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A fund 'inflation hideaway'?
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May 14, 1999: 6:16 p.m. ET
Lindner Funds hopes market-neutral plan will boost returns and be a haven
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NEW YORK (CNNfn) - If the latest reading on the consumer price index is making you skittish about inflation and a possible market dive, Lindner Funds says it has a place for you to hide.
The company has asked the Securities and Exchange Commission for permission to transform one of its funds, the Lindner Bulwark Fund, into a market-neutral fund.
Market-neutral funds try to neutralize risk by investing half the portfolio in long positions in stocks they believe are undervalued and will rise. The funds "short" the other half of the portfolio in stocks they think are overvalued and will fall. In a "short sale" an investor would borrow the stocks and sell them, then buy them back at a lower price and profit from the difference.
While hedge funds have used the strategy for years, mutual funds were not allowed to try it until a tax law change. The first market-neutral fund, Barr Rosenberg Market Neutral Fund, debuted in December 1997.
"It offers people a safe haven in down markets," said Eric Ryback, president of Lindner Asset Management.
The U.S. stock market sank on Friday on news that the Consumer Price Index (CPI) soared 0.7 percent in April, its largest gain in 8-1/2 years. The index is a key indicator about inflationary forces.
The Lindner Bulwark Fund, with just $20 million in assets, is up 1.24 percent year to date as of Thursday, according to fund tracker Morningstar. It was up 0.18 percent in 1998 and lost 22.27 percent the year before. But it gained 28.77 percent in 1996.
Ryback said a former manager of the fund came up with the idea for a domestic hybrid fund that would preserve capital in down markets. It invested some of the portfolio in precious metals; some in "longs" and "shorts"; and the rest in S&P 500 put options (options to sell a security at a given price, an investment usually made to protect against falling markets).
But the fund struggled because the S&P put options were not a good hedging strategy, he said. Gold prices also sank.
Ryback restructured the fund about 18 months ago. He abandoned the S&P hedging strategy and reduced the exposure to metals. The fund slowly started emphasizing the long-short strategy and the company restructured its management.
Now, the fund is 50 percent in cash and 50 percent in longs and shorts. When it gets SEC approval it will put the rest of the cash into the new strategy.
Jeff McConnell, an analyst at Morningstar, said there are only five market-neutral funds that he tracks, including the Legg Mason Market Neutral Trust launched in February. Every fund has lost money since its inception, he said.
"It's a difficult strategy," McConnell said. "It's difficult to neutralize all of these factors."
Another disadvantage the funds have are their expense ratios of 2 percent or more. On top of that, they have to pay dividends on the stocks they short, which adds another percentage point to annual expenses.
"I don't think at this point there's any reason for people to take a serious look at these funds with the results they've had so far," McConnell said.
The Dessauer Global Equity Fund likes to think of itself as shareholder-friendly.
In fact, it says it is the first closed-end fund to convert automatically to an open-end fund. The fund had a clause in the prospectus when it launched in 1997 that it would become an open-end fund if, after 18 months, it traded at a 5 percent or greater discount for 15 consecutive trading days.
"We weren't going to sit there and watch a discount exist for years and years while we collect an adviser fee," said Tom McIntyre, president of the fund and Dessauer & McIntyre Asset Management.
The fund opened about two weeks ago, and shareholders made 2 percent on the conversion.
(A closed-end fund has a fixed number of shares and trades like stock on the New York Stock Exchange at a premium or a discount to its net asset value. An open-end fund creates new shares to meet demand. So if a fund converts, investors who held discounted shares can sell them at a higher price).
Steve Buller, a closed-end fund analyst at Ernst & Young, said it is common for funds to convert to open-end funds after a vote by shareholders or the board. But he has never seen an automatic trigger.
"It's unusual to have an automatic conversion feature," Buller said.
The fund, with about $87 million in assets, is up 19.3 percent year to date as of Friday, McIntyre said. It earned 26.3 percent last year.
The fund owns big global names such as Glaxo Wellcome (GLXO), Citigroup (C) and Cable and Wireless Communications (CWZ). Its holdings span the banking, entertainment, financial services, health, and technology sectors, among others.
"This is so shareholder-friendly," McIntyre said.
Bonds slumped on Friday and took their worst beating in three years after the consumer price index threw cold water on the market. Here's how bond funds performed for the week, according to Lipper Analytical Services.
At the top of the list was USAA Income Strategy Fund, up 1.22 percent for the week May 6 through May 13 and up 1.30 percent year to date; followed by Mitchell Hutch Conservative Portfolio, up 1 percent this week but down 0.25 percent year to date; and Smith Barney Total Return, class L shares, up 0.99 percent this week but down 1.90 percent year to date.
The three biggest losers were Merriman Flexible Bond Fund, down 0.29 percent this week but up 2.49 percent year to date; Fundmanager Portfolios' Bond Portfolio Financial Advisor Class, down 0.10 percent this week and down 0.89 percent year to date; and IDEX Series Fund Flexible Income Portfolio, up 0.10 percent this week and up 0.15 percent year to date.
-- Staff writer Martine Costello covers mutual funds for CNNfn.com. If you have any comments about mutual funds you can contact her at cnnfn.interact@turner.com
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