategy, such as Hussman Strategic Growth (MUTF: HSGFX).  Over all, the returns tend to be muted but this is often an attraction for investors.  Over the past ten years, the average annual return was 5%.

Van Eck Intl Investors Gold C (IIGCX)

If there is a bear market, it will definitely shake confidence.  During such times, gold is often a winner.

One good offering is the Van Eck Intl Investors Gold C (MUTF: IIGCX) fund.  It helps that the portfolio manager, Joe Foster, is actually a geologists.  Thus, he is able to do deep analysis of  exploration projects.

Even though the expense ratio is high – coming to 1.95% — the fund has still been able to produce average annual returns of 28.90% over the past ten years.

For more on gold mutual funds, you can check out my recent piece for InvestorPlace.com.

Tom Taulli’s latest book is “All About Short Selling” and his Twitter account is @ttaulli.  He does not own a position in any of the stocks named here.

Article printed from InvestorPlace Media, https://investorplace.com/2011/04/bear-market-mutual-funds-401k-investing-investments/.

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