Sunday, June 17, 2007

BEARX as a Defensive Fund

The Prudent Bear fund (BEARX) is the only true mutual fund that I've ever considered owning. It is actively managed, so it comes with a high expense ratio (1.75%) in addition to potential penalties (1%) for buying and selling within a month. Despite these shortcomings, I'm getting to like BEARX.

The Prudent Bear fund has an uncanny ability to go up in value during corrections (as any bear fund should) and during slow rallies - exactly the kind of behavior I'm looking for in a defensive fund. The managers use a combination of options, selling short, and buying long positions in certain companies to achieve these surprising results.

Now, this fund has not always performed well during weak markets. It actually fell 5% or so during the long downturn in 2004, and it's been pretty flat during the slow rallies so far this year. However, in combination with other funds that I've discovered more recently like CSD and DBV, I think BEARX provides exactly the kind of diversification that my defensive portfolio needs. In the short term, BEARX always goes up during corrections, so it makes sense to buy it during slow rallies. The probable, but not guaranteed, ability of BEARX to actually go up during slow rallies is then icing on the cake. If it rises with the S&P 500, great! If not, it's still providing insurance against a correction while CSD and DBV are doing their thing.

The following charts show BEARX (red) and the S&P 500 (blue) during the 5 most recent slow rally+correction phases. CSD and DBV are also included in the final two.

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