Reno Gazette-Journal from Reno, Nevada • Page 40

4E Reno Gazette-Journal Sunday, January 1 4, 1 996 Hedge year. The Robertson Stephens Contrarian fund in San Francisco, the Lindner Bulwark fund in St. Louis and the Rydex Ursa fund in Bcthesda, Md. also short the market. But it's important to note that most of these funds go short with only a portion of their assets.

The majority of their dollars are in other assets, such as Treasury bills, gold stocks, bonds or stocks that the managers believe are relatively immune to big market declines. Before you invest in one of these funds for hedging purposes, you should be sure you're comfortable with the entire portfolio. Foreign stock funds. So far this year, many foreign stock markets have risen while the U.S. market has floundered.

But this potential hedge also is dicey: It's general- ly difficult for foreign markets to advance if the biggest market of all (the United States) winds up tanking severely. Some experts say the best hedge of all is simply to build up cash, perhaps selling 10 percent to 20 percent of your U.S. stocks and waiting for lower prices to reinvest. In the long run, the easiest way to hedge against trouble and hedge against your emotions getting the best of you is to be well-diversified, notes John Markese, executive director of the American Association of Individual Investors in Chicago. Specific hedges, he says, can be expensive and ultimately useless crutches.

"You shouldn't own anything you don't want to hold long-term," he argues. Following indexes helped funds shine in 1995 The mutual fund industry pitted its best minds against the computer last year. The machines won. Decisively. The average stock mutual fund rose 31.1 percent in 1995.

The average fund that aims to duplicate the Standard Poor's 500 index soared 36.8 percent. The men and women who try to beat the 500 put in long hours looking for stocks that will soar. But 500 index funds simply buy shares of the 500 stocks in the 500. Much of the work is done by computer. So what, exactly, does the manager of an 500 fund do all day? Mostly, they manage other funds.

Consider Gus Sauter, man ager of the Vanguard Index Trust 500 Portfolio. He says he spends about 15 minutes a day managing the $15 billion. One of Vanguard's traders spends another 30 minutes each day, making the fund own exactly as much of each stock as its representation in the 500. Every once in a while, Standard Poor's drops a stock from the index, which means Sauter and his trader have a busy day. They have to dump the old stock and buy its replacement.

And sometimes a stock gets merged out of existence and out of Sauter's portfolio. Vanguard usually tenders the stock to the buyer. Otherwise, the fund's business is pretty simple, and largely driven by computer. "Basically, it's managing the cash that comes into the fund each day," Sauter says. That's not always easy.

A goqd index fund manager can't afford to keep 7 percent to 8 percent of the fund's assets in money market securities, or cash, says Rich Whitney, manager of T. Rowe Price Equity Index Fund. In a rising market, cash acts as a drag on a fund's performance. And there are few things more humiliating than lagging the 500 when you're running an index fund. "If you don't get invested right away, you can be behind all year," Whitney says.

USA Today From IE ering a sharp pullback in the rest of your portfolio. Unfortunately, there is no perfect stock market hedge one that works every time. "The concept is El Dorado, but I haven't found it," quips Michael Lipper of mutual fund tracker Upper Analytical Services in New York, referring to the mythical South American gold hoard. There are, however, some investments that can provide a reasonable hedge. Here's a look at some ideas for today's hedge-seekers: Commodity plays.

So far this year, gold and energy prices have been rising while stocks in general have weakened. The gains in those Banking on America8 commodities have helped boost some mutual funds that have invested heavily in gold mining stocks or natural-resource companies. The T. Rowe Price New Era natural resources fund in Baltimore, for example, is up 3 percent since Dec. 31; some gold-mining funds are up more than 10 percent.

But aside from some brief rallies in recent years, gold- and energy-related funds have been lousy investments. The reason: They are typically inflation hedges, "and if there's no inflation those hedges become problematical," says Sheldon Jacobs at the No-Load Fund Investor newsletter in Irvington-on-Hudson, N.Y. What's more, if the stock market overall is weakening because of recession worries, neither gold nor energy prices may hold up for long. Likewise, real estate funds, another favorite "hard asset" hedge, aren't likely to perform well if recession fears mount. Funds that "short" the market.

A handful of mutual funds use short-selling techniques that involve selling borrowed securities, betting on a market decline. If prices plunge, these funds profit. But if prices rebound, the funds can suffer. The Crabbe Huson Special fund in Portland, was short certain high-flying technology stocks for much of 1995 a bad bet at the time. But that bet now is paying off: The fund is up 4 percent this TO tP0 LOT TO IF Si Redd to mm.

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"I saw the lake, I saw the Big Berthas (slot machines), I saw the opportunity," he recalled of his first visit to Reno. "It wasn't because I was smart. I should have moved to Nevada in the first place." Gaming machines were something less than innovative in those days. "The slot machine business didn't have anything new," he said in a recent interview. "The machines were basically a piece of iron with a lemon in the front." That may be, in part, because casino owners then considered slots a necessary evil.

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