 Fund Profile: The Prudent Bear Fund
by Ann C. Logue
The S&P 500 is down about 4% for the year to date, and it's been a struggle to cut the loss to that level. All the uncertainty about the economy, the war and the election is collected into the market price, and it's not pretty. The only happy investors are the bears, those cranky folks with a pessimistic mindset and the willingness to bet on markets going from good to bad and from bad to worse.
One of the more famous bears is David Tice, the founder and lead manager of the Prudent Bear Fund. Tice has long been a short-seller, working for high-net-worth individuals and institutional accounts. (Short selling is a bet on a security's price going down; the investor borrows shares of stock, sells them, then hopes to buy them back at a lower price to repay the loan and reap a profit on the amount of the decline.) He also sells investment research to people who don't necessarily want to sell short but who do want to know what to avoid. Mutual funds could not sell short in any significant fashion until the tax laws changed in the mid-1990s; Tice followed by rolling out his Prudent Bear Fund to let individuals in on the fun.
As befits a defensive fund in this market, only 9.6% of Prudent Bear's assets were in common stock (as of March 31, 2008), primarily split between basic materials and mining and minerals companies. The largest holding, which is 1.27% of assets, is Capstone Mining Corp. (Toronto: CS.TO), followed by Golden Cycle Gold Corporation (NYSEacra: GCGC) at 1.02% of assets. In third place is East Asia Minerals Corporation (Pink Sheets: EAIAF), which is just a half a percent of the fund's value.
The Prudent Bear fund emphasizes its short selling, which is something that few mutual funds do. Although 85% of assets are in Treasury bills and other cash equivalents, this is not a giant money-market fund. Instead, the cash position offsets the fund's short-selling position, worth 40.50% of assets, and its options and futures activities, worth 1.6% of assets.
Using exchange-traded funds, Tice and Company have made short bets on three different market sectors: the S&P 500, through the SPDR Trust Series I (AMEX: SPY); technology, using the Technology Select Sector ETF (AMEX: XLK); and industrial companies, with the Industrial Select Sector ETF (AMEX: XLI). It has also shorted shares in several different companies. The largest of these positions is in Robert Half International (NYSE: RHI), which provides temporary staffing and related services. Next is Fortune Brands (NYSE: FO), a holding company for different branded consumer businesses including alcohol, home improvement and golf. The third-largest short position is in Equifax (NYSE: EFX), which provides credit ratings and other data services.
The Prudent Bear Fund is sold with no load and a minimum investment of $2,000. It has a 0.25% 12b-1 fee and an expense ratio of 2.33%. It's high because selling short is expensive. In addition to the commissions for buying and selling, the fund pays interest to the lender while the position is outstanding, and it also has to pay any dividends that the lender would have received during that time.
The fund is down for the year-to-date but is beating the S&P 500. It's designed to do best in bad markets, so this is its time. For the last three years, The Prudent Bear Fund is up an average of 7.96%, better than the market's average of 7.50%. For the last five years, though, the average investor would have been better off in the S&P 500.
That's the challenge of a bear fund. If you believe that the economy is growing, even a little bit, then the stock market will have an upward bias over the long run. There will be a few years when things are terrible; sometimes there will even be two of these miserable years in a row. The Prudent Bear Fund and others bear-market funds should be thought of as insurance: allocate a small part of the overall performance to them, knowing that you give up some return in good years for protection in down years. They probably make the most sense for investors with large portfolios looking for some stability rather than the highest possible capital appreciation.
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