MUTUAL FUNDS / RUSS WILES : Bracing for Inevitable End of Bull Market Run

Eventually, the current bull market will end. And when it does, investments that hold their values during downdrafts will return to favor.

Mutual fund investors have a number of defensive options from which to choose if they want to prepare for this. Money-market funds, government-bond portfolios and gold funds all might flourish in an era of declining stock prices.

So too might a handful of bad-weather funds.

These contrarian portfolios pursue strategies that should prove profitable when the broad stock market falters. These strategies include buying gold shares, holding cash, selling stocks short and buying options that would appreciate in a market decline.

Probably the two best examples of bear market funds are the Rydex Ursa and Juno portfolios (no load; [800] 820-0888). The Ursa (Latin for “bear�) fund seeks to track the Standard & Poor’s 500 stock index--but in reverse. If the index falls 5%, Ursa strives to be in the plus column by the same amount.

To do this, management sells stocks short and bets on options and futures that would gain ground in down markets. Ursa’s returns don’t run exactly opposite to those of the S&P; 500, in part because the fund holds interest-bearing cash investments.

During the first five months of 1995, for example, Ursa was down 11.7%, while the S&P; 500 was ahead better than 16%. The fund debuted in early 1994.

Rydex Juno presents a way to bet on rising interest rates, as the fund seeks to perform inversely with the 30-year U.S. Treasury bond. To accomplish this, management sells Treasury-bond futures contracts or buys options that would rise if T-bond prices fell. Three-month-old Juno thus offers a simple way to hedge a portfolio of bonds or bond funds.

Both Ursa and Juno, along with five traditional funds in the Rydex family, cater to market timers, and cash moves swiftly among them. Ursa, for example, counted $420 million in assets in March, but that dwindled to $140 million by early June.

“We welcome people to trade or allocate as aggressively as they want,� said Juno manager Michael Byrum.

Rydex requires a minimum $10,000 that can be invested in any combination of the funds.

Robertson Stephens Contrarian (no load; [800] 766-FUND) is another pick that might hold up in a depressed environment. The fund isn’t touted as a bear market play, but with short sales accounting for 23% of assets, it should fare well if stock prices head south.

“We are having no trouble finding short ideas in the current environment since the values being placed on some businesses reflect a certain amount of market euphoria,� wrote manager Paul Stephens in a recent report.

Stephens has earmarked another 55% of the portfolio to mining, real estate and energy stocks--all of which should flourish if inflation accelerates. But management can change the fund’s asset mix--and thus its temperament--at any time.

Despite Contrarian’s current orientation to inflation hedges and short sales, the fund so far has not behaved like a bear market beneficiary. It slumped 5.5% in 1994, a lackluster year for stocks generally, but has sizzled so far in 1995, rising nearly 25% through May 31.

Investors can also choose from among a couple of bearish Dreyfus funds managed by Comstock Partners in Jersey City, N.J.

For example, Dreyfus’ Comstock Partners Strategy Fund A (4.5% sales charge; [800] 645-6561) has loaded up on gold stocks, foreign bonds, cash and options on the S&P; 500. The more aggressive Dreyfus Capital Value A, which also charges a 4.5% load, has similar holdings, along with short positions on individual stocks.

“We’re not real comfortable with financial assets right now,� said Troy Hottenstein, director of research for Comstock Partners. The stock and bond markets have become expensive and speculative, in his view.

Dreyfus Capital Value A sparkled in the rough market years of 1987 and 1990 but has been quiet otherwise. Morningstar Inc. of Chicago and New York-based Value Line both give it low ratings. Dreyfus Comstock Partners Strategy A opened in 1993 and has not yet been rated. Nor have the other funds discussed in this column.

Yet another defensive play is Lindner Bulwark (no load; [314] 727-5305), which aims to hold its ground during inflationary periods. The fund’s managers may venture into gold shares and bullion along with defensive options and futures, and they can sell stocks short.

Bulwark opened its doors in February, 1994, and gained 7.2% over the remainder of what turned out to be a sub-par year. So far, 1995 has presented a different story, however, with the fund off 2.1% during the first five months of the year.

If you’re convinced a stock market drop is near, consider moving a portion of your assets into a bear market fund such as these. But for most of your money, at most times, the contrarian route doesn’t make sense.

For starters, these types of funds can be volatile, based on their use of gold stocks, short selling and other speculative strategies. Also, most of the above portfolios are youngsters, lacking a history that dates even to the 1990 bear market.

In addition, most of the above funds, with the exception of Lindner Dividend, are costly to own, with above-average expense ratios.

Finally, it should be noted that funds that make big bets on lower stock prices have the odds stacked against them because the market’s long-term direction points upward.